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The Bureau has made significant progress redesigning its approach for conducting the 2010 Census, including early planning, a greater reliance on contractors, and actions related to nonresponse follow-up, a key cost driver. Specifically, the Bureau’s preparations for the 2010 Census appear to be further along than at a similar point during the planning cycle for the 2000 Census. The Bureau also plans to make the most extensive use of contractors in its history, turning to the private sector to supply a number of different mission-critical functions, including data collection, data processing, and address and map updates. In addition, the Bureau has developed new initiatives to reduce the cost of nonresponse follow-up that include using a short-form-only census questionnaire and automating field operations. For the 2010 decennial, the Bureau developed a design for the census early in the decade, and Congress has been supportive of the Bureau’s approach. However, the situation 10 years ago for the 2000 decennial was somewhat different. In testimony before Congress in late 1995, we expressed concern that Congress and the Bureau had not agreed on the fundamental design and budget of the census, and that the longer this situation continued, the greater the risk that the census would not be planned well and that hundreds of millions of dollars would be spent inefficiently. Indeed, the final life-cycle cost for the 2000 Census exceeded the original estimates by about $1.5 billion, or about 30 percent. While this time the Bureau has planned earlier than in the past, it needs to do more. The Bureau has a significant responsibility to provide Congress with detailed documentation and analyses that provide support and justification for its 2007 budget and 2010 life-cycle cost estimate, especially during a time when the nation is facing serious fiscal challenges. In our view, the Bureau needs to inform Congress in a timely manner on the cost and progress being made toward a successful 2010 Census. In planning early for the 2010 Census, the Bureau established four goals aimed at addressing shortcomings with the 2000 enumeration: (1) increase the relevance and timeliness of data, (2) reduce operational risk, (3) increase coverage and accuracy, and (4) contain costs. To achieve these goals, three components—all new operations—are key to the Bureau’s plans for 2010: enhancing procedures for building its address list, known as the Master Address File (MAF), and its associated geographic information system, called the Topologically Integrated Geographic Encoding and Referencing (TIGER®) database; replacing the census long-form questionnaire with the American Community Survey (ACS); and conducting a short-form-only decennial census supported by early research and testing. Steps that the Bureau has taken to correct problems it encountered when planning past censuses are another sign of the thoroughness of the Bureau’s planning process. For example, early in the decade, senior Bureau staff considered various goals for the 2010 Census and articulated a design to achieve those goals. Moreover, staff with operational experience in the census participated in the 2010 design process. According to Bureau officials, this was a departure from the 2000 planning effort, in which Bureau staff with little operational experience played key roles in the design process, resulting in impractical reform ideas that could not be implemented. For the 2010 Census the Bureau plans to make the most extensive use of contractors in its history, turning to the private sector to supply a number of different mission-critical functions, including nationwide data collection and processing activities, and improvements to the address file and maps. The Bureau estimates that of the $11.3 billion total cost of the census, around $1.9 billion (or 17 percent) will be spent for its seven largest contracts. To date, the Bureau has awarded three of its seven major contracts that account for approximately $1.3 billion. Those contracts support (1) MAF/TIGER modernization; (2) the development and operation of the Decennial Response and Integration System (DRIS)—a system planned to integrate decennial responses; and (3) the Field Data Collection Automation (FDCA) program—a system designed to provide field staff with the equipment and infrastructure needed to collect census data. As detailed below, it will be important for the Bureau to monitor the contracts to avoid late design changes and hastily designed, untested systems that could result in additional costs. In fiscal year 2007, the Bureau will also award three of four remaining major decennial contracts as follows: in February 2007, the Bureau plans to award the contract for Data Access and Dissemination System II, which will replace the Bureau’s current data tabulation and dissemination system; in March or April 2007, the 2010 Census printing contract will be awarded; and, in April 2007, the Bureau will begin to lease office space for the 2010 Census. The exact date for the 2010 communications contract—which is set to be awarded sometime in fiscal year 2008—is not yet firmly established. As we noted in our May 2006 report, the Bureau has a tight schedule for systems development and testing; therefore, it will be important for the Bureau to keep the award of decennial contracts on schedule. To stay on schedule, we recommended that the Bureau ensure that key systems provided by contractors are fully functional and ready to be assessed as part of the 2008 Dress Rehearsal. While the Bureau neither agreed nor disagreed with this recommendation, the Bureau did state that it would be providing the results from the 2006 Census Test to the FDCA contractor. Staying on track is important because we previously reported that during the 1998 Dress Rehearsal for the 2000 Census a number of new features were not test-ready; as a result, the Bureau said it could not fully evaluate them with any degree of assurance as to how they would affect the census. These late design changes and hastily developed, untested systems resulted in additional costs to the census. We recognize that contractors can help the Bureau address the challenges it faces as it plans for and implements the 2010 Census, especially as it becomes increasingly difficult to count the nation’s population with the Bureau’s in-house staff and capabilities. For example, the contractors that the Bureau relied on to perform some of its major decennial activities during Census 2000 generally performed well. However, increased reliance on contractors entails certain management challenges, including overseeing them to ensure that they meet the Bureau’s needs in an effective, economical, and timely manner. For example, according to the Department of Commerce Office of Inspector General, the Bureau did not have sufficient program management staff to efficiently acquire systems and manage complex, high-dollar contracts during Census 2000. As a result, the cost of the Bureau’s data capture system increased from $49 million to $238 million by the end of that decennial. Closely monitoring these major contracts will be important. In March 2006, we testified that while project offices responsible for the DRIS and FDCA contracts had carried out initial acquisition management activities, neither office had the full set of capabilities needed to effectively manage the acquisitions. For DRIS, the Bureau’s project office had established baseline requirements, but the Bureau had not validated the requirements and had not implemented a process for managing the requirements. Also, the project office had identified the project’s risks but had not developed written mitigation plans or established milestones for completing key risk mitigation activities. As for FDCA, the Bureau again had specified baseline requirements but had not validated them. While the project office had begun activities to oversee the contractor’s performance, it had not determined which performance measures it would use, and the office had not implemented a risk management process. Until these basic management activities are implemented, both systems could face increased risks of cost overruns, schedule delays, and performance shortfalls. The Bureau has agreed to take steps to mitigate some of these challenges, such as enhancing the ability of key contract project offices to better manage contracts through such actions as developing action plans with milestones for key activities and regularly briefing senior managers. Since 2000, the Bureau has reengineered the decennial census and has begun to implement new initiatives to reduce the cost of nonresponse follow-up, including a short-form-only census and automation, the key feature of which is the use of hand-held mobile computing devices (MCD). First, the Bureau plans to contain the cost of nonresponse follow-up by increasing mail response through a short-form-only census. The overall mail response rate has been declining steadily since 1970. In the 1980 Census, the mail response rate was 75 percent, 3 percentage points lower than it was in the 1970 Census. In the 1990 census, the mail response rate dropped to 65 percent and, in 2000, appeared to be leveling off at about 64 percent. Contributing to this decline was the unwillingness of some of the public to complete the long form. Specifically, the response rates during the 1990 and 2000 censuses to the short form were higher than the response rate to the long form. Bureau data suggest a 1 percent increase in the mail response rate would result from conducting a short-form-only census. Secondly, by using the MCD, the Bureau plans to automate field data collection to contain the cost of nonresponse follow-up. If successfully used, the MCD would allow the Bureau to automate operations and eliminate the need to print millions of paper questionnaires and maps used by census workers to conduct address canvassing and nonresponse follow-up, as well as managing field staff’s payroll. The benefits of using the MCD have been tested in the 2004 and 2006 tests. For example, during the 2004 Census Test, the MCD allowed the Bureau to successfully remove over 7,000 late mail returns from enumerators’ assignments, reducing the total nonresponse follow-up workload by nearly 6 percent. The ability to remove late mail returns from the Bureau’s nonresponse follow-up workload reduces costs, because census workers no longer need to make expensive follow-up visits to households that return their questionnaire after the mail-back deadline. However, the MCDs experienced significant reliability problems during the 2004 and 2006 census tests. At this point, the uncertainty surrounding the MCD’s reliability constitutes a risk to the cost-effective implementation of the 2010 Census. Specifically, during the 2004 Census Test, the MCDs experienced transmission problems, memory overloads, and difficulties with a mapping feature—all of which added inefficiencies to the test’s nonresponse follow-up operation. During the 2006 Census Test’s address canvassing operation, the device was slow to pull up address data and accept the data entered by census workers. Further, the MCD’s global positioning system (GPS) receiver—a satellite-based navigational system to help workers locate street addresses and collect coordinates for each structure in their assignment area—was also unreliable. According to Bureau officials, some workers had trouble receiving signals; but even when a signal was available, the receiver was slow to find assignment areas and correct map locations. The Bureau extended the operation 10 days and still was unable to complete the job, leaving census blocks in Austin, Texas and on the Cheyenne River Reservation, South Dakota unverified. While acknowledging that the MCD’s performance is an issue, the Bureau believes the problem will be addressed through a contract that was awarded on March 30, 2006, to develop a new MCD, among other things. However, the new MCD will not be operationally tested until the 2008 Dress Rehearsal, and if problems do emerge, little time will be left to develop, test, and incorporate refinements. In our May 2006 report, we highlighted the tight time frames to develop the MCD and recommended that systems being developed or provided by contractors for the 2010 Census—including the MCD—be fully functional and ready to be assessed as part of the 2008 Dress Rehearsal. The Department of Commerce noted in its comments on our draft report that the Bureau provided competitors for the contract with information about the design, requirements, and specification for the 2006 test in the request for proposals. Commerce also noted that the Bureau would share preliminary results from the 2006 test with the firm that was awarded the contract, upon the availability of those results. The Bureau, however, did not specify when preliminary results would be available. If after the 2008 Dress Rehearsal the MCD is found not to be reliable, the Bureau could be faced with a remote but daunting possibility of having to revert to the costly, paper-based census used in 2000. The Bureau in its 2005 life-cycle cost estimate did indicate that if it were to conduct a paper-based census in 2010 using the same methods as 2000, the life-cycle cost would increase by $1.3 billion dollars. However, as discussed in more detail later in this testimony, we are unable to determine the validity of the Bureau’s cost estimates, paper-based or not, because those estimates are not supported by timely and detailed data. Nevertheless, we support the Bureau’s efforts to contain cost and look forward to seeing the MCD that is currently being designed under the FDCA contract as well as more details concerning the Bureau’s cost estimates. Despite its emphasis on cost containment, the Bureau does not have a comprehensive, integrated project plan that details milestones and itemized costs for completing key activities for the 2010 Census, and its $11.3 billion life-cycle cost estimate for the 2010 Census lacks timely and complete supporting data. The supporting data of the estimate are not timely because they do not include the most current information from testing and evaluation, and the estimate is not complete because it does not provide sufficient information on how changing assumptions could affect cost. Absent this information, we are unable to determine the affect proposed budget reductions will have in 2007, as well as the impact of those reductions on the overall design and the Bureau’s 2010 life-cycle cost estimate. In our January 2004 report, we reported that the Bureau’s cost projections for the 2010 decennial census continue an escalating trend. As previously noted, the Bureau now estimates the 2010 Census will cost over $11.3 billion, making it the most expensive in history, even after adjusting for inflation. Although some cost growth can be expected, in part because the number of housing units—and hence the Bureau’s workload—has become larger, the cost growth has far exceeded the increase in the number of housing units. For example, the Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels, while the average cost per housing unit for 2010 is expected to increase by approximately 29 percent from 2000 levels. Moreover, the risk exists that the actual, final cost of the census could be considerably higher. Indeed, the Bureau’s initial cost projections for previous censuses proved to be too low because of such factors as unforeseen operational problems or changes to the fundamental design. For example, during the 2000 Census, the Bureau was unable to finalize its fundamental design until late in the decade because of lack of agreement between the administration and Congress over the design. This required the Bureau to proceed down a dual track. The Bureau estimated that the 2000 Census would cost around $4 billion if sampling was used, as opposed to $5 billion for a traditional census without sampling. In the end, the price tag for the 2000 Census (without sampling) was over $6.5 billion, a 30 percent increase in cost. Our January 2004 report contained a recommendation for improving the transparency, comprehensiveness, and timeliness of the 2010 Census’ life- cycle costs. We specifically recommended that the Bureau develop a comprehensive, integrated project plan for the 2010 Census, and we also emphasized the importance of providing information on the interrelationships and dependencies among project milestones. Such a project plan would be updated as needed and would include: (1) detailed milestones that identify all significant interrelationships; (2) itemized estimated costs of each component, including a sensitivity analysis, and an explanation of significant changes in the assumptions on which these costs are based; (3) key goals translated into measurable, operational terms to provide meaningful guidance for planning and measuring progress, and (4) risk and mitigation plans that fully address all significant potential risks. We noted then that, although some of this information is available piecemeal, to facilitate a thorough, independent review of the Bureau’s plans and hold the agency accountable for results, having a single, comprehensive document would be important. Although the Bureau disagreed with the recommendation, it stated it would develop and provide such a document to Congress and GAO. More than 2 years passed and the Bureau did not provide this plan. The Bureau has stated that it agrees with the Office of Management and Budget that the annual budget submission process is the appropriate vehicle for providing comprehensive and detailed cost information on 2010 Census planning. However, in our view, having a single comprehensive project plan that is updated annually, as we recommended in 2004, would have provided the Bureau with additional support for its fiscal year 2007 budget request. Further, GAO reemphasized the need for such a plan in testimonies during March and June 2006. The Bureau’s most recent cost estimate is not based on timely and complete information. As stated in our January 2004 report, the Bureau derived its 2010 cost estimate, in June 2001, by using the actual cost of the 2000 Census combined with assumptions about such cost drivers as (1) staffing needs, (2) enumerator productivity, (3) pay rates for census workers, (4) the nonresponse rate for mailing back the questionnaires, and (5) inflation. However, the most recent life-cycle cost estimate does not incorporate current information about assumptions made in 2001, leaving us unable to link information on assumptions among the cost estimates released in 2001, 2003, and 2005. For example, one key assumption that has not been updated pertains to the use of a new technology—new hand-held, GPS-enabled MCDs. These devices are important to the success of the 2010 census because they are expected to make possible automated and streamlined address canvassing, nonresponse follow-up, coverage measurement, and payroll operations. The Bureau anticipated that the use of MCDs would facilitate reductions in administrative and support costs in the Bureau’s field offices, including a 50 percent reduction in clerical and administrative local census office staff costs and a 50 percent reduction in space at each local census office. However, the Bureau’s existing assumptions about the use and reliability of the MCD were not updated to reflect information from the 2004 Census Test, which revealed that assumptions about staffing and space associated with the new technology had changed since the June 2001 life-cycle estimate. Specifically, Bureau evaluations of the 2004 test show that more help desk staff at the local census office were needed to support the use of the MCD, and additional storage space was needed for the devices. However, the Bureau did not use this information when revising its cost estimate in 2005 because, according to Bureau officials, they conduct field tests for operational purposes only—not to inform the cost estimates. In our view, revising cost estimates on the most recent information— including test results that are pertinent to cost assumptions—can assist the Bureau and external decision makers to oversee costs and make necessary resource allocations to help ensure a successful, cost-effective census. The Bureau’s cost estimate also lacks complete information, such as sensitivity analysis regarding assumptions that could affect cost drivers. OMB Circular A-94 provides guidelines for cost-benefit analysis of federal programs and recommends that agencies develop a sensitivity analysis for major projects with significant uncertainty, like the decennial census. The circular provides a method for determining how sensitive outcomes relate to changes in assumptions. In January 2004, we reported that the Bureau could provide more robust information on the likelihood that the values the Bureau assigned to key cost drivers could differ from those initially assumed. We also stated that updates of the life-cycle cost could be timelier—previously the life-cycle cost estimate had been provided at 2- year intervals. While the Bureau agreed to provide updates of the life- cycle cost annually, the Bureau’s latest life-cycle cost document does not contain a sensitivity analysis on assumptions that impact cost. Having transparent information about cost estimates is especially important, because decennial costs are sensitive to many key assumptions. In fact, for the 2000 Census, the Bureau’s supplemental funding request for $1.7 billion in fiscal year 2000 primarily involved changes in assumptions related to increased workload, reduced employee productivity, and increased advertising. Given the cost of the census in an era of serious national fiscal challenges, it would be beneficial for the Bureau and Congress to have sensitivity information about the likelihood—high, medium, or low—that certain assumptions would drive costs. By providing this information, the Bureau would better enable Congress to consider funding levels in this uncertain environment. Questions have been raised about the impact of proposed reductions in the Bureau’s fiscal year 2007 overall budget request. Would such a budgetary change cause the dramatic changes in the decennial’s overall design and life-cycle cost that the Bureau predicts? The answer is that given the lack of consolidated, timely, and detailed plans and cost estimates, we simply cannot tell. Importantly, this testimony notes that the preparatory steps for the 2010 Census have almost reached a point where the Bureau will no longer be able to effectively undertake design changes and other significant corrective actions if such are needed—for example, in response to unanticipated failures of the MCD. To help policymakers make informed decisions, including funding decisions, the Bureau needs to provide policymakers with comprehensive, timely, and updated information. As we have previously reported, the Bureau has planned earlier than in the past and that its plans and efforts to reengineer the census have potential to contain costs. However, we believe the Bureau needs to do more. In this testimony, as well as in our previous reports and testimonies, we have discussed the Bureau’s ongoing emphasis on reengineering the census to contain costs. We have noted that while the $11.3 billion estimate makes the 2010 Census the most expensive in history, new cost drivers have emerged. As we previously recommended, a periodically updated comprehensive project plan and cost estimate that is supported by transparent, detailed, and comprehensive analyses and documentation would enable analysts, policymakers, and others to ascertain whether significant risks exist that could cause costs to increase. We believe that in this era of serious national budget challenges, it is important for the Bureau to implement our 2004 recommendation not only for this fiscal year but every fiscal year of the 2010 decennial life-cycle. To conduct its oversight and budgetary functions, Congress needs the Bureau to provide it with an annually updated comprehensive, integrated project plan which includes milestones, itemized costs, measurable goals, and risk mitigation plans. That concludes my statement, Mr. Chairman. I would be pleased to respond to any questions you or other members of the Subcommittee may have. For questions regarding this testimony, please contact Brenda S. Farrell, on (202) 512-6806, or by email at farrellb@gao.gov. Individuals making contributions to this testimony include Carlos Hazera, Assistant Director; Mike Carley, Betty Clark, Robert Goldenkoff, , Shirley Hwang, Wright Lewis, Krista Loose, Lisa Pearson, Scott Purdy, Mark Ryan, Shannon VanCleave, and Timothy Wexler. 2010 Census: Census Bureau Needs to Take Prompt Actions to Resolve Long-standing and Emerging Address and Mapping Challenges. GAO- 06-272. Washington, D.C.: June 15, 2006. 2010 Census: Costs and Risks Must be Closely Monitored and Evaluated with Mitigation Plans in Place. GAO-06-822T. Washington, D.C.: June 6, 2006. 2010 Census: Census Bureau Generally Follows Selected Leading Acquisition Planning Practices, but Continued Management Attentions Is Needed to Help Ensure Success. GAO-06-277. Washington, D.C.: May 18, 2006. Census Bureau: Important Activities for Improving Management of Key 2010 Decennial Acquisitions Remain to be Done. GAO-06-444T. Washington, D.C.: March 1, 2006. 2010 Census: Planning and Testing Activities Are Making Progress. GAO-06-465T. Washington D.C.: March 1, 2006. Information Technology Management: Census Bureau Has Implemented Many Key Practices, but Additional Actions Are Needed. GAO-05-661. Washington, D.C.: June 16, 2005. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-09. Washington, D.C.: January 12, 2005. Data Quality: Census Bureau Needs to Accelerate Efforts to Develop and Implement Data Quality Review Standards. GAO-05-86. Washington, D.C.: November 17, 2004. Census 2000: Design Choices Contributed to Inaccuracies in Coverage Evaluation Estimates. GAO-05-71. Washington, D.C.: November 12, 2004. American Community Survey: Key Unresolved Issues. GAO-05-82. Washington, D.C.: October 8, 2004. 2010 Census: Counting Americans Overseas as Part of the Decennial Census Would Not Be Cost-Effective. GAO-04-898. Washington, D.C.: August 19, 2004. 2010 Census: Overseas Enumeration Test Raises Need for Clear Policy Direction. GAO-04-470. Washington, D.C.: May 21, 2004. 2010 Census: Cost and Design Issues Need to Be Addressed Soon. GAO- 04-37. Washington, D.C.: January 15, 2004. Decennial Census: Lessons Learned for Locating and Counting Migrant and Seasonal Farm Workers. GAO-03-605. Washington, D.C.: July 3, 2003. Decennial Census: Methods for Collecting and Reporting Hispanic Subgroup Data Need Refinement. GAO-03-228. Washington, D.C.: January 17, 2003. Decennial Census: Methods for Collecting and Reporting Data on the Homeless and Others Without Conventional Housing Need Refinement. GAO-03-227. Washington, D.C.: January 17, 2003. 2000 Census: Lessons Learned for Planning a More Cost-Effective 2010 Census. GAO-03-40. Washington, D.C.: October 31, 2002. The American Community Survey: Accuracy and Timeliness Issues. GAO-02-956R. Washington, D.C.: September 30, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The U.S. Census Bureau (Bureau) estimates that the 2010 Census will cost over $11.3 billion, making it the most expensive in our history. The U.S. House of Representatives and Senate appropriation bills propose to reduce the Bureau's fiscal year 2007 budget request, raising questions about the Bureau's design of the 2010 Census and associated costs. Based on issued GAO work, this testimony addresses the extent to which the Bureau has (1) made progress redesigning its approach, including nonresponse follow-up, a key cost driver; and (2) developed a comprehensive project plan for the 2010 Census, as well as timely, detailed cost data for effective oversight and cost control. Since 2000, the Bureau has made significant progress in redesigning the 2010 Census. Preparations for the 2010 Census appear to be further along than at a similar point of the 2000 Census; the Bureau plans to make the most extensive use of contractors in its history to implement such mission-critical tasks as data collection and processing, and updating addresses and maps; and it has developed new initiatives, such as changing to a short-form-only census and automating field operations to reduce nonresponse follow-up costs. Still, the Bureau will have to resolve challenges that could increase the costs of the census. For example, the Bureau will need to effectively monitor contracts, as $1.9 billion of the $11.3 billion life-cycle costs will be spent on seven major contracts. The Bureau has agreed to take steps to mitigate some of these challenges, such as enhancing the ability of key contract project offices to better manage contracts through such actions as developing action plans with milestones for key activities and regularly briefing senior managers. Also, the use of hand-held mobile computing devices (MCD) to help reduce nonresponse follow-up costs by automating operations and managing the agency's payroll is a key component of the redesigned census. However, the MCDs experienced reliability problems during testing. The Bureau maintains that those problems will be fixed by developing a new MCD through a contract awarded in March 2006; however, the new MCD will not be tested until the 2008 Dress Rehearsal, and little time will remain to develop, test, and incorporate refinements if the MCDs do not perform as expected. If after the Dress Rehearsal the MCD is found to be unreliable, the Bureau could be faced with the remote but daunting possibility of having to revert to the costly paper-based census used in 2000. The Bureau has not developed and provided a comprehensive, integrated project plan that details milestones, itemized costs, and measurable goals for completing key activities. Also, the Bureau's $11.3 billion life-cycle cost estimate lacks timely and complete supporting data, because it does not contain the most current information from testing and evaluation nor does it provide sufficient information on how changing assumptions could affect costs. For example, one key assumption that has not been updated pertains to the use of the MCDs. The Bureau anticipates that their use could reduce administrative and support costs in its local census offices, including 50 percent cost reductions for staff and office space. However, the 2004 Census Test showed that more help desk staff and more storage space would be needed to support the devices. The Bureau did not change the life-cycle cost estimate because, in the view of Bureau managers, field tests are for operational purposes, not to inform cost estimates. However, using test results to update cost assumptions could assist the Bureau and external policymakers to oversee costs and make necessary resource allocations. Furthermore, absent a comprehensive plan and updated cost information, the effect of proposed 2007 budget reductions on the overall design and life-cycle costs of the 2010 Census cannot be determined. |
Funds from the rental-of-space account in FBF pay for all leased space in GSA’s inventory. During fiscal years 1997 and 1998, GSA received appropriations of about $4.6 billion in NOA for this account, about $2.3 billion in each fiscal year. GSA submitted two requests, totaling $324 million in NOA, to reprogram funds from other FBF accounts into the rental-of-space account. On August 8, 1997, GSA requested approval to reprogram $110 million of the fiscal year 1997 appropriated funds, and on January 9, 1998, it requested approval to reprogram another $214 million of fiscal year 1998 appropriated funds. Both requests were approved. The amounts requested equaled about 4.7 percent of the amount initially requested by GSA in its budget requests for the rental-of-space account for fiscal year 1997, and 9.4 percent of the amount requested for fiscal year 1998. In its August 8, 1997, reprogramming request for fiscal year 1997, GSA attributed the need for the reprogramming to three causes. First, it had estimated that the overall average rents would increase by 2 percent, but actual rent increases ranged from 3 to 5 percent. This resulted in the cost to the account being underestimated by about $30.9 million. Second, on the basis of regional expectations, GSA had overestimated the amounts that would be saved through lease cancellations by about $74.1 million. Third, GSA had not been able to absorb a $5.1 million congressional reduction in appropriations requested for rental-of-space expenditures in fiscal year 1997. According to a GSA official, the agency could not absorb this cut because GSA was already short of NOA in this account. GSA alerted its oversight committees in its reprogramming request letter that these problems would also affect the rental-of-space account in fiscal year 1998. In its January 9, 1998, reprogramming request for fiscal year 1998, GSA attributed the need for the reprogramming to four causes. First, GSA needed $143.6 million to cover the $110 million underestimation in fiscal year 1997 and to annualize this error for fiscal year 1998. Second, as in fiscal year 1997, GSA had estimated the overall average rental rate increase at 2 percent, but actual increases ranged from 3 to 5 percent. This resulted in the cost to the account being underestimated by about $22.5 million. Third, as in fiscal year 1997, it had overestimated savings from lease cancellations, this time by about $41.8 million. Finally, on the basis of what regional staff believed was going to happen, GSA had underestimated the need for expansion space. This resulted in a need for an additional $6.1 million. The process of formulating the budget is to begin no later than the spring of each year, about 9 months before it is transmitted to Congress and 18 months before the beginning of the fiscal year in which the budget becomes effective. During the first 6 months of this period (from about April through September), PBS compiles information on the various budget elements, including the rental-of-space account; reviews the information for reasonableness and accuracy; and prepares its budget estimates. During the next 3 months (October through December) these estimates are to be submitted as a portion of GSA’s budget request to the Office of Management and Budget (OMB) for review. OMB reviews the budget request and passes it back to GSA with any changes, and GSA may appeal OMB ‘s changes before the budget is finalized. Early the following year (between the first Monday in January and the first Monday in February), the budget is to be submitted to Congress for its review and appropriation of funds. Because of the timing of the budget process, when GSA realizes that an estimation error has been included in its budget request for that fiscal year (in fiscal year 1997 in this case), the error usually cannot be corrected in a future budget estimate until the second fiscal year after the error occurred (in this case, fiscal year 1999). To accomplish our objectives, we observed the Galaxy program in operation, reviewed training materials on its operation, reviewed documentation on the reprogramming requests, and interviewed PBS officials and budget and/or program analysts responsible for maintaining Galaxy in 10 of GSA’s 11 regions. We discussed with the PBS Deputy Controller what elements were needed to track and forecast rent expenditures. We checked to see that the elements discussed were included in the Galaxy program. We did not verify the accuracy of the data in Galaxy, but we did obtain information from PBS on how it planned to ensure that the data would be accurate, reliable, and consistent. We also did not contact customer agencies to verify the extent to which they were being contacted by GSA regarding their future space needs. We did our work in Washington, D.C., between August 1998 and May 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator of GSA. GSA’s comments are discussed at the end of this letter. GSA has taken corrective actions to specifically improve its tracking of the rental-of-space account and to improve its budget estimating for this account. The major step taken to improve both the tracking and estimating of the rental-of-space account was GSA’s development of the Galaxy program to be the primary tool to manage the rental-of-space account for fiscal year 1999 and to help manage project expenditures for fiscal year 2001. The reason Galaxy was developed was to provide a means to have all the regions use a consistent format, the same set of tools, and the same assumptions to monitor, reconcile, and estimate future expenditures from the rental-of-space account. Rent account analysts responsible for the rental-of-space account had not had a financial management tool for tracking and analyzing the account since September 1997. The previous automated system was discontinued when STAR was being put on-line. Rent account analysts had been using manual spreadsheets to monitor the account since that time. The Galaxy program software was developed under an existing support services contract, at no additional cost to GSA except for some travel to a region, as an interim program until a module could be developed for STAR. Current plans are to enhance Galaxy so that it will interface with STAR. A statement of work to accomplish this objective is currently being developed. To implement Galaxy, GSA provided each region with training on its use and a copy of the software already loaded with the region’s data for active lease contracts and active lease projects as of October 1, 1998. Galaxy has seven basic components, which include the elements PBS has identified as needed for tracking actual expenditures and estimating the funding requirements for future expenditures from the rental-of-space account. These components are described in table 1. The program can also generate various reports on both leases and projects, such as base rent by month, RWAs by lease number, IBAAs by lease number, lump sums by lease, operating cost escalation/CPI by lease, NOA by base lease, and estimate of rent increases tied to projects. Rent account analysts are responsible for ensuring that Galaxy’s data are accurate, reliable, and consistent. The training manual states that all active leases and projects loaded in Galaxy “must be validated.” The manual lists five steps that the analyst must follow to validate the information. Table 2 lists these steps. Also, other guidance in the manual indicates that Galaxy must be reconciled to NEAR on a monthly basis to ensure that accurate obligations are stated in NEAR. Further, the manual states that the effectiveness of any system is contingent upon the information it is supplied. Therefore, each region is responsible for ensuring the accuracy of the data input into Galaxy. Without accurate data, a credible status report for the rental-of- space account cannot be produced. Further, the regional rent account analysts we interviewed all agreed that communications between themselves and the realty specialists will be key in maintaining the accuracy of Galaxy. The analysts believed that communications would be of particular importance in estimating the rent account for a future budget year because, in order to estimate future expenditures, they rely not only on information about active leases, but also on information on projects in process. Project information is dependent upon the realty specialists’ communications with the customer agencies. The analysts we interviewed all believed that, with proper communications, Galaxy should help avoid past problems and improve the estimating process. We were told that all GSA regions are to create a branch that will have as one of its responsibilities the initiating and inputting of all project data into STAR. This process should help ensure that the projects are entered into STAR. In May 1999, at least one region had already begun interviewing applicants for positions in the new branch. We agree that good communication between the analysts maintaining Galaxy and the realty specialists maintaining STAR is critical to the accuracy of the data in Galaxy. To project the rent expenditure account, it is particularly important to obtain data on lease projects, which reflect potential changes in the inventory. This information is not as readily available as data on existing leases, but must be obtained from customer agencies. Further, we agree that good communication between GSA and its customer agencies is essential to improving the accuracy of the rental- of-space estimate. However, this may not be easily accomplished, even with good communications, given that for budget purposes GSA needs to estimate changes in space requirements approximately 18 months in advance. In his testimony on April 24, 1997, the PBS Commissioner testified that, when he asked federal agency facility managers in a quarterly meeting whether they could identify the space reductions from downsizing a year in advance, they all said that they could not. This shows how difficult it may be for GSA to get accurate information on changes in the inventory. In addition to implementing Galaxy, GSA has taken other steps to address its underestimation that led to a total of $324 million in reprogramming requests for fiscal years 1997 and 1998. Table 3 lists the areas with budget estimation problems in the rental-of-space account as well as the NOA needed by fiscal year. In addition to implementing Galaxy, GSA has taken several other steps to specifically address the problem areas listed in table 3. First, a GSA official told us that GSA regions would use local market rental rate increases to determine the region’s estimated rental rate increase for a budget year. In fiscal years 1997 and 1998, GSA used national averages to determine rental rate increases. Further, according to an official, GSA will try to improve its estimation of lease cancellations by comparing the amount of a region’s projected cancellations with the historical trends for that region. If the projected cancellations for a region appear to deviate from the historical trends, the divergence will be reviewed to see whether there is a justification for it. If there is not, GSA will rely on the historical trend data. In fiscal years 1997 and 1998, the budget estimates that overestimated the savings from lease cancellations relied on the figures provided by the regions. Finally, with regard to expansion space, according to a GSA official, no specific action other than the use of Galaxy is being taken. The variance in this area only amounted to 0.03 percent and that only in fiscal year 1998. Also, PBS officials told us that four controls have been established to improve the rental-of-space account estimate of future expenditures. Each region (1) will be required to develop a financial plan to be used to track the rental-of-space account on a quarterly basis, (2) will be required to provide an explanation for a variance of plus or minus 0.5 percent between actual obligations and the established targets, (3) will have a set limit of NOA for existing leases and annualizations of leases, and (4) will have a “cannot exceed limit” for indefinite authority. Further, as we stated in our March 1998 testimony on overestimation of rental revenue projections, GSA issued an order in July of 1997 establishing FIS, with one of its responsibilities being the budget estimating process. It also hired a chief financial officer to oversee FIS. If implemented as designed, both actions should, in our opinion, improve PBS’ financial management of FBF. Galaxy appears to have elements needed to track PBS’ rental-of-space account and aid in more accurately estimating this account for future budgets. To the extent that PBS effectively implements the steps it has taken to maintain accurate data and good communications within GSA and with its customer agencies, has improved its estimation and budgetary process, and has corrected the problems it identified as causing its underestimation of the rental-of-space account, it should be able to produce better estimates of this account in the future. On July 16, 1999, the PBS Deputy Controller provided oral comments on a draft of this report. He said that GSA generally agreed with the draft report and pointed out that PBS had established a requirement that the regions explain variances of plus or minus 0.5 percent between actual obligations and established targets. We modified our report to reflect this requirement. We are sending copies of this report to Representative Robert E. Wise, Ranking Democratic Member of your Subcommittee; Senator Ben Nighthorse Campbell, Chairman, and Senator Byron L. Dorgan, Ranking Minority Member, Senate Subcommittee on Treasury and General Government, Committee on Appropriations; Senator George V. Voinovich, Chairman, and Senator Max S. Baucus, Ranking Minority Member, Senate Subcommittee on Transportation and Infrastructure, Committee on Environment and Public Works; Representative Jim Kolbe, Chairman, and Representative Steny Hoyer, Ranking Minority Member, House Subcommittee on Treasury, Postal Service, and General Government, Committee on Appropriations; the Honorable David J. Barram, Administrator, GSA; and to others upon request. If you have any questions regarding this report, please call me or Ron King at (202) 512-8387. The key contributor to this assignment was Tom Keightley. Bernard L. Ungar Director, Government Business Operations Issues The first copy of each GAO report and testimony is free. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the General Services Administration's (GSA) Galaxy program for estimating the rental expenses of the Federal Buildings Fund, focusing on whether the: (1) new Galaxy program included the elements needed for tracking actual rental expenditures and forecasting future rental-of-space funding requirements; and (2) additional actions the Public Building Service (PBS) was taking to improve its budget process addressed the causes of its underestimation of the rental-of-space account. GAO noted that: (1) Galaxy has seven basic components that appear capable of providing the data elements needed to track the actual expenditures made from the rental-of-space account and thus aid in forecasting the funding required for the rental-of-space account for budget purposes; (2) PBS has recognized that the success of the Galaxy program depends on the accuracy and maintenance of the data entered into Galaxy; (3) consequently, it has emphasized this issue in its training manual for Galaxy; (4) this manual states that all active leases and projects loaded into Galaxy must be validated; (5) the manual lists five steps that the analyst must follow to validate the information; (6) rent account analysts that GAO interviewed emphasized the need to maintain good communications among: (a) themselves, who maintain Galaxy; (b) the realty specialists, who maintain PBS' System for Tracking and Administering Real Property, the system from which the data in Galaxy were downloaded; and (c) customer agencies that provide information on their space needs; (7) GAO agrees that GSA and its customer agencies need to have good communications to ensure that GSA knows about any potential changes in inventory that a customer agency may plan in a given fiscal year, so that those changes are reflected in GSA's budget submission; (8) PBS has taken steps to improve: (a) how it calculates the rental-of-space estimate, such as using local market rental increases instead of national averages in calculating the rent increase estimates; and (b) the budgeting process in general, by establishing the Office of Financial and Information systems to oversee budget formulation, including estimating the rental-of-space account funding requirements; and (9) GAO believes that the actions PBS has identified to improve its budgeting process, if effectively implemented, address the causes it identified for its underestimation of the rental-of-space account. |
Attention deficit disorders are among the most commonly diagnosed childhood behavioral disorders. Although there are a number of disorder subtypes, as a group these disorders are referred to as Attention Deficit Hyperactivity Disorder (ADHD). Symptoms include hyperactivity, impulsiveness, and inattention. The American Psychiatric Association’s diagnostic manual provides criteria for identifying ADHD; however, there is no agreed upon test to confirm an attention disorder. Estimates of the prevalence of the disorder vary widely. A recent international review of 19 epidemiological studies conducted in various countries since 1980 on the prevalence of ADHD in school-age children reported ranges of 2 percent to 18 percent. The review found that the ADHD prevalence rate varies depending on the diagnostic criteria, the children included in the sample, and how the data were collected. Researchers conducting the review concluded with a “best” estimate of between 5 and 10 percent of children and adolescents having some form of this disorder. Although controversial, stimulants are the most common treatment for attention disorder symptoms and are the only drugs that are approved by the Food and Drug Administration (FDA) for this purpose. Methylphenidate is the most widely used stimulant, but amphetamines have been increasingly prescribed. Antidepressants, including buproprion and velafaxine, are not approved by the FDA for the treatment of ADHD; however, they are sometimes prescribed by physicians for ADHD if stimulant medications are ineffective or inappropriate for a particular patient. ADHD drugs come in generic forms, but are often referred to by their brand names. Methylphenidate brand names include Ritalin (see fig. 1), Concerta, Methylin and Metadate. Brand name amphetamines include Adderall, Dexedrine, and Dextrostat. Both types of stimulants are available in quick acting, but short duration (2 to 6 hours) tablets. Recently, sustained or extended release tablets lasting 8 to 12 hours have become available, and a once-a-day skin patch is under development. Longer acting drugs may reduce the need for some children to take their medications at school. Several companies are testing nonstimulant drugs for ADHD treatment that do not have the potential for abuse or physical dependency associated with stimulant drugs. Methylphenidate and amphetamines are classified under the federal Controlled Substances Act as Schedule II drugs—those with a high potential for abuse and severe psychological or physical dependence if abused. A 1995 Drug Enforcement Administration (DEA) review of methylphenidate concluded that based on studies of laboratory animals and humans, methylphenidate was similar in pharmacological effects to cocaine and amphetamines. The DEA establishes annual production quotas for Schedule II drugs by analyzing data on past sales, inventories, market trends, and anticipated need. The production quotas for methylphenidate and amphetamines have risen considerably since 1990. (See table 1.) A number of factors have contributed to the increase in the quotas, according to researchers. Key factors include (1) the number of people diagnosed as having ADHD has grown with an expansion in the criteria used to diagnose ADHD; (2) longer periods of treatment for the disorder; (3) more girls are receiving medication than in prior years; and (4) a greater public acceptance of psychopharmacologic treatment of youth. According to data obtained by DEA, about 80 percent of the prescriptions for amphetamines and methylphenidate were to treat children with ADHD. Along with the increase in the use of stimulant medications have come concerns that these drugs may be being diverted from their prescribed use, or otherwise abused. School settings are perceived as particularly vulnerable for abuse because schools store attention disorder drugs for students needing medication while at school. DEA interviews in 1997 with schools officials in three states indicated that schools might leave medications in unsecured locations, such as teachers’ desks, making theft possible. A number of anecdotal news accounts of students abusing these drugs at school have heightened concerns. (See app. IV.) However, no studies are available to document the degree to which these medications are diverted at school. There is some evidence from a small number of studies and national data that abuse of these drugs does occur. (See app. V.) For example, the University of Michigan has surveyed a national sample of public and private 8th, 10th, and 12th grade students since 1991. Of 12th graders surveyed in 2000, 2 percent reported using Ritalin without a prescription in the past year. The University of Michigan survey does not specify where drug use occurred. Based on our survey, an estimated 8 percent of principals in public middle schools and high schools in the United States reported at least one incident of diversion or abuse of attention disorder drugs during the current 2000-2001 school year. (See fig. 2.) Most of those principals reported knowing of only one incident at their school. An additional 3 percent of school principals reported at least one possible incident, but were uncertain of the drugs involved. Of the 8 percent reporting an incident of diversion or abuse in the current school year, only methylphenidate was involved at 73 percent of the schools, and only amphetamines were involved at 20 percent of the schools. In the remaining cases, the specific drug could not be determined or both drugs were involved. Using the U.S. Department of Education designations for community, we classified schools as being located in central cities, urban communities, or small towns. We compared incident rates by school and community type. (See fig. 3.) Due to the low number of incidents overall, we were unable to draw any statistical conclusions about possible association between these factors and the incidence rate. Principals reporting any incident at their school were asked to briefly describe the incident for which they had the most information. A content analysis of the 51 incidents described by our sample respondents showed that in 38 cases the student gave or sold pills to other students. For example, “Student brought Adderall to school and attempted to sell it to other students.” A second type of incident (4 cases) involved pills being stolen from other students or the school. The remaining incident descriptions were varied, such as “In all (6) cases, a pill was found outside the entrance to the main building. We aren’t sure if it is a student taking the medication at school or bringing it from home and dropping it outside.” The students involved in the estimated 8 percent of schools with reported diversion or abuse incidents were most often expelled or suspended from school as a consequence of the incident, according to principals. Other measures taken by schools in response to the incident are shown in table 2. An estimated 42 percent of the principals that were aware of an incident did not call police regarding the drug diversion or abuse incident. Consequently, measures of attention disorder diversion or abuse based on official police records may underreport actual occurrences. Most principals did not perceive the diversion or abuse of prescribed attention disorder drugs to be a major problem at their school. An estimated 89 percent reported that it was less of a problem than other illicit drug use, excluding alcohol and marijuana. In general, illicit drug use (excluding alcohol and marijuana) was reported to be not a problem at all or a minor problem by approximately 78 percent of the principals. In addition, the most frequent comments voluntarily written by principals were comments regarding the lack of an ADHD medication abuse problem at their school. For example, one principal stated that “I feel comfortable in stating that there is ‘NO DIVERSION’ of medication that is administered through the office/clinic.” We compared incident rates by the principal’s assessment of the problem, but were unable to draw any statistical conclusions about a possible association due to the low number of incidents overall. Most school officials reported that attention disorder medications are administered to students during the school day, most often by a nurse. However, only a small fraction (less than 2 percent) of a school’s students were reported to receive these drugs. Most schools reported that drugs were stored in locked cabinets or rooms, and that students are observed when they take their medications. Nationally, an estimated 90 percent of schools have school staff administering attention disorder medication to some students on a typical day, according to principals we surveyed. Schools that do not typically administer these drugs may have policies that prohibit dispensing medication, or do not have students currently requiring attention disorder medication during school hours. As shown in figure 4 estimates, statistically more middle school officials (96 percent) administered ADHD medications than did high school officials (83 percent). However, incident estimates by community type were not statistically different. While 90 percent of principals in our study population reported that their schools administer attention disorder medications, a relatively small fraction of students attending these schools were administered attention disorder medications while at school. An estimated 1.1 percent of students (in schools where drugs are administered) were dispensed methylphenidate and an estimated 0.5 percent of students were administered amphetamines, for an overall rate of almost 2 percent. A DEA drug diversion official expressed concern during recent congressional testimony with the volume of methylphenidate on hand at school for student daytime dosing. Our survey found that 6 percent of schools stored 600 pills or more, while over half of the schools stored 100 pills or less. (See fig. 5.) At schools that dispense attention disorder medications, the personnel approved to administer medications varied among schools. Nurses were reported to most often carry out that task, and second to nurses, nonhealthcare professionals, such as secretaries, most often dispense medications. (See table 3.) Lack of a nurse or other trained healthcare professional was noted as a concern by several principals. Of the 107 optional comments written by principals in our survey, 13 comments were about the need for nurses to administer medication to students. For example, one wrote, “School districts should be forced to provide full- time nursing services so that only medically-trained personnel can distribute medication.” For nonhealthcare professionals administering attention disorder medications, all but 5 percent of school officials reported some kind of training was provided to prepare staff for their duties. Principals reported multiple forms of training for staff. Training was provided by written instruction at 41 percent of schools, by healthcare professionals in about 49 percent of the schools, by oral instruction at 49 percent of schools, and 9 percent were provided video instruction. Most school principals reported that ADHD medications are kept in locked spaces. Approximately 72 percent of the schools that dispense attention disorder medications store the drugs in a locked cabinet and a locked office or room. Examples of this type of storage are shown for schools “A” and “B” in figure 6. An additional 24 percent of schools kept medications in either a locked cabinet or a locked office or room. Some school principals noted that during nonschool hours medication security was tighter, such as locking the room in which medication was stored in addition to a locked cabinet, or using a vault. Of those reporting that medications were kept locked, the average number of people with access was three people, and at most schools (93 percent) fewer than six persons have access to the medications. Because most schools secure attention disorder medications in locked storage, and the low overall rate of diversion or abuse, we were unable to draw statistical conclusions about any possible association between number of incidents, medication security, or security and school type. Cabinet and door locks school B Almost all (96 percent) of the school principals in schools that administer medications reported that students are observed when they are administered medication to assure that it is taken. Of the 90 percent of schools that administer attention disorder medications, about 48 percent have parents only transporting student medications from home to school. Another 34 percent of schools allow either parents or students to transport medications and 12 percent had students transporting their own medications. Among those schools that have students transporting their own medications, several principals commented that controls were in place to assure that none of the medication was diverted from home to school. For example, one principal reported that the medication bottle must be taped closed with the number of pills inside indicated on the bottle and accompanied by a note signed by the parent. We compared incident rates by how the medications were transported to school, but were unable to draw any statistical conclusions due to the low number of incidents overall and the distribution of responses. Many states in the United States have statutes, regulations, and/or mandatory policies regarding the administration of medication at schools. At the local level, most of the principals in our survey of middle and high schools reported having school district provisions regarding the administration of medication. From our survey of state education officials (see app. III), we determined that 37 states and the District of Columbia have statutes, regulations, and/or mandatory policies addressing medication administration at schools, as shown in appendix VI. The remaining 13 states do not, as discussed in the following sections. Of the 37 states with applicable provisions, 29 require or authorize schools to adopt medication administration policies; in most of these states, schools issuing policies for the administration of medication must incorporate minimum statewide requirements. The other eight states and the District of Columbia do not expressly delegate authority to local schools, but provide for the regulation of medication administration in schools based on statewide or districtwide requirements. We analyzed provisions in the 37 states and the District of Columbia based on five common statewide requirements for administering medication at schools: (1) whether schools must obtain authorization from the student’s parent or guardian to administer medication, (2) whether schools must obtain written orders or instructions from the student’s physician or other licensed medication prescriber to administer medication, (3) whether schools must receive and store prescription medication in an original container with proper pharmaceutical labeling, (4) whether schools must provide storage for medication that is secure and inaccessible except to authorized school personnel, and (5) whether schools must document the administration of medication to the student in a medication log. Although these five categories represent the more common statewide requirements, they do not represent the full array of state requirements that regulate the administration of medication in schools. For example, Maine and New Jersey have minimum state requirements for school medication administration policies, but not in one of the five categories reflected in appendix VI. Maine requires that all unlicensed personnel receive training before administering medication, while New Jersey prohibits anyone other than a doctor, nurse, or parent from administering medication in a non-emergency situation. Other states limit the amount of medication that schools may store; require parents or guardians to deliver medications to schools; establish procedures for returning and/or destroying any unused medications; and establish safeguards specific to self-administration of medications by students. From our review, we found that 28 states and the District of Columbia require that schools obtain authorization from the student’s parent or guardian before administering medication. Virtually all of these jurisdictions specifically require written authorization. In addition, 19 states and the District of Columbia require that schools obtain orders or instructions from the student’s physician or other licensed medication prescriber before administering medication. In most of these jurisdictions, the requirement for a medication order is met if the prescriber provides specific instructions for administration (e.g., the name, route, and dosage of the medication and the frequency and time of the administration). However, in two states, Utah and Washington, schools must also obtain a written statement from the prescriber that administering medication at school is medically necessary or advisable. Finally, 22 states and the District of Columbia require schools to obtain prescription medication in an original container with proper pharmaceutical labeling. Eighteen states specify the manner in which schools must store medication to ensure its security. These states vary in terms of the level of security required. States such as Indiana, Iowa, and Oklahoma simply require a secure or inaccessible location to store medication. However, most states specify locked storage for medication and a few impose more stringent security measures. For example, Massachusetts requires schools to store prescription medications in a securely locked cabinet, which is substantially constructed and anchored to a solid surface, with access to keys restricted. Sixteen states require schools to document the administration of medication to the student in a medication log or other like-named record.Documentation requirements vary between these states. Although some of the states do not specify the content or format of the medication log, many require, at a minimum, that the log reflect the date, time, and dosage of the medication given to the student, and the name or signature of the person administering the medication. A few states impose additional documentation requirements. For example, along with other states, Connecticut requires schools to document any skipped dose and the reason for it; Maryland requires scheduled pill counts for controlled substances and reconciliation against the medication log; and Massachusetts requires schools to document the return of any unused medication to the student’s parents. From our survey responses, we found that 13 states do not have applicable statutes, regulations, or mandatory policies addressing the administration of medication in schools, as reflected in appendix VI. Although 5 of the 13 states (Idaho, Kansas, Missouri, Montana, and New York) identified provisions in their survey responses, the cited provisions cover areas that are not directly within the scope of our inquiry and are not included in appendix VI. For example, Missouri and New York have statutes addressing when a student with asthmatic conditions may carry and use a prescribed inhaler at school. Thus, appendix VI does not include every provision cited by a survey respondent, only those provisions relevant to our work. Finally, during our survey, 22 states and the District of Columbia reported that they have policy guidelines addressing the administration of medication in schools. The policies in these jurisdictions are discretionary and do not create legal requirements for administering medication in schools, as do the statutes, regulations, and mandatory policies reflected in appendix VI. Nevertheless, the discretionary policies often contain detailed recommendations to assist schools adopting medication administration policies. The discretionary policies cover the same broad range of medication administration procedures reflected in the various state statutes, regulations, and mandatory policies. Only seven states have no applicable statutes, regulations, or policies (discretionary or mandatory) addressing the administration of medication in schools. Lack of a state policy on the administration of medication does not prevent schools in a state from developing their own provisions, and most have. According to responses in our survey of school principals, 90 percent of schools have received district regulations or policies regarding the administration of prescription medications. For example, South Carolina officials reported that the state has no statutes, regulations, or policies in this area; however, the Charleston County School District medication administration policy mirrors many of the policies developed by other states. For example, the Charleston district requires that written medication requests be completed by the prescribing physician and parent, that medication be delivered by the parent in its original container, that medication be kept locked at the school, and be administered by a nurse or designated staff. An estimated 17 percent of school principals reported that their school policy had recently changed regarding the administration of prescription drugs to students. Of the 17 percent reporting a policy change in the last 2 years, 29 percent reported that the change was due to problems with the handling of medications at the principal’s school or at a neighboring school. We do not believe that the diversion or abuse of attention disorder medications is a major problem at middle or high schools. Based on our findings, few middle or high school principals are aware of ADHD medication diversion or abuse, and most do not believe this is a major problem. Furthermore, states and localities appear to be cognizant of the potential for problems and many have established policies and procedures to minimize risks. Finally, the development of nonstimulants for attention disorders and increasing use of once-a-day stimulant medications may reduce the potential for diversion or abuse at school by reducing the need for the medications to be administered during school hours. Agency comments were not requested for this report because no federal agency or federal policies were reviewed. We did discuss our findings with the Drug Enforcement Administration’s Office of Diversion Control prior to the completion of our report and have incorporated changes where necessary. We will send copies of this report to the Ranking Member, House Committee on the Judiciary; the Chairman, Senate Committee on the Judiciary; the Ranking Member, Senate Committee on the Judiciary; the Administrator, Drug Enforcement Administration; and other interested parties. Copies of this report will be available on GAO’s homepage at http://gao.gov. The major contributors to this report are acknowledged in appendix VII. If you or your staffs have any questions about this report, please contact me at (202) 512-8777 or Darryl W. Dutton at (213) 830-1000. Our objectives in this review were to (1) determine the prevalence of diversion and abuse of attention disorder drugs in public schools, 2) describe the school environment in which drugs are administered to students, and (3) obtain information on state laws and regulations regarding the administration of prescription drugs in schools. We conducted our review between February and June 2001 in accordance with generally accepted government auditing standards. To attain our objectives, we surveyed a statistically representative random sample of public school principals. We focused our attention on middle schools and high schools, which we defined as schools containing grades 6 or higher. Specifically, we asked these principals a series of questions about any incidents of diversion and abuse of attention disorder drugs at their school since the beginning of the 2000-2001 school year. We also asked a number of questions covering school policies and practices on the administration and storage of these types of attention disorder drugs. The study population for the survey of public school principals consisted of all public schools in the 2000-2001 school year that have at least one grade between 6th and 12th (inclusive), more than 1 teacher, and a total of at least 10 students. The sample was drawn from a list of all public schools in the United States compiled by The Common Core of Data (CCD) for the 1998-99 school year. The CCD is the U.S. Department of Education’s primary database on public elementary and secondary education in the United States. We used the 1998-99 CCD file to produce a list of schools representing our study population. From this list of 35,522 schools, we drew a random sample of 1,033 schools to represent the study population in the 50 states and the District of Columbia. Of the 1,033 surveys we mailed out, 735 completed surveys were returned, a response rate of 71 percent. See appendix II for a copy of our survey instrument. The sample design for this study is a single-stage stratified sample of schools in the study population. The strata were defined in terms of type of school (middle school, high school, etc.) and community type (city, urban, or small community). Since type of school was not available on the sample frame, we developed criteria based on the highest and lowest grade level reported for the school. The first six strata consist of schools for which an unambiguous assignment to middle school or high school can be made. An additional three strata consist of upper grade schools that have grade levels that overlap between the middle school and high school definitions. The following rules are used to assign middle, high, or high/middle school type: High school – Schools on the CCD having their high grade and their low grade between 9th and 12th grade, inclusive. Middle school – Schools on the CCD having their high grade between 6th and 9th, inclusive. In addition the low grade for the school must be 8th or below (but not less than 4th grade). High/middle – Schools with at least one grade that is greater than or equal to 6th grade, no grades less than 4th grade, and not meeting the above definitions for high school or middle school. Finally, we sampled another six residual strata that are composed of schools that would meet either the “middle school” or the “high/middle school” definition, except for the presence of some grades less than the 4th grade. The strata definitions, population sizes, and sample sizes are summarized below. Estimates produced in this report are for schools in our study population that could be classified as either a middle school or a high school for the 2000-2001 school year. Although the sample was stratified according to 1998-99 grade levels at the school, estimates are produced for type of school (middle and high school) as determined from the responding school’s grade composition for the 2000-2001 school year. The survey responses provide each school’s lowest and highest grade for the 2000- 2001 school year, and these data were used to classify the responding schools as a middle school or as a high school according to the definition shown below. Of the 735 surveys returned, 596 could be classified as either a middle school or as a high school. Data from schools that could not unambiguously be classified as middle or as a high school are not included in our estimates of middle or high school characteristics. High school – Responding schools having their high grade and their low grade between 9th and 12th grade, inclusive, for the 2000-2001 school year. Middle school – Responding schools having their high grade between 6th and 9th, inclusive, for the 2000-2001 school year. In addition, the low grade for the school must be 8th or below (but not less than 4th grade). These definitions are consistent with those used in the definition of the survey’s sampling strata, except that the low and high grade is based on 2000-2001 school year data instead of on the 1998-99 CCD data. Because we surveyed a sample of public school principals, our results are estimates of all participants’ characteristics and thus are subject to sampling errors that are associated with samples of this size and type. Our confidence in the precision of the results from this sample is expressed in 95-percent confidence intervals. The 95-percent confidence intervals are expected to include the actual results for 95 percent of the samples of this type. We calculated confidence intervals for our study results using methods that are appropriate for a stratified, probability sample. For the percentages presented in this report, we are 95-percent confident that the results we would have obtained if we had studied the entire study population are within +/- 10 or fewer percentage points of our results, unless otherwise noted. For example, a nurse administers medications at an estimated 59 percent of the middle and high schools. The 95-percent confidence interval for this estimate would be no wider than +/- 10 percent, or from 49 percent to 69 percent. For estimates other than percentages (including estimates of ratios), 95-percent confidence intervals are +/- 10 percent or less of the value of the estimate, unless otherwise noted. In addition to these sampling errors, the practical difficulties in conducting surveys of this type may introduce other types of errors, commonly referred to as nonsampling errors. For example, questions may be misinterpreted or the respondents’ answers may differ from those of people who did not respond. We took several steps in an attempt to reduce such errors. For example, we developed our survey questions with the aid of a survey specialist. We discussed the questionnaire with officials at the American Association of School Administrators and the National Association of Secondary School Principals. We held discussions or pretested the questionnaire with 10 public school principals. All initial sample nonrespondents were sent at least one follow-up questionnaire mailing. All data were double keyed during data entry, and GAO staff verified a sample of the resulting data. Computer analyses were performed to identify inconsistencies and other indications of errors, and a second independent analyst reviewed all computer programs. To obtain information on state laws and regulations regarding the administration of prescription drugs in schools, we conducted a brief survey of state department of education officials (or persons designated by officials) in the 50 states and the District of Columbia. The survey requested information on all state statutes, regulations, or other written policies regarding the administration of prescription drugs to students in public schools. As was the case with the survey of public school principals, the questionnaire sent to the state education officials was developed with the aid of a survey specialist, was reviewed by an attorney, and was pretested. See appendix III for a copy of this survey instrument. We received survey responses from 48 states and the District of Columbia, and we verified the accuracy of the survey information by researching the states’ statutes and regulations. Likewise, we researched the statutes and regulations of the two states that did not respond (Ohio and Oregon). We focused on five types of medication administration requirements that appeared in many states as the basis for analyzing the various state laws. As background, we searched Lexis-Nexis and Proquest databases for anecdotal evidence of diversion and abuse of attention disorder medications in schools. Using only the information provided in the resulting pool of articles, specific incidents described in each article were identified, matched for duplication where evidence allowed, and summarized. We did not verify the reliability or validity of the reports. We reviewed the anecdotal accounts of school-based diversion or abuse of attention disorder medications to provide an indication of the public perception of diversion and abuse of attention disorder medications at schools. We searched two major on-line databases for the period January 1996 to February 2001 for anecdotal accounts. The databases include articles from over 30,000 sources, including every major U.S. newspaper, magazines, and other published sources. Because of the nature of news coverage, no conclusions can be drawn from these accounts. We did not verify the reliability or validity of the identified incidences. “Administrators at xx Middle School had heard about Ritalin Abuse for almost three years, Principal X said. But they did not know of abuse within the school until a teacher spotted two students passing something in a restroom last month. Since then, 15 students have been suspended.” Cincinnati Post (Cincinnati, OH) May 8, 2000. “Fifteen students at xx Middle School are suspected of abusing the prescription drug Ritalin. According to details of the investigation of this incident, students gave away the tablets or sold them for 50 cents to $1.” Daily Herald (IL) May 8, 2000. “Now comes word that the drug used to control the disorder – Ritalin – is being used recreationally by people who certainly don’t need it…. At xx Middle School, 15 students were suspended recently for this.” The Deseret News (Salt Lake City, UT) May 6, 2000. While most of the incidents identified involved students caught selling or stealing the medications at school, about 20 anecdotal incidents involved theft or abuse by a teacher, principal, nurse, or other school personnel. For example, in one anecdotal incident, a principal was arrested on charges that he stole Ritalin pills from the school medicine cabinet. Anecdotal incidents were reported in 37 out of 50 states. Measure of abuse Students are asked if they have used any of a wide range of drugs, including alcohol and tobacco. Only students who answered “yes” to the use of amphetamines are then asked to specify the type of amphetamine used, with Dexedrine and Ritalin as two of the amphetamine type choices. Students are asked about their lifetime, annual, monthly, and daily use of specific drugs, including their nonprescribed use of Ritalin and of amphetamines, which are described in the survey as “uppers.” Study population Since 1991, a representative national sample of public and private school 8th, 10th, and 12th graders have been surveyed annually, a sample of about 50,000 students overall in 420 public and private schools. Since 1991, 6th through 12th graders in Indiana have been surveyed on their use of amphetamines, and since 1998 on their nonprescribed use of Ritalin. Students are asked about use of Ritalin without a prescription in their lifetime and within the last 30 days. Interviewees are asked about their use and frequency of use of various licit and illicit drugs. Nonmedical use of any psychotherapeutic includes any prescription-type pain reliever, tranquilizer, stimulant, or sedative. Every 3 years since 1984, the state has surveyed 6th through 12th graders. The 1999-2000 survey of approximately 7,000 students was the first to include questions specifically about Ritalin. Since 1971, random samples of households throughout the United States have been interviewed at their place of residence. In 1999, 66,706 persons including 12 to 17 year olds were interviewed. Drug Treatment Episodes Methylphenidate (Ritalin) Within each facility participating in DAWN, a designated reporter, usually a member of the emergency department or medical records staff, is responsible for identifying drug-related episodes and recording and submitting data on each case. Juvenile Amphetamine Use % Tested Positive (Range at different cities) Arrestees are asked about taking specific drugs, including amphetamines “like Ritalin,” on a lifetime, annual, monthly, and 48-hour basis. A general question is asked to include other drugs not specifically mentioned. Since 1988, data on emergency department drug related visits has been collected from a representative sample of U.S. acute care hospitals, including 21 oversampled metropolitan areas. The 1999 sample consisted of 592 hospitals. More than 2,500 juvenile male detainees in 9 sites and more than 400 juvenile female detainees in 6 sites are administered urine tests and interviewed in detail about their drug taking, purchases and other drug- related questions. Appendix VI: State Statutes, Regulations, and Mandatory Policies Addressing the Administration of Medication to Students The California respondent told us that the implementing regulations are being drafted. The respondent for the District of Columbia told us that currently there are no implementing rules or regulations. The regulation requires either a pharmacy label or the physician’s prescription. See 511 Ind. Admin. Code 7-21-8(a)(3). In addition, although the regulation does not require schools to obtain a physician’s written orders, an Indiana statute provides immunity from liability to school employees who administer prescription medication in compliance with the parent’s or guardian’s written permission and the practitioner’s written orders. See Ind. Code 34-30-14-2. The Maine statute also requires the state commissioner of education to adopt rules for medication administration in schools, including training requirements for unlicensed personnel. The Maine respondent told us that the rules have been proposed but not yet enacted. The regulation requires either the physician’s instructions or a pharmacy label. Oregon Admin. Rules, 581-021-0037(1)(c). The Pennsylvania respondent told us that currently there are no implementing guidelines in effect. The pharmacy-container requirement is specific to self-administered medications. Code of Rhode Island Rules 14-000-011, sec. 18.9.1.1. The South Dakota respondent told us that the state board of education has not promulgated rules under the statute, but that the state department of health has issued discretionary guidelines addressing medication administration in schools. William Bates, Christine Davis, Jennifer Joseph, Stuart Kaufman, Monica Kelly, Lawrence Kinch, Lori Levitt, Mark Ramage, Anne Rhodes-Kline, and Lisa Wallace. | Children diagnosed with attention deficit disorders are often treated with stimulant medications, such as Ritalin or Adderall. These drugs are controlled substances under federal law because of their high potential for abuse. Many of these stimulant drugs must be taken several times a day to be effective, so children need medication during the school day. Concern has arisen that the increasing use of these medications in school might provide additional opportunities for drug abuse. No data exists on the extent to which attention disorder drugs have been diverted or abused at school, or the extent to which state laws or regulations guide local school officials in safely administering these drugs. Middle and high school principals reported little diversion or abuse of attention disorder drugs. For the first seven to nine months of school year 2000-2001, about eight percent of principals in public middle and high schools reported that attention disorder drugs had been diverted or abused at their school. Most of the principals reported that school officials administer attention disorder medications, with about two percent of the school's students on average being administered attention disorder drugs on a typical day. Medications are given by nurses in about 60 percent of the schools, and by non-health professionals, such as secretaries, in most of the remaining schools. Medications are kept locked in almost all (96 percent) of the schools, according to the principals, and students are observed while taking their medications. Thirty-seven states and the District of Columbia have either statutes, regulations, or mandatory policies addressing the administration of medication to students. State provisions require schools to obtain written parental authorization to administer medication, ensure that the medication is securely stored, and store prescription medication in the original pharmacy container. |
The increased popularity and widespread use of OHVs on federal lands in the 1960s and early 1970s prompted the development of a unified federal policy for such use. Executive Order 11644 was issued in February 1972 to establish policies and provide for procedures to control and direct the use of OHVs on federal lands so as to (1) protect the resources of those lands, (2) promote the safety of all users of those lands, and (3) minimize conflicts among the various uses of those lands. The order directs the agency heads responsible for managing the federal lands to issue regulations governing the designation of areas where OHVs may and may not be used. Under the order, OHV use can be restricted or prohibited to minimize (1) damage to the soil, watersheds, vegetation, or other resources of the federal lands; (2) harm to wildlife or wildlife habitats; and (3) conflicts between the use of OHVs and other types of recreation. The order closes wilderness and primitive areas to OHV use. It also requires the federal agencies to issue OHV use regulations, inform the public of the lands’ designation for OHV use through signs and maps, enforce OHV use regulations, and monitor the effects of OHV use on the land. Executive Order 11989 was issued in May 1977 and contained three amendments to the previous order. While these amendments lifted restrictions on the use of military and emergency vehicles on public lands during emergencies, they otherwise strengthened protection of the lands by authorizing agency heads to (1) close areas or trails to OHVs causing considerable adverse effects and (2) designate lands as closed to OHVs unless the lands are specifically designated as open to them. Both BLM and the Forest Service have developed regulations in response to the executive orders. These regulations require the agencies to designate areas where OHVs may be used and to manage the use of OHVs on public lands through each agency’s resource management planning process, which allows for public participation. The regulations also require the agencies to monitor the use of OHVs, identify any adverse effects of their use, and take appropriate steps to counteract such effects. Both BLM and the Forest Service follow the principles of multiple use and sustained yield in managing their lands. BLM transfers most of its authority and responsibility for day-to-day operations through its state and district offices to its over 140 resource area offices. The Forest Service manages its lands through staff assigned to its regions, forest supervisor offices (forests), and over 600 ranger districts. Both BLM and the Forest Service prepare comprehensive land and resource management plans for their public lands. BLM develops plans for its resource areas that describe the standards, guidelines, and goals for each use on the land—including recreation. The section on recreation usually designates the areas within the resource area that are open, open with restrictions, or closed to OHV use. The Forest Service prepares plans for its forests that contain goals and objectives for using and protecting the resources within a forest’s ranger districts. These plans provide for a mix of activities, including the use of OHVs. Both BLM and the Forest Service supplement their comprehensive management plans with more detailed activity plans describing the on-the-ground actions needed to implement the management plans. These activity plans generally identify specific areas or roads and trails as open, open with restrictions, or closed to OHVs; stipulate conditions for using OHVs; emphasize the use of OHVs in suitable areas; prescribe management actions; and prescribe monitoring for adverse effects. External and internal reviews have identified weaknesses in BLM’s and the Forest Service’s implementation of the executive orders on OHVs. In 1979, the Council on Environmental Quality concluded, in a report entitled Off-road Vehicles on Public Land, that both BLM and the Forest Service have been slow to address damage from OHVs to soils, vegetation, wildlife, and watershed resources. Similarly, the Department of the Interior’s Inspector General, in a 1991 report on BLM’s activities, and the Forest Service, in a 1986 review of its OHV program and in an ongoing review, disclosed various deficiencies, such as incomplete inventories of routes open and closed to OHV use, inadequate mapping and posting of OHV routes, untimely resolution of conflicts between OHV users and other users of the lands, and limited monitoring of the effects of OHV use on natural and cultural resources. According to the Forest Service, the current review is focusing on (1) the quality of its OHV trails’ design, (2) the quality of its trails’/areas’ maintenance, (3) the direction of its forest plans, (4) its employees’ knowledge and competency, and (5) the quality of its cooperation with the private sector and other government entities. The Forest Service plans to incorporate the results of the review into an action plan to improve the OHV program. At the eight locations we reviewed, OHV programs generally received limited federal funding, and relatively few staff devoted either all or part of their time to OHV activities. According to BLM and the Forest Service, the limited federal funding available for their recreation programs, including their OHV programs, has generally been less than requested and does not reflect their management needs. Within the appropriated dollar allocations, OHV activities were given lower funding and staffing priorities than other competing programs at the eight locations we reviewed, and—according to agency officials—this ranking is typical for other BLM and the Forest Service locations with OHV activities. State governments, local communities, and private organizations, however, were contributing funds and volunteering services to supplement the federal efforts. In fiscal year 1993, the OHV programs at the eight locations we reviewed received an estimated $1.8 million in federal and state funding. (See table 1.) In the aggregate, two-thirds of this funding came from the states. Four of the five states in which the eight case studies were located had state OHV programs that allocated funds through grants and other means to support OHV activities throughout the states, including those on federal lands. The states obtain most of their funds for the programs from OHV licensing fees and state gasoline taxes. Almost all of the remainder of the funding for OHV activities at the eight locations came from the federal government. Local communities and private organizations contributed funds at some locations and services and materials at all locations; the total value of these contributions, however, was not readily available. As table 1 indicates, the federal contribution ranged from a low of 12 percent at the Barstow Resource Area—where California contributed over $700,000, or about 40 percent of the total estimated funding for the eight locations—to a high of 100 percent at the Stateline Resource Area—where Nevada provided no funds for the OHV program. In dollar terms, the federal contribution was as low as $25,000 at the Mesa Ranger District in Arizona and as high as $110,000 at the Salt Lake Ranger District in Utah. At all eight locations, the majority of the staff working on OHV programs devoted only part of their time to OHV activities. These individuals generally had other responsibilities involving such activities as recreation, maintenance, and/or law enforcement. At six of the eight locations, between two and four staff were spending part of their time and between none and two were working full-time on OHV activities. At the remaining two locations, where the OHV programs were larger, more staff were devoted to OHV activities. At the Barstow Resource Area, 11 staff spent part of their time and 13 staff worked full-time on the OHV program, and at the Mt. Pinos Ranger District in California, 7 staff spent part of their time and 4 staff worked full-time on the OHV program. At all eight locations, individual OHV users, OHV user groups, and local volunteers contributed services and materials to the OHV programs. At two locations—the Boise Front Special Recreation Management Area within the Cascade Resource Area in Idaho and the Paiute ATV Trail in Utah—coalitions with local governments and organizations have supplemented the resources available for OHV programs. The Boise Front is a 43,000-acre patchwork of public and private lands that forms the primary watershed and a scenic backdrop for the city of Boise. Historically, the Front has been one of the most popular recreation areas in Idaho. Serious conflicts have arisen between OHV use and efforts to prevent trespassing on private property, protect watersheds, and control erosion. In 1988, the Boise Front Coalition was formed to deal with these and other conflicts. The coalition, whose members include representatives of city, county, state, and federal agencies as well as private landowner and user groups, has organized volunteers to clean up litter, install hay bales and water bars to control erosion, place route signs, and maintain trails. This work has supplemented the efforts of BLM and of the state, which, between 1990 and 1993, contributed over $120,000 to reconstruct trails, enforce laws, and provide information and education for visitors. Currently, the Front’s OHV roads and trails have signs, maps, information boards, and rest rooms and are patrolled by the county sheriff’s department. Although the coalition had not completely resolved the Front’s conflicts at the time of our review, it was working to do so. The Paiute ATV Trail is an approximately 200-mile-long loop route through mountains and canyons in central Utah. The trail runs through BLM, Forest Service, state, county/community, and private lands. It was opened in 1988 and is managed by the Paiute ATV Trail Committee, a coalition of federal, state, and local interests under the Forest Service’s leadership. Through 1993, the state of Utah had provided over $80,000 in OHV matching grant funds to post trail signs, relocate trails, and install bridges, sanitation stations, and erosion control measures. Local communities have also helped to maintain trails, prepare maps, post signs, and monitor the effects of OHV use. The trail is nationally recognized by the OHV recreation community as a unique riding experience, and visitors come to it from all parts of the country. BLM and the Forest Service have partially implemented the executive orders’ requirements that they designate lands for OHV use, monitor OHV use, and correct any adverse effects of OHV use. According to OHV program managers and staff at the eight locations we visited, the higher priority given to other programs and limits on the funding and staffing allocated for OHV activities have prevented full implementation of the executive orders’ requirements. At the eight locations we visited, BLM and the Forest Service have completed the initial designation of their lands for OHV use, basing these designations largely on the existing uses of areas, roads, and trails for activities such as recreation, mining, logging, and grazing. Subsequently, as they have updated and amended their resource management plans, they have revised their initial designations to better protect natural and cultural resources and minimize conflicts among users of the lands. However, at five of the eight locations we reviewed, the OHV program staff have not finished inventorying their lands, mapping their designations, and posting signs to inform the public of their designations. The BLM and Forest Service locations we visited have designated their lands as open, open with restrictions, or closed to OHV use. BLM’s lands are generally less hilly or mountainous and are located in more desertlike environments than the Forest Service’s lands; hence, they provide more open terrain for cross-country OHV use. The Forest Service’s lands generally include more rugged, mountainous, and forested terrain, where OHV use is typically restricted to roads and trails. As table 2 indicates, about 39 percent of the lands in the four BLM resource areas were open to unrestricted cross-country use, while none of the lands in the four Forest Service ranger districts were open to such use. OHV use was restricted to existing or designated roads and trails on about 59 percent of the BLM lands and on about 53 percent of the Forest Service lands. The resource areas had closed about 2 percent of their lands to OHV use, while the ranger districts had closed about 47 percent of their lands. Lands designated as open (without restrictions) include areas where (1) OHVs have historically been used for recreation, (2) management and resource information gathered to date has not supported designation as closed or restricted, and/or (3) the land management planning process has indicated that further OHV use would not have significant adverse effects on natural or cultural resources. Lands on which OHV use is restricted to existing or designated roads and trails include natural or cultural resources that could be adversely affected by unrestricted cross-country OHV use. For example, in the Barstow Resource Area’s Afton Canyon Natural Area, vehicular access is limited to designated roads and trails to protect sensitive riparian habitat and scenic beauty along one of the few places where the Mojave River flows above ground. Lands designated as closed to OHV use include wilderness areas, natural areas where research is being conducted, some areas of critical environmental concern, and other special management areas. For the most part, lands closed to OHV use in the four ranger districts we visited were located in watershed areas sensitive to erosion or in congressionally designated wilderness areas. For example, at the Salt Lake Ranger District in Utah, 64,000 acres were in four designated wilderness areas. At the time of our review, the four resource areas we visited had no designated wilderness areas, but they did have lands that had been studied and were being considered for possible designation as wilderness areas by the Congress. OHV use is generally allowed in such wilderness study areas so long as it does not impair an area’s wilderness potential. However, we found that OHV use in some wilderness study areas was either prohibited or severely restricted. For example, in the San Rafael Resource Area in Utah, about 253,000 acres in seven wilderness study areas were being considered for possible designation as wilderness areas. OHV use was prohibited in three of the areas and restricted to a few existing trails in the other four. As required under the executive orders, BLM and the Forest Service have issued regulations requiring that their designations of lands for OHV use be communicated to the public through maps and signs posted on areas and routes. However, the staff at all four of the resource areas and one of the ranger districts we visited have had difficulty complying with these regulations. They have not completed inventories of their OHV areas, roads, and trails, and they have not finished preparing maps and posting signs to indicate where OHVs may or may not be used. Without such inventories, maps, and signs, neither the public nor the staff can be certain whether specific areas, roads, or trails are available for OHV use. For example, an OHV user on an existing but unmarked trail may inadvertently ride off of the trail, leaving new tracks. Later, other OHV users may follow the new tracks, incorrectly assuming that they represent an existing trail available for OHV use. At the Cascade Resource Area, agency staff accompanying us to view a network of trails did not agree on which ones were existing and therefore available for OHV use. Without maps and signs to identify OHV routes, restricted-use areas are, in effect, used and managed as open-use areas. OHV program managers and staff at the four resource areas and one ranger district cited limits on funding and staffing and higher priorities for other programs as the primary reasons for their inability to comply more fully with the executive orders’ requirements. They also noted that they manage vast land areas—from several hundred thousand acres to over 3 million acres—and are responsible not only for posting new signs but also for replacing signs that have deteriorated or have been vandalized. Program managers at three of the five locations that have not fully complied with the executive orders’ requirements for inventories, maps, and signs—the Mesa Ranger District in Arizona, the Barstow Resource Area in California, and the San Rafael Resource Area in Utah—told us that they are currently compiling inventories of their OHV routes and will eventually map these routes and post signs on them. Managers at the Cascade Resource Area in Idaho told us that the low density and wide distribution of OHV use in the area did not warrant the investment of resources needed to complete the inventories, maps, and signs. The Cascade Resource Area has, however, completed the maps and signs for the very small portion (less than 3 percent) of its land that lies within the Boise Front, where OHVs are most heavily used. Managers at the Stateline Resource Area in Nevada told us that the resource area has not had the funds or staff to complete the inventories, maps, and signs. In responding to a draft of this report, BLM said that it is working with state and local governments and interest groups to supplement federal and state funds to complete inventories, maps, and signs for its roads and trails. According to BLM, several offices are working innovatively with volunteers, using a geographic positioning satellite system and a geographical information system to inventory the roads and trails and produce maps for the public’s and its own administrative use. The three remaining ranger districts we visited—Mt. Pinos and Upper Lake in California and Salt Lake in Utah—have extensive maps of OHV routes that clearly identify the location and number of each road and trail and, in the case of the Mt. Pinos maps, describe the routes and specify their level of difficulty and length. These maps are available to the public at the respective ranger districts. Informative signs were posted on the designated roads and trails in these districts. According to OHV program staff at these locations, the maps and signs help keep OHV users in authorized areas. As required under the executive orders and implementing regulations, BLM and the Forest Service have prepared resource management and activity plans that require systematic, documented monitoring to (1) identify any adverse effects of OHV use on natural and cultural resources and any needed corrective actions and (2) determine users’ compliance with OHV regulations. Such monitoring includes measuring changes in vegetation, soil, and wildlife habitat at key locations and regular intervals; recording the data; evaluating and analyzing the results; and modifying the program’s management as necessary in light of the results. Monitoring is particularly important in unmapped, unmarked areas where OHVs may inadvertently be intruding on restricted or closed areas. None of the eight locations we visited was systematically monitoring and documenting the adverse effects of OHV use and any needed corrective actions except in areas where competitive events requiring permits are held. Agency employees performing other duties and members of the public—including both OHV users and members of environmental groups—were periodically observing and reporting adverse effects of OHV use, but such anecdotal evidence does not provide the comprehensive documentation that is needed to fully characterize the resource damage and set priorities for corrective action. To partially offset the difficulty of monitoring vast tracts of land with limited funds and staff, some locations we visited were concentrating their monitoring on locations with heavy OHV use, sensitive soils, riparian areas, or critical wildlife habitat. The Barstow Resource Area, for example, had developed a listing of “hot spots” where management attention is most needed. This listing provides the staff with a basis for setting priorities for monitoring and taking corrective action. The executive orders and implementing regulations also require BLM and the Forest Service to enforce all rules and regulations governing OHV use on their lands. These requirements are designed to, among other things, protect public health and safety and minimize land-use conflicts. All eight of the locations we visited were undertaking various enforcement activities. However, such activities were sometimes hampered because maps and signs were not available to communicate OHV designations, and the number of law enforcement staff was limited at the various locations. All eight locations were issuing citations for violations of OHV regulations, primarily for licensing and equipment violations. Available information—from estimates, partial computer records, and actual citations—indicates that the number of OHV citations varied from fewer than 10 at one location to more than 200 at another during calendar year 1993. Such wide variation was due, in part, to differences in the size of the agencies’ law enforcement staffs and in the use the locations were making of cooperative agreements with local communities to provide supplemental law enforcement support. Many OHV program staff told us that they consider making one-to-one contact with OHV users on the trail more effective as an approach to law enforcement than issuing citations. According to staff at all of the sites we visited, the presence of law enforcement staff helps to ensure compliance with OHV use regulations. In addition, educational efforts and materials are used to increase compliance with regulations, promote visitors’ safety, and decrease the adverse effects of OHV use. As required by the executive orders and implementing regulations, BLM and the Forest Service were taking actions to correct the adverse effects of OHV use at the eight locations we visited. However, because the agencies did not have complete monitoring data, the full nature and extent of the adverse effects and the actions needed to correct them are unknown. All eight locations were taking actions, such as relocating trails, maintaining trails, replanting vegetation, and closing affected areas. These actions were designed to prevent further damage from OHV use, maintain existing or provide additional opportunities for OHV recreation, or resolve conflicts between OHV users and other users and residents. At the Barstow Resource Area, a camping and OHV staging area was closed to protect the habitat of the desert tortoise, and a new access road was graded to attract OHVs to a nearby open-use area. At the Upper Lake Ranger District, erosion control measures were installed on a system of OHV trails to minimize the damage to soils and watersheds from OHV use and preserve opportunities for OHV recreation. At the Mesa Ranger District, an area was partially closed to OHVs to allay public concerns about health and safety problems and the visual degradation of the area; the area was fenced; locked entrance gates were installed; designated looped trails were numbered and posted; closed routes were barricaded; and play areas, including hill climbs, were planted with vegetation. Staff at all eight locations identified adverse effects of OHV use that, at the time of our visits, had not been corrected. At the Mesa Ranger District, for example, extensive damage to resources caused by vehicles driving up and down the banks of, and across, a dry streambed had not been corrected because funding and staffing had been allocated to other areas with greater OHV use. Similarly, at the Nellis Dunes OHV play area in the Stateline Resource Area, health and safety problems—including high-speed, uncontrolled, cross-country OHV riding; garbage dumping; auto stripping; indiscriminate camping; partying; and firearms shooting—had not been corrected because the limited resources were being used to manage higher-priority OHV racing competitions generally held elsewhere. Although more than 20 years have passed since the issuance of the first executive order calling for the management of OHV use on federal lands, BLM’s and the Forest Service’s compliance with the provisions of the two orders has been mixed. According to OHV program managers and staff at the eight locations we visited, both agencies have given higher priority to other activities and have allocated limited funding and staffing to their OHV programs. Furthermore, both agencies have relied heavily on the states to support their OHV programs so that, in an era of constrained federal funding, the extent of their future compliance is likely to depend on the level of support they receive from nonfederal sources. Should such support waver or cease in the future for any reason, the agencies’ ability to comply with the executive orders would be further hampered. Some BLM and Forest Service locations have made more efficient use of the resources available to them by targeting their monitoring and enforcement to the most heavily used or the most environmentally sensitive lands. Also, some have formed coalitions with state governments, local communities, and private organizations (such as the Boise Front Coalition and the Paiute ATV Trail Committee), to supplement their resources for OHV programs. As the agencies continue to inventory, map, and post signs to identify their OHV areas, roads, and trails, they should be able to implement the executive orders’ provisions more fully. This report provides information on the use and impact of OHVs on public lands. It makes no recommendations. We requested comments on a draft of this report from the Departments of the Interior and Agriculture. We met with and received comments from agency officials, including the Deputy Director, Bureau of Land Management, Department of the Interior, and the Acting Associate Deputy Chief of the Forest Service, Department of Agriculture. They generally agreed with the information and conclusions in the report and offered several technical clarifications, which we incorporated in the report where appropriate. In addition, Interior and Agriculture provided the following comments, which addressed broader issues than our work at the eight case-study locations. Interior stated that BLM is revising its OHV, trail, access, and transportation manuals and handbooks to clarify its management goals and objectives and to integrate these components into a holistic transportation access network. The transportation access network will be planned, designed, constructed, maintained, and monitored to meet the needs of recreationists, authorized users, and BLM. BLM believes that this systematic approach will prove more effective for managing OHV use than the individual activity approach used in the past. In addition, BLM is hiring an OHV/trail technical assistant to provide its resource areas with help and training in ways to inventory, plan, develop, maintain, operate, and monitor roads and trails. BLM is also revising its sign catalog and procedures for ordering signs to improve the resource areas’ ability to acquire and use consistent signage. Interior also said that BLM is moving from an agency that manages specific activities on federal lands to one that manages the condition of the lands’ resources according to consistent standards. The use of OHVs, along with all other uses of the public lands, will be allowed in areas or along trails where the use is compatible with the desired condition of the resources. Staffing and funding will emphasize a holistic approach to managing a specific piece of ground rather than individual activities. By enabling BLM to apply consistent standards to all activities, this approach should support the agency’s efforts to focus staff time and funding on problems in “hot spots” or areas where the resources are not in the desired condition. In its comments, Agriculture said that at current funding levels, the Forest Service will continue to restrict its mapping, signing, and monitoring of adverse effects to the areas that receive the heaviest OHV use and are the most ecologically sensitive. Agriculture further said that efforts to more fully implement the executive orders depend heavily on the availability of funding, that the amounts available generally fall well below the amounts needed and requested, and that each ranger district has to make very difficult choices about how to allocate its limited resources among its various programs and activities. We conducted our review between December 1993 and June 1995 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and Members of Congress, the Secretaries of the Interior and Agriculture, the Director of the Bureau of Land Management, the Chief of the Forest Service, and other interested parties. We will also send copies to others upon request. Please call me at (202) 512-7756 if you or your staff have any questions. Major contributors to the report are listed in appendix X. Representative Bruce F. Vento asked us to review the implementation of Executive Orders 11644 and 11989 by the Department of Interior’s Bureau of Land Management (BLM) and the Department of Agriculture’s Forest Service. These orders were issued in the 1970s to establish policies and provide for procedures to regulate the use of off-highway vehicles (OHV) on federal lands. More specifically, our objectives were to obtain information on (1) the funding and staffing for OHV programs and (2) the extent to which the two agencies were complying with the executive orders’ requirements that they designate federal lands for OHV use, monitor OHV use to identify adverse effects and any needed corrective actions and to determine compliance with regulations, and address or correct any adverse effects of OHV use. To perform this review, we reviewed the executive orders and BLM’s and the Forest Service’s implementing regulations. We spoke with and obtained information from (1) BLM and Forest Service headquarters officials; (2) BLM state, district, and resource area officials and OHV program staff; (3) Forest Service regional, forest, and ranger district officials and OHV program staff; (4) state government OHV program officials; (5) representatives of OHV user groups, including the Blue Ribbon Coalition and the Motorcycle Industry Council; and (6) representatives of environmental groups, including the Sierra Club and the Audubon Society. We learned that neither BLM nor the Forest Service had nationwide data on its funding and staffing for OHV programs and neither had reliable data on the extent or effects of OHV use on its lands. Hence, we agreed with the requester’s office to obtain information illustrative of BLM’s and the Forest Service’s OHV programs by reviewing the implementation of such programs at four BLM resource areas and four Forest Service ranger districts where, we were told, the use of OHVs was high. During our review, we visited several other BLM and Forest Service locations to obtain additional information about the agencies’ OHV programs. We selected the eight locations on the basis of (1) the number of acres managed, (2) the estimated extent of OHV use, (3) the type of OHV use, (4) and the type of terrain on which OHVs were used. We attempted to obtain some diversity in our selection while concentrating on the areas with the highest use that exhibited the types of problems OHV program managers face at the local level. We limited our selection to the western states because they have the most OHV activity and the most acres of land managed by BLM and the Forest Service. We obtained concurrence from the requester’s office and from BLM and Forest Service headquarters and state/regional officials that the locations selected would illustrate each agency’s OHV program and the problems associated with OHV use. A brief description of the eight locations and the basis for their selection follows. Barstow Resource Area, California. California ranks first in OHV use on BLM lands and fourth in the number of acres of BLM lands in the conterminous United States. The OHV use reported by BLM for California is about double that reported by BLM for the next 10 highest states. According to BLM’s California state office, the Barstow Resource Area has the most OHV use of any BLM location in the state. Four-wheel drive vehicles and motorcycles are most commonly used for this largely desert terrain. Stateline Resource Area, Nevada. Nevada ranks sixth in OHV use on BLM lands and first in the number of acres of BLM lands in the conterminous United States. The Stateline Resource Area receives substantially more OHV use than any other BLM resource area in the state. Four-wheel drive vehicles, motorcycles, and all-terrain vehicles (ATV) are preferred for this mostly desert terrain. Cascade Resource Area, Idaho. Idaho ranks eighth in OHV use on BLM lands and eighth in the number of acres of BLM lands in the conterminous United States. OHV use in the Cascade Resource Area is concentrated in an area known as the Boise Front, which has the most intensive OHV use in the state. The Boise Front encompasses BLM, Forest Service, state, and private lands and has been managed cooperatively over the past 10 years. Four-wheel drive vehicles and motorcycles are used most often for this terrain consisting of mountain valleys and forested foothills. San Rafael Resource Area, Utah. Utah ranks second to California in OHV use on BLM lands and second to Nevada in the number of acres of BLM lands in the conterminous United States. The San Rafael Resource Area, according to BLM’s Utah state office, has some of the highest OHV use on BLM lands in the state. Four-wheel drive vehicles, motorcycles, and ATVs are preferred for this semiarid terrain with some canyons. Upper Lake Ranger District, California. California ranks first in OHV use on Forest Service lands and first in the number of acres of Forest Service lands in the conterminous United States. According to the Forest Service, OHV use reported for California is more than double that reported for the next highest state, which is Arizona. OHVs, primarily motorcycles, are used year round on terrain ranging from chaparral at lower elevations to conifer forests at higher elevations. Mt. Pinos Ranger District, California. A second Forest Service location in California was selected because the use of OHVs in the state is high. All types of OHVs—including motorcycles, four-wheel drive vehicles, and ATVs—are widely used in the Mt. Pinos Ranger District on terrain ranging from chaparral at lower elevations to conifer forests at higher elevations. Mesa Ranger District, Arizona. Arizona ranks second to California in OHV use on Forest Service lands and sixth in the number of Forest Service acres in the conterminous United States. The Mesa Ranger District has the highest OHV use in the state. ATVs and four-wheel drive vehicles are used most frequently for this arid terrain, which ranges from rolling hills to mountains. Salt Lake Ranger District, Utah. Utah ranks fifth in OHV use on Forest Service lands and 10th in the number of Forest Service acres in the conterminous United States. The Salt Lake Ranger District has some of the highest OHV use in the state. Motorcycles and four-wheel drive vehicles are used most commonly for this terrain consisting of foothills and steep canyons. During our visits to each of the eight locations, we reviewed resource management plans and activity plans that addressed OHV management. Additionally, to obtain information on funding and staffing, we held discussions with resource area and ranger district managers and their OHV program staff and obtained available documentation on funding and staffing. Precise funding and staffing information was not available because none of the BLM and Forest Service locations accounted for the OHV program separately from other recreation programs. OHV program staff provided us, for fiscal year 1993, with estimates of the amount of federal funding and the number of staff that were being devoted to OHV activities at each of the eight locations and with the actual amount of state funding provided through cooperative partnerships at all of the locations except the one where state funding was not provided. To obtain information on the designation of land for OHV use, we talked with resource area and ranger district managers and OHV program staff and reviewed regulations, resource management plans, activity plans, and other documentation relevant to the determination of where OHVs are and are not allowed. We also obtained information on how these determinations were communicated to the public through such means as maps and signs. To obtain information on the monitoring of OHV use to identify its adverse effects and to determine compliance with regulations for it, we spoke with resource area and ranger district managers, OHV program staff, and law enforcement staff. We also reviewed regulations, resource management plans, activity plans, and other documentation to determine how and to what extent monitoring—systematic, documented monitoring as well as casual, sporadic monitoring—of OHV use was being done, how any adverse effects of such use and any needed corrective actions were being identified, and how regulations for OHV use were being enforced through the issuance of citations and other means. To obtain information on the corrective actions being taken to address the adverse effects of OHV use, we spoke with resource area and ranger district managers and OHV program staff and reviewed documentation on the types of corrective actions needed, taken, and not taken. To develop more specific information on corrective actions, we concentrated on two sites within each resource area and ranger district—one site where corrective actions had been taken and one site where corrective actions had not been taken or additional actions remained to be taken. When needed corrective actions had not been taken, we determined the reasons why. We conducted our review of the eight case-study locations between December 1993 and June 1995 in accordance with generally accepted government auditing standards. The Barstow Resource Area is part of BLM’s California Desert District. It includes about 3.2 million acres of BLM land in southern California’s Mojave Desert and is located 1 or 2 hours driving time northeast of the Los Angeles metropolitan area, where 15 million people reside. The resource area includes some of the most popular and intensively used OHV areas in California. OHV use is highest at a number of designated open-use areas near Los Angeles and several other rapidly growing communities; it includes organized, competitive, high-speed racing events; hill climbing; and sand dune, trail, and cross-country riding. (Fig. II.1 shows, among other things, the location of the resource area and of Afton Canyon and Juniper Flats—two sites we reviewed during our visit.) Funding for the Barstow Resource Area’s OHV program comes from both BLM and the state of California. During fiscal year 1993, for example, the estimated funding for Barstow’s OHV program totaled about $805,000—of which $705,000, or 88 percent, was provided by the state and an estimated $100,000, or 12 percent, was provided by BLM. About $550,000 of the state funding was directed toward the El Mirage OHV Recreation Area, a 24,000-acre intensive-use OHV area, which is located 100 miles from Los Angeles and is operated by BLM under a federal, state, and county cooperative management plan. About $561,000 (or about 70 percent) of the combined $805,000 in funding at Barstow was spent on staff salaries, supporting 13 full-time OHV staff and 11 staff who devote part of their time to OHV activities. Of the full-time OHV staff, 10 work at El Mirage—3 law enforcement rangers, 1 recreation planner, 1 park ranger, 3 facility maintenance staff, 1 site manager, and 1 administrative assistant. The remaining three full-time staff—one recreation planner and two park rangers—work at other locations. The 11 staff who devote part of their time to OHV activities include 9 law enforcement rangers, 1 supervisory recreation planner, and 1 equipment operator, all of whom work outside El Mirage. The remaining $244,000 was spent on nonsalary items, including contracted road construction, grading, equipment, and signs. Barstow’s OHV use designations were initially based on an environmental analysis that was completed in the course of developing the 1980 California Desert Conservation Area Plan (the resource management plan covering the Barstow Resource Area) and a 1982 amendment to the plan. The plan’s objectives in designating lands for OHV use include minimizing damage to natural, cultural, and aesthetic resources; providing a network of routes for desert travel; reducing conflicts among desert users; and providing for appropriate off-highway recreation. Traditional land uses heavily influenced the designations. Table II.1 shows that, at the time of our review, OHV use on 2.87 million acres, or 90 percent of the Barstow Resource Area’s 3.2 million acres, was restricted to designated routes in marked areas and existing routes in unmarked areas to (1) minimize harm to resources by preventing the harassment of wildlife and protecting threatened and endangered species, (2) prevent damage to land being considered for designation as wilderness, and (3) minimize conflicts with other users of the desert. Another 300,000 acres (9 percent) at five locations were designated as open to OHV use because of their recreational importance. The remaining 30,000 acres (1 percent) were closed to OHV use to protect certain sand dune systems, dry lakes, and primitive areas. Total BLM acres in resource area Acres designated as— Open to OHV use Restricted to certain areas Closed to OHV use 9 percent (300,000 acres) 90 percent (2,870,000 acres) 1 percent (30,000 acres) Special OHV events (annually) After developing the 1980 Desert Plan, Barstow allowed OHV use on all existing routes unless they were posted as closed because it did not have an inventory of existing routes open to OHV use. In 1989, BLM finished publishing a series of desert-access maps showing existing routes, closed routes, closed areas, and open cross-country use areas. Barstow is currently developing an inventory of routes open to OHV use and is changing its practice from allowing OHV use on all existing routes unless posted as closed to allowing OHV use only on those routes posted as open. About 2.3 million acres, or about 72 percent of Barstow’s lands, have been inventoried and, according to Barstow recreation planners, the routes being proposed as open to OHV use represent about 32 percent of the existing routes shown on the 1989 desert-access maps. On most Barstow Resource Area lands, posting for OHV use is either incomplete or has not been done at all. Signs are, however, in place at the five OHV open-use areas and at areas where site-specific plans have been written, including the Rainbow Basin Natural Area, the Afton Canyon Natural Area, and the Juniper Flats Cultural Area. Signs at the five OHV open-use areas include perimeter boundary signs and visitor information boards. At Rainbow Basin, Afton Canyon, and Juniper Flats, routes open to OHV use have been posted. The other locations available for OHV use within the resource area have generally not been posted because of insufficient funds. Unauthorized OHV use in inadequately posted areas sometimes damages resources, such as soils and plants, and creates conflicts among users of the lands. OHV competitions occur frequently within the Barstow Resource Area; 41 events involving 10,000 participants and 35,000 spectators took place during fiscal year 1993. The events require a BLM permit and primarily occur on weekends in the designated open-use areas, especially Johnson Valley, Stoddard Valley, and El Mirage. Events for all types of OHVs—including motorcycles, ATVs, desert buggies, and four-wheel drive vehicles—are held. While most of these events are timed, competitive races, some nonspeed, nontimed events are held for vehicles registered for street use. At El Mirage, all-out, high-speed time trials are held. The Barstow Resource Area has not implemented a systematic OHV monitoring program to identify and document the adverse effects of OHV use. Although the 1980 Desert Plan identified such monitoring as an important component of the OHV program and included establishing a desertwide monitoring program by the end of fiscal year 1987 as a program goal, OHV monitoring has not been established at Barstow because of constraints on staff resources and the higher priority of other work. According to Barstow OHV program staff, the effects of OHV use are primarily identified through the incidental, undocumented observations of Barstow staff while they are in the field performing work for other programs. The effects of OHV use have also been reported to BLM staff by the public, including OHV users and environmental groups. Except for monitoring permitted OHV competitions, we were told, Barstow’s OHV and other recreation program staff do little of the systematic, documented monitoring specified in the regulations, the Desert Plan, and site-specific management plans. Barstow has 13 authorized law enforcement ranger positions; however, according to the chief ranger, only 7 positions were staffed in all of 1993 and about 40 percent of the rangers’ time was spent on enforcing the regulations for OHV use. According to OHV program staff, public safety receives a higher priority than resource protection. Barstow law enforcement rangers issued 237 citations during 1993, most of which were for vehicle registration and inspection violations. Fewer than 10 citations were issued in 1993 for resource damage and OHV use in unauthorized areas because, according to law enforcement staff, it is difficult to establish intent when existing routes in most areas are not posted for OHV use. In January 1994, the Barstow Resource Area Manager developed a listing of 12 locations that were most in need of corrective actions to address the adverse effects of OHV use. The listing, referred to as the Barstow OHV management’s “hot spots” listing, was based on the field observations of law enforcement rangers and other Barstow staff. Among the adverse effects listed were erosion, vandalism of signs, OHV use in unauthorized areas, shooting, and garbage dumping. Actions needed to correct these adverse effects included closing areas to OHV use, increasing law enforcement ranger patrols, fencing, and increasing cooperative efforts with local residents and interest groups. OHV program staff identified two locations within the Barstow Resource Area for us as examples of places where needed corrective actions have, or have not, been taken. They pointed to the Afton Canyon Natural Area, which includes 35,000 acres of resource area lands and 6,500 acres of private lands, as a place where corrective actions have eliminated the adverse effects of OHV use, including erosion, damage to riparian vegetation, and aesthetic degradation. In 1980, BLM designated Afton Canyon as an area of critical environmental concern to protect aesthetic values and habitat for wildlife (bighorn sheep and birds of prey). Afton Canyon is one of the few natural riparian areas in the Mojave Desert. Before its designation, it was a popular free-play area for motorcycles: Hill climbs took place at “Competition Hill,” and OHVs could be used in all areas, including riparian ones. In 1989, BLM restricted OHV use in the Afton Canyon area to routes designated by signs as open. The area has been partially fenced, metal barriers have been placed on closed routes (see fig. II.2), and local youth scouting groups are scheduled to assist with rehabilitation work at Competition Hill. Signs posted at the primary highway access to Afton Canyon inform the public that OHV use in the area is restricted. The signs also inform the public about the location of a nearby OHV open-use area. About $110,000 had been spent through fiscal year 1993 at Afton Canyon under a site-specific management plan that identified actions BLM believed were needed to address the adverse effects of OHV use. According to Barstow OHV program staff, the actions taken thus far have been successful, and OHV users interested in cross-country, free-play activities have moved to the nearby OHV open-use areas. Juniper Flats is the first location on Barstow’s list of OHV hot spots and was identified by OHV program staff as a site where some corrective action has been taken but much more is needed. Juniper Flats encompasses about 17,000 acres that are located in a critical watershed, provide important wildlife habitat, and have high cultural sensitivity and shallow, fragile soils. According to OHV program staff, heavy OHV use by residents of communities adjacent to Juniper Flats has eroded soil, damaged vegetation, degraded riparian areas, and destroyed fences and signs. In 1993, BLM placed Juniper Flats under an emergency closure. Motorized vehicle use in the area was restricted to posted routes, a condition that was expected to last for 2 years pending completion of a more thorough site-specific management plan. Posting of routes open to OHV use is ongoing: About two-thirds of the signs have been installed. Vandalism of signs and OHV use outside designated routes are continuing problems in the area. Additional needed actions identified by OHV program staff include installing the remaining signs, rehabilitating hill climb areas (see fig. II.3), raking and seeding, installing barriers, planning cooperatively with local citizens and interest groups, and establishing priority law enforcement surveillance. The Barstow Resource Area Manager told us that she had requested funding for the rehabilitation work but that the other actions will have to wait until additional staff and funds become available. At the Barstow Resource Area, we discussed BLM’s management of OHV use with a representative of the American Motorcycle Association, who was very familiar with the area. He said that he has motorcycled there about 25 weekends each year for the past 5 years. The representative is primarily involved in organized motorcycle events. He told us that he accepts the fact that BLM has designated five areas as open to cross-country OHV use and has restricted OHV use elsewhere to posted routes. He identified desert buggy racing in Stoddard Valley and casual OHV use in the Cinnamon Hills desert tortoise habitat as negatively affecting these areas. He said that BLM could strengthen Barstow’s OHV management by improving its oversight of desert buggy racing, its handling of conflicts between OHV use and other forms of recreation, its posting of the boundaries of the five areas designated as open to OHV use, and its communications with the OHV community. We also discussed OHV use in the Barstow Resource Area with a representative of the Sierra Club’s California Desert Committee, who has resided in southern California for over 50 years and visits Barstow several times a year. Overall, he characterized the Barstow Resource Area as doing a good job of managing OHV use. However, he characterized Cinnamon Hills as adversely affected by OHV use, primarily because damage is being done to desert tortoise habitat. Among his other concerns are the land scars caused by OHV hill climbs, such as those at Juniper Flats; the spillover of OHV use into restricted areas from the five designated open-use areas; and heavy OHV use near parking, camping, and picnic areas. He is also concerned because several areas of critical environmental concern are located within OHV open-use areas and are therefore susceptible to damage. The representative would like to see OHV use outside the open-use areas more strictly limited to routes that have been posted as open to OHV use. The Cascade Resource Area is part of BLM’s Boise District. It is located in southwest Idaho adjacent to Boise, the capital and largest city in Idaho, and includes about 487,000 acres of BLM land. OHV activities in the resource area are mainly concentrated in an area known as the Boise Front, which is the most intensively used OHV area in Idaho. (Fig. III.1 shows the location of the resource area and of the Boise Front and Treasure Valley Corridor—two sites we reviewed during our visit.) The Cascade Resource Area’s OHV program is funded by BLM and the state of Idaho. Cascade OHV program staff estimated that funding totaled about $79,000 for fiscal year 1993, of which about $54,000 came from BLM and $25,000 from the state Off-Road Motor Vehicle Gas Tax Fund. The funding provided by BLM was spent on staff salaries, partially funding four positions—two recreation specialists, one maintenance worker, and one law enforcement ranger, each of whom spent only part of his or her time on OHV activities. The funding received from the state, which accounted for almost one-third of the total amount of funds, was spent for maintenance equipment and signs. In addition, the state provides its counties with funds from the Off-Road Motor Vehicle Gas Tax Fund for law enforcement and maintenance within BLM resource areas to support OHV program activities. In fiscal year 1993, the state provided various Idaho counties with $20,000 for law enforcement patrols in the Boise Front and $17,500 for fencing and maintenance in other Cascade OHV areas. The Cascade Resource Area’s OHV program is also supported by volunteers working through the Boise Front Coalition, a community service organization with representation from city, county, state, and federal agencies; private landowners; and user groups. The Cascade Resource Area’s OHV use designations, originally based on historic use, were revised after an environmental analysis was completed during the development of the 1988 Cascade Resource Management Plan. As table III.1 shows, 244,118 acres, or approximately half of Cascade’s lands, were designated as open to OHV use because no significant adverse effects were identified in the analysis. OHV use on another 241,215 acres, or just under half of Cascade’s lands, was restricted because the analysis identified highly erodible soils, watershed values, and sensitive species habitats as needing protection. The remaining 2,113 acres were closed to OHV use because the analysis determined that OHV use would conflict with other recreational activities, the survival of sensitive plant species, or mining activities. Total BLM acres in resource area Acres designated as— Open to OHV use Restricted to certain areas Closed to OHV use 50.0 percent (244,118 acres) 49.5 percent (241,215 acres) 0.5 percent (2,113 acres) Special OHV events (annually) OHV use in the 241,215 restricted acres is limited either to existing or designated roads and trails. On 229,220 of these acres, OHV use is restricted to existing roads and trails; however, Cascade does not have an inventory, maps, or signs to identify the number of miles or the location of the existing roads and trails that are available. Hence, OHV users on these lands have no way of knowing whether they are using an existing trail open to OHV use or engaging in prohibited cross-country activities. The remaining 11,995 acres—about 3 percent of the land in the resource area—are located within the Boise Front, where OHV use is restricted to 15 miles of designated roads and trails that have been inventoried, mapped, and posted to minimize resource damage. Outside the Boise Front OHV area—about 97 percent of the land in the resource area—maps have not been prepared and signs have not been posted, according to the OHV program manager, because these areas are less intensively used, existing use is dispersed, and available resources have been devoted to the higher-priority Boise Front. The Cascade Resource Area does not systematically monitor OHV use and document the adverse effects of such use, even though its Off-Road Vehicle Management Plan—the OHV program activity plan for implementing the Cascade Resource Management Plan—contains specific guidance for formal monitoring. According to the Cascade OHV program manager, some systematic monitoring of the effects of OHV use was done in the early 1980s, but it was discontinued because of limits on staffing and funding and other work priorities. Monitoring is currently limited to casual, sporadic observations made by Cascade staff while out in the field performing range, wildlife, road maintenance, and other program work. Eventually, some more systematic monitoring is intended for the heavily used Boise Front, but OHV monitoring in less intensively used areas will continue to be handled in a cursory manner. Enforcement problems include vandalism and OHV use off of roads and trails, especially in the Boise Front. BLM has cooperative agreements with state and county law enforcement agencies for the enforcement of OHV regulations in the Boise Front. About 200 citations are issued annually by BLM law enforcement rangers and county sheriffs who patrol the area. Typically, citations are issued for vehicle licensing and equipment violations, and warnings are usually given for OHV use off of designated routes. Although the Cascade Resource Area maintains no official listing of areas where corrective actions have been or need to be taken to address the adverse effects of OHV use, the Cascade OHV program manager identified the (1) Boise Front as an area where corrective actions have been taken and (2) Treasure Valley Corridor as an area where OHV use is a management problem and such actions have not been taken. We visited the two locations as a part of our review. Because of its proximity to Boise, the Boise Front is a popular area where (1) intensive OHV use has eroded soil in watershed areas and (2) vandalism has damaged signs, gates, and sanitation facilities. As a result, OHV use on the Boise Front has been restricted to designated roads and trails, which have been mapped and posted to communicate their location to the public. Other corrective actions taken in the Boise Front include closing roads and trails to OHV use (see fig. III.2), planting vegetation on closed trails, annually scheduling and performing road and trail maintenance, replacing damaged route markers and signs, and increasing the presence of law enforcement officers in the late afternoons and evenings. Since 1990, over $100,000 in state funds has been spent for Boise Front projects. The Treasure Valley Corridor is becoming problematic for the Cascade Resource Area as the number of new roads and trails increases. Because OHV use in this area is less intensive than in the Boise Front, the Corridor has historically received less BLM management attention and fewer staffing and funding resources. Although OHV use on federal lands in the Corridor is restricted to existing roads and trails, few signs, maps, or trail markers inform the public which roads and trails are open to OHV use. As new trails appear from unauthorized cross-country OHV use and few signs identify the existing trails, the public finds its increasingly difficult to distinguish between the trails that are and are not available for OHV use. As figure III.3 shows, there is little perceptible difference between the two classes of trails: The trail that runs horizontally across the picture is authorized for use, while the two trails that appear to go uphill from this trail are not. At the Cascade Resource Area, we discussed BLM’s management of OHV use with members of the Idaho Trail Machine Association. The members told us that they frequently ride their motorcycles in the Boise Front. Among the OHV management problems they identified at this location were vandalism and the need for more OHV trails. The members also mentioned the need for maps and other information on OHV opportunities in areas other than the Boise Front. They would like to see BLM provide more funding for OHV recreational opportunities on its lands. We also discussed OHV use with a member of the Idaho Conservation League who frequently rides horses and hikes in the Boise Front. This individual identified vandalism; erosion from OHV use off of designated trails; and OHV conflicts with other recreational activities such as horseback riding, mountain biking, and hiking as continuing OHV management problems in the Boise Front. He would like to see the Boise Front closed to OHV use because of these problems. The San Rafael Resource Area is part of BLM’s Moab District. Located in Emery County in south central Utah, it is about 2 hours driving time southeast of the Salt Lake City metropolitan area, which has a population of about 1.1 million. The resource area includes about 1.5 million acres of BLM land, which receive some of the highest OHV use in the state. (Fig. IV.1 shows, among other things, the location of the resource area and of Justensen Flats and Mexican Mountain—two sites we reviewed during our visit.) Funding for San Rafael’s OHV program comes from both BLM and the state. OHV program staff estimated that funding for fiscal year 1993 totaled about $60,000, of which $50,000, or 83 percent, was provided by BLM and $10,000, or 17 percent, was provided by the state. The federal funding helped to pay the salaries of two staff—a recreation planner and a law enforcement ranger—who spent part of their time on OHV activities. The state funding was spent on sanitation facilities and other improvements at a resource area campground that is used by OHV enthusiasts. In addition, in 1993, Emery County supported San Rafael’s OHV program with an estimated $32,000 worth of labor and equipment to construct access roads and paths to this campground. San Rafael’s OHV use designations, initially based on historic use, were revised after an environmental analysis was completed as part of the development of the 1991 San Rafael Resource Management Plan. As shown in table IV.1, OHV use on 1,035,895 acres, or about 71 percent of the San Rafael Resource Area’s lands, is restricted to roads and trails; cross-country OHV use is prohibited to protect areas of critical environmental concern, developed recreation sites, critical soils, riparian areas, and wildlife and plant habitats. Additionally, 293,233 acres, or about 20 percent of the lands, were designated as open to OHV use because no significant adverse effects were identified during the environmental analysis. The remaining 133,766 acres, or about 9 percent of the lands, were closed to OHV use to protect undisturbed plant communities and primitive scenic areas. Special OHV events (annually) Although the San Rafael Resource Management Plan provides that OHV use in restricted areas be limited to designated roads and trails, such roads and trails have not been fully identified through an up-to-date inventory or maps and signs. The San Rafael Resource Area inherited numerous roads and trails dating from uranium exploration in the 1950s and 1960s and was compiling an inventory of the existing roads and trails at the time of our review. Also, the resource area was considering whether to continue posting only closed routes or to begin posting open routes instead. San Rafael has placed signs at points of entry to some closed areas, including a 12,000-acre area where an emergency closure was invoked to protect a threatened species of cactus and wildlife habitat. According to the San Rafael Resource Area Manager, a low-keyed and cautious approach towards identifying and publicizing OHV recreational opportunities exists within the resource area because of an ongoing controversy over right-of-way access across BLM lands. San Rafael does not systematically monitor OHV use to identify and document the adverse effects of such use. Casual, sporadic monitoring, which is often undocumented, is done incidentally when resource area staff are in the field working on range, wildlife, cultural, and other BLM programs. According to the OHV program manager, a schedule had been set up to monitor intrusions into San Rafael wilderness study areas, including those by OHVs. At the time of our review, however, this was the only systematic monitoring of OHV use that was going on. Monitoring OHV use has not been a priority, according to the OHV program manager, because the resource area has had limited staff and funds. San Rafael shares a law enforcement ranger with another resource area. As a result, this one ranger has about 2.5 million acres of BLM lands to patrol for all law enforcement purposes, including the enforcement of OHV regulations. The ranger, assigned to San Rafael in May 1993, had issued about 80 OHV citations through March 1994. Most of the citations, according to the ranger, were written for using OHVs in closed areas—including riding cross-country off of roads and trails. No studies, reports, or other official records were available at the San Rafael Resource Area to identify either the corrective actions that have been or need to be taken to address the adverse effects of OHV use. San Rafael’s OHV program manager, however, identified (1) Mexican Mountain, located north of the Interstate 70 highway corridor, as an area where corrective actions have been taken to address the adverse effects of OHV use and (2) Justensen Flats, which is also located in the Interstate 70 highway corridor, as an area where OHV use is a management problem and corrective actions are needed. We visited the two locations. Mexican Mountain is a 59,000-acre wilderness study area, half of which is in the San Rafael Resource Area and the other half in another BLM resource area. Mexican Mountain was recently closed to OHV use because the 1991 San Rafael Resource Management Plan classified it as a highly scenic primitive area. A 4-mile stretch of existing road extends into the closed area, providing easy access from the adjacent Buckhorn Draw area, which receives heavy OHV use. In the summer of 1993, the road was posted as closed, and law enforcement patrols were increased on weekends. In January 1994, a metal gate barricade and fencing were installed at a key entry point in an effort to deny access to four-wheel drive vehicles and ATVs (see fig. IV.2). San Rafael’s OHV program manager estimated that, excluding the costs associated with ranger patrols, about $5,000 was spent between May 1993 and May 1994 to control OHV intrusions into the Mexican Mountain area. He believes that intrusions into the closed area have since declined because the gate, signs, and patrols clearly indicate that OHV use is prohibited at this location. San Rafael OHV program staff consider Justensen Flats problematic because OHV use at this location spills over into adjacent lands that BLM has closed to OHV use. Justensen Flats is part of the 9,610-acre Devil’s Canyon wilderness study area and is a popular location for weekend camping and OHV use because it is easily accessible from the highway. Eight signs prohibiting OHV use at various locations in and around Justensen Flats have been strategically posted, but OHV use in the closed areas is continuing, as shown in figure IV.3. Surveillance at Justensen Flats has declined because fewer volunteers are helping to patrol the area. San Rafael’s law enforcement ranger, who has patrol duties elsewhere, visits the area only about once a month. San Rafael’s OHV program manager told us that he intends to request $10,000 in funding next year for fences, gates, and an information kiosk at Justensen Flats. According to him, erosion control measures—such as installing rock barriers and raking and planting vegetation on unauthorized trails—are also needed at this location. At the San Rafael Resource Area, we discussed BLM’s management of OHV use with the president of the Utah Trail Machine Association, who told us he had motorcycled in the area for the past 20 years. He characterized the San Rafael Resource Area as one of BLM’s most restrictive areas in Utah in terms of OHV use. In his view, San Rafael closes areas to OHVs too quickly in its efforts to confine their use. He expressed concern because San Rafael does not have an inventory of roads and trails or maps for identifying available OHV routes. He was also concerned that state OHV funds were being spent on campgrounds within the resource area rather than on roads and trails. We also discussed OHV use in the San Rafael Resource Area with a representative of the Southern Utah Wilderness Alliance. He, too, expressed concern that the San Rafael Resource Area does not have maps showing the location of designated OHV trails. He noted other OHV management problems, including unposted closed areas, damage to riparian areas and sensitive soils, and conflicts with other recreational activities, such as mountain biking and hiking. Overall, however, he considered the San Rafael Resource Area’s OHV program to be the best of all such programs in Utah’s BLM resource areas. The Stateline Resource Area is part of BLM’s Las Vegas District. It includes 3.7 million acres of BLM land in Nevada located adjacent to Las Vegas, a rapidly growing metropolitan area with a population of 850,000. The resource area offers a variety of recreational opportunities for OHV users. Casual OHV use of four-wheel drive vehicles, ATVs, and motorcycles on Stateline lands is increasing as the Las Vegas population continues to grow. Also, organized OHV competitions are frequently held within the resource area. (Fig. V.1 shows, among other things, the location of the Stateline Resource Area and of Nellis Dunes and Ivanpah Valley—two sites we reviewed during our visit.) At the Stateline Resource Area, funding for the recreation program is synonymous with funding for the OHV program because the recreation program staff work almost entirely on administering organized OHV competitions. For fiscal year 1993, BLM provided about $102,000 for Stateline’s OHV program—an amount that fully funded two recreation planners and partially funded one law enforcement ranger. According to Stateline budget staff, virtually no BLM funding was available for signs, maps, or road maintenance. We were also told that the state of Nevada does not provide funding for Stateline’s OHV program. However, Clark County—which is located within the Stateline Resource Area—provides about $75,000 annually to the program for signs to restrict OHV use and a BLM law enforcement ranger to patrol designated critical desert tortoise habitat. Although Stateline’s OHV use designations were initially based on historic use, they were—at the time of our review—being revised as part of the development of a Stateline Resource Management Plan. The designations shown in table V.1 below were those in effect at the time of our review. OHV use was then restricted on 1,104,166 acres, or about 30 percent of Stateline’s lands, to either existing routes in unposted areas or designated routes in posted areas in an effort to protect (1) primitive lands in wilderness study areas, (2) soils in fragile watershed areas, (3) scenic lands, and (4) the desert tortoise and its habitat. Some 2,563,862 acres, or almost 70 percent of the lands, were designated as open to OHV use. The remaining 3,313 acres, or less than 1 percent of the lands, were closed to OHV use in an effort to protect significant archeological resources. Special OHV events (annually) A recent draft of the Stateline Resource Management Plan proposed considerable changes in the designation of lands available for OHV use to increase protection for wildlife habitat, cultural resources, and soils, as well as improve nonmotorized recreational opportunities. Among the proposed changes was a reduction in the number of acres designated as open to OHV use from 2,563,862 (70 percent) to only 9,180 (less than 1 percent). Conversely, under the plan, the number of acres designated as restricted would increase from 1,104,166 (30 percent) to 3,649,757 (99 percent). The Stateline Resource Area has not provided an inventory, maps, or signs to identify the total number of miles, or the location, of the routes available for OHV use. According to OHV program staff, it has not done so because the OHV program has relatively low priority and receives limited resources. They told us that the only routes posted for OHV use are those located in a 135,000-acre critical desert tortoise habitat area. The staff intends to inventory some OHV routes in other areas in the near future if funding becomes available. Although OHV competitions requiring permits occur frequently within the Stateline Resource Area, the draft management plan proposed reducing the number of acres where competitive OHV racing is allowed from 2,655,278 to 238,162. During fiscal year 1993, 27 OHV events were held within the resource area. Some of the races were over 200 miles long, and the events involved over 200 participants and over 500 spectators and members of support crews. Different events were held for different types of OHVs, including motorcycles, ATVs, desert buggies, and four-wheel drive vehicles. Although most of the events are timed, competitive races, some are untimed events for vehicles registered for street use. According to Stateline’s OHV program staff, no systematic monitoring is done to identify and document the adverse effects of casual OHV use. The monitoring of casual OHV use, according to the staff, consists of incidental, undocumented observations made by resource area staff working in the field on other recreational, range, wildlife, and cultural programs. The OHV program staff stated that, in their opinion, casual OHV use has not had a significant adverse effect within the Stateline Resource Area because such use is so dispersed and because the area’s terrain is rough. The Stateline Resource Area does systematically monitor OHV competitions for which a BLM permit must be obtained. In addition to issuing permits for such events, this monitoring includes documenting conditions before and after the event, particularly those that have an effect on the desert tortoise. Such OHV events are generally limited to sand washes, powerline roads, trails for four-wheel drive vehicles, and other courses used in past events that have received biological and archeological clearances. Stateline shares two law enforcement rangers with another resource area; each ranger has about 3.5 million acres of BLM lands to patrol. While on patrol, the rangers say, they perform multiple duties, including monitoring OHV use; checking for mining infractions, tortoise habitat violations, cactus thefts, drug problems, and hazardous materials dumping; and responding to complaints. Fewer than 10 OHV-related citations were written during 1993, according to the rangers, and these were for cross-country OHV use in areas where OHVs are restricted to designated and posted routes. The rangers stated that relatively few citations were issued because Stateline had only recently posted some of the designated routes. No studies, reports, or other official records were available at Stateline to identify the corrective actions that either have been taken or need to be taken to address the adverse effects of OHV use. Stateline OHV program staff, however, did identify for us the Ivanpah Valley as an area where management actions have been taken to address the effects of competitive OHV racing and the Nellis Dunes as an area where OHV use is a management problem and corrective actions are needed. We visited the two locations during our review. Ivanpah Valley, located about 20 miles southwest of Las Vegas, encompasses approximately 315,000 acres, of which 224,000 are available for OHV use. Because of its proximity to Las Vegas and accessibility from an adjacent four-lane highway, Ivanpah Valley is used extensively for OHV competitions of all types, as well as for casual OHV use. Management actions taken to minimize the adverse effects of OHV competitions include limiting OHV events to 10 annually and allowing no more than 250 participants per event; confining the events to existing routes; monitoring both before and after the events to identify any adverse effects on the desert tortoise; monitoring by OHV and law enforcement staff on the day of the event; requiring sponsors of the event to remove food and garbage; and confining spectators and work crews to designated, previously disturbed areas. Figure V.2 shows desert buggy racing and signs that were posted by Stateline staff to protect a desert tortoise burrow. The adverse effects of OHV competitions at this location are now under control, according to OHV program staff, and any OHV impact off of existing roads and trails in the vicinity is the result of casual use. According to OHV program staff, the Nellis Dunes, a 9,180-acre designated OHV play area located about 15 miles northeast of Las Vegas, has Stateline’s highest OHV use. No management attention is directed to the Nellis area, however, because Stateline’s limited OHV program funds and staff are being used to manage OHV competitions that are generally conducted elsewhere in the resource area. No signs, maps, sanitation facilities, trash cans, or other improvements exist at the Nellis Dunes. Increasingly, the area is being used for garbage dumping, auto stripping, indiscriminate camping, drinking and partying, and shooting. Stateline staff also cited cross-country OHV driving at unsafe speeds and the dumping and burning of stolen autos as problems at Nellis. According to the staff, they may visit Nellis about once a month, generally in connection with a nearby OHV competition. In addition, a local user group occasionally assists the resource area in providing visitor services and monitoring OHV use in the Nellis Dunes area. At the Stateline Resource Area, we discussed BLM’s OHV program with a representative of the Southern Nevada Off-Road Enthusiasts, who is also an active desert buggy racer on Stateline lands. He characterized Stateline’s OHV program as underfunded and understaffed. His primary concern with Stateline’s OHV management, as a racer, is the restriction of OHV races to previously used routes. He maintained that this practice concentrates the effects of OHV use on the same roads and trails, giving the resources no time to recover. Despite this concern, the representative would like to see more maps, signs, and route markers within the resource area to slow the increase in the creation of unauthorized trails through uncontrolled, casual OHV use. We also discussed OHV use with a representative of the Red Rock Audubon Society. He characterized Stateline’s management of OHV competitions as good, but of casual OHV use as not so good. He expressed concern that casual OHV use receives little management attention and that the number of new unauthorized trails is increasing, especially in the Ivanpah Valley. This representative would like to see more maps, trail signs, efforts to teach responsible OHV use, and enforcement of OHV rules. The Mesa Ranger District is part of the Tonto National Forest, within the Forest Service’s Southwestern Region. It is located in the south-central part of Arizona, less than half an hour’s drive east of Phoenix. It provides OHV recreational opportunities to the 2.2 million residents of the greater Phoenix metropolitan area. The ranger district’s 440,327 acres range from low hills to mountains, with numerous streams, washes, mesas, and plateaus throughout. The vegetation is highly diverse because of wide variations in the soil, elevation, and climate. (Fig. VI.1 shows, among other things, the location of the Mesa Ranger District and of the Bulldog Canyon and Lower Sycamore Creek OHV areas—two sites we reviewed during our visit). During fiscal year 1993, the Mesa Ranger District’s OHV program manager estimated that about $198,000 was available for OHV activities. About $25,000, or 13 percent of this amount, represented federal funds, and $173,000, or 87 percent, represented state funds. Of the federal funds, about $24,000, or 96 percent, was spent on salaries; the remaining $1,000 was spent on purchasing signs. All of the state funding was earmarked for restoring OHV trails. The OHV program manager told us that there are no full-time OHV staff at Mesa. He said that he is responsible for the ranger district’s OHV activities and recreational, range, wildlife, and cultural resource programs. Thus, he is able to spend only about 10 percent of his time on the OHV program. In addition, a law enforcement ranger spends about 10 percent of his time on OHV enforcement activities within the Mesa Ranger District. According to the program manager, OHV use designations within the Mesa Ranger District have generally been made through the ranger district’s planning process, although historical uses of the land have influenced some of the designations. As table VI.1 shows, there were no OHV open-use areas at Mesa at the time of our review. Instead, OHV use was restricted to designated roads and trails on about 247,827 acres; the remaining 192,500 acres were closed to OHV use. The closed areas included wilderness areas, areas reserved for research, and a desert botanical garden. Total acres in ranger district Acres designated as— Open to OHV use Restricted to certain areas Closed to OHV use 0 56 percent (247,827 acres) 44 percent (192,500 acres) Special OHV events (annually) As table VI.1 shows, OHV use in the Mesa Ranger District is generally limited to designated roads and trails. In practice, however, it is limited to existing roads and trails because restricted-use information has not been communicated to the OHV users. The Mesa Ranger District does not have an inventory of its existing roads and trails. Signs and maps identifying the location of roads and trails that are available for OHV use are complete for two areas, the Bulldog Canyon OHV Area and the Lower Salt River Recreation Area. For the remainder of the lands in the Mesa Ranger District where restricted OHV use is allowed, mapping has not been done because staff and funds have been limited. The Mesa Ranger District does not systematically monitor OHV use to identify and document its adverse effects. Its staff do, however, make casual, undocumented observations when they are in the field working on range, wildlife, and other programs. According to Mesa’s OHV program manager, the ranger district’s limited resources and other higher-priority work have precluded formal studies or evaluations of the adverse effects of OHV use. The ranger district has used the staff’s casual observations of OHV degradation to prioritize some of the corrective actions that are needed if and when funds become available. Restrictions on OHV use are enforced in the Bull Dog Canyon OHV Area and the Lower Salt River Recreation Area where OHV management has been implemented and where Mesa’s law enforcement staff estimated that he issues 10 or fewer citations per year. Outside these two areas, the ranger told us, citations are generally issued for damage to resources, not for riding off the trail, because no signs or maps tell OHV users where they can or cannot go. According to the law enforcement staff, it is difficult to prove that resources have been damaged by an OHV user’s straying off an existing road unless the damage is witnessed. An increase in the number of unauthorized trails—disturbing soil in previously undisturbed areas—is Mesa’s most significant OHV problem. According to Mesa’s OHV program manager, actions have been taken to correct this problem at the Bulldog Canyon OHV Area. At the Lower Sycamore Creek OHV Area, however, inappropriate OHV use is causing adverse effects, and corrective action is needed. According to the program manager, the Bulldog Canyon OHV Area encompasses about 20,500 acres and contains about 8 miles of OHV roads and trails traveled primarily by four-wheel drive vehicles and ATVs. Past OHV damage has been rectified by fencing the entire area and closing it to motorized vehicles except on designated routes. Before OHV use was restricted in the area, it degraded soils and vegetation, detrimentally affecting wildlife habitat, aesthetics, and water quality. In addition, uncontrolled access to the area had led to indiscriminate shooting, trash dumping, and partying. Corrective actions included not only fencing strategic parts of the area but also installing gates and combination locks at the two access points (see fig. VI.2). To gain access to the area, OHV users now have to obtain a use permit and the lock combination (which is changed periodically) from staff at the Mesa Ranger District. Corrective actions in the Bulldog Canyon OHV Area have also included blocking some roads and trails with boulders and signs and obliterating some trails and then replanting vegetation. Because of this work, off-road traffic and partying have decreased; however, the program manager said that routine law enforcement staff patrols, trash removal, and sign and fence maintenance are necessary for continued success. The Lower Sycamore Creek OHV area, part of the 27,000-acre Sycamore Creek Management Area, consists of a sandy streambed with low hills to the east and a wide, open flood plain to the west. Within this area, Sycamore Creek often travels underground. The OHV program manager said that he does not know how many acres are in the Lower Sycamore Creek OHV Area because exact boundaries have not been defined. Although OHV use in the area is restricted, no maps have been prepared, and no roads or trails have been posted for OHV use except a 1-mile road leading into the area. Because of limited staffing and funding, the area was not being managed as a restricted area, and the limits on OHV use were not being enforced at the time of our visit. OHV use has degraded the Lower Sycamore Creek area. Vehicles driving back and forth across the streambed and up and down the stream banks have eroded the soil and trampled the riparian vegetation. (See fig. VI.3.) No effort has been made to minimize the impact of OHV use on the Lower Sycamore Creek area. Both OHV use and its adverse effects increased in this area about the time that OHV use was curtailed in the Bulldog Canyon area and many users shifted to the Lower Sycamore Creek area, according to Mesa’s OHV program manager. The manager also said that the ranger district’s available OHV resources have thus far been used to improve areas that have greater conflicts among OHV users or more intensive OHV use than Lower Sycamore Creek. He said, however, that the Lower Sycamore Creek area is next in line for corrective action once resources become available. We discussed the Mesa Ranger District’s management of OHV use with a member of the Arizona Governor’s OHV Advisory Group; he is also active in the Arizona State Association of 4-Wheel Drive Clubs and comes from four generations of OHV users. He characterized Mesa’s OHV program as lacking maps, signs, law enforcement staff, funds for road and trail repairs, and funds in general. He pointed out that the ranger district has almost nothing that an OHV user can take or view on an outing, such as a map, instructions, or signs, that would help the user stay on designated roads and trails and adhere to whatever rules might apply. We also discussed the Mesa Ranger District’s management of OHV use with a member of three environmental organizations—the National Audubon Society’s Arizona Conservation Committee, a Maricopa County hikers’ group, and the Sierra Club. He is involved in and informed about environmental issues and concerns in and around the ranger district. He is primarily concerned about the adverse effects of OHV use on riparian areas, such as in the Lower Sycamore Creek area. He expressed concern about conflicts between OHV users and other recreationists, noting that birds and wildlife are impossible to observe when OHVs are in an area because the vehicles make so much noise. The lack of OHV maps and signs and the lack of law enforcement presence within the Mesa Ranger District also concern him. The Mt. Pinos Ranger District is part of the Los Padres National Forest, within the Forest Service’s Pacific Southwest Region. It encompasses about 441,000 acres located about 60 miles north of the Los Angeles, California, metropolitan area, where 15 million people reside. The ranger district, which provides a variety of OHV opportunities, has been used by OHV enthusiasts since the late 1950s. OHV use is particularly heavy in two areas—(1) Ballinger Canyon on the western side of the ranger district and (2) a series of trails connecting the ranger district with a state recreational area on the eastern side. (Fig. VII.1 shows, among other things, the location of the Mt. Pinos Ranger District and of Ballinger Canyon and Lockwood Creek—two sites we reviewed during our visit.) During fiscal year 1993, an estimated $239,000 was available for OHV activities in the Mt. Pinos Ranger District. About $98,000, or 41 percent of this amount, was provided by the Forest Service and about $141,000, or 59 percent, was provided by the state. Of the federal funds, approximately $96,000 was spent on maintenance and salaries; the remaining $2,000 was available for the planning and analysis required for rerouting OHV trails—the major problem at Mt. Pinos. The state funds were generally spent to maintain and restore trails and pay the salaries of OHV program personnel, including law enforcement officers. The Mt. Pinos OHV staff includes four full-time OHV patrol officers and seven staff who spend varying proportions of their time on OHV activities—five recreation staff (25 percent), one recreation officer (30 percent), and one administrative officer (10 percent). The Mt. Pinos Ranger District’s OHV use designations, originally based on historic use, were revised after an environmental analysis was completed during the development of the 1976 Los Padres National Forest OHV Management Plan. As table VII.1 shows, no OHV open-use areas existed in the Mt. Pinos Ranger District at the time of our review except for a 300-acre parcel of land adjacent to and managed by a state recreation area on the eastern side of the ranger district. OHV use within the ranger district was restricted to designated roads and trails on about 260,000 acres. The remaining 181,000 acres, which include wilderness, natural, and other special interest areas, were closed to OHV use. Total acres in ranger district Acres designated as— Open to OHV use Restricted to certain areas Closed to OHV use 0 59 percent (260,000) 41 percent (181,000) Special OHV events (annually) A detailed map of all the roads and trails available for OHV use in the ranger district has been published, and the posting of signs on roads and trails has been completed. The Mt. Pinos OHV program manager estimated that, within the ranger district, OHV users can explore more than 350 miles of roads and trails. The Mt. Pinos Ranger District issues permits for two speed-controlled timed races that are held each year in the Ballinger Canyon area. The race route covers about 75 miles, and each event has about 250 participants. The Mt. Pinos Ranger District has no systematic monitoring program to identify and document the adverse effects of OHV use. Although a general OHV monitoring plan exists as an attachment to the 1976 OHV management plan, it does not include needed standards for measuring changes to resources caused by OHV use. At the time of our review, a task force was working to establish these standards. Monitoring is currently limited to day-to-day, casual observations made when ranger district staff are in the field performing other routine duties. Monitoring for specific purposes, such as the two races or environmental assessments, has been conducted on various OHV routes to identify damage to resources, trails needing rerouting, or actions required to bring trails up to certain standards. For the two races each year, the Mt. Pinos OHV program manager told us that staff monitor conditions before and after the event, conduct technical inspections, and check for vehicle licenses and safety equipment. As a part of these activities, they inspect the race route for adequate trail markings, such as flags and signs, before the race, and for damage and trash after the race. The Mt. Pinos law enforcement staff do not consider illegal OHV activities to be a significant problem within their ranger district. The staff, however, issued about 115 citations during fiscal year 1993. Typically, citations were issued for license or equipment violations, and warnings were given to OHV users found riding off of designated routes. The Mt. Pinos law enforcement staff have no cooperative agreements with local law enforcement agencies. Although the Mt. Pinos Ranger District maintains no official listing of areas where corrective actions have been or need to be taken to address the adverse effects of OHV use, the Mt. Pinos OHV program manager identified (1) Ballinger Canyon as an area where corrective actions have been taken to address such adverse effects and (2) Lockwood Creek as an area where OHV use is a management problem and corrective actions have not been taken. Ballinger Canyon encompasses about 7,000 acres and contains about 50 miles of trails used annually by an estimated 5,000 OHV enthusiasts, according to the Mt. Pinos District Ranger. Unauthorized OHV use caused erosion and visual scarring in the canyon, decreasing water quality and disturbing wildlife. Corrective actions that have been taken by the Mt. Pinos Ranger District include repairing trails, rerouting a trail, fencing the access to routes where trespassing occurred, frequently patrolling the area by rangers, and, as shown in figure VII.2, posting signs and trail markers. OHV use in the Lockwood Creek area is a problem, according to Mt. Pinos OHV staff, yet because of limited resources, corrective actions remain to be taken. The problem centers on an OHV route that follows a narrow, rocky creek bed, which is bound on both sides, at least for part of the route, by canyon walls (see fig. VII.3). The OHV route crosses the creek in 23 places, and OHVs using it have damaged the streamside environment and disturbed wildlife. According to OHV staff, this bank-to-bank riding increases sedimentation, destroys vegetation, and threatens the creek’s waters and vegetation with pollution from potential oil and gas leaks. The ranger district’s wildlife biologist told us that habitat for sensitive species, such as the California Red Legged Frog and the Western Pond Turtle, exists along the OHV route that runs through Lockwood Creek. At the time of our review, an environmental analysis was being done that included Lockwood Creek. According to the OHV program manager, the plan—when completed—will reroute OHV use away from the creek. During our visit to the Mt. Pinos Ranger District, we interviewed a lifelong OHV enthusiast who is familiar with the ranger district’s OHV roads and trails and holds membership in several OHV groups. He and his family use both four-wheel drive vehicles and motorcycles for their OHV activities. According to the enthusiast, many OHV users in the Mt. Pinos Ranger District are primarily concerned about land management decisions made by the Forest Service that further restrict OHV use in particular areas. He stated, for example, that an OHV trail was recently closed after the area through which it passed was designated as a wilderness. He also said that temporary route closures would not be necessary if the Forest Service did not drag its feet in identifying and correcting problems before the need for closure arose. We also interviewed a member of the Sierra Club who campaigned for the legislation that established three wilderness areas in the Los Padres National Forest in California and who is very familiar with the Mt. Pinos Ranger District. In her opinion, OHV use in the ranger district, particularly motorcycle use, causes unwanted noise; resource damage in the form of erosion, devegetation, habitat disruption and destruction, and stream siltation; and aesthetic degradation. The Salt Lake Ranger District is part of the Wasatch-Cache National Forest, within the Forest Service’s Intermountain Region. It is located in northern Utah and includes the Stansbury Mountain Range to the west and the Wasatch Mountain Range to the east of Salt Lake City, a metropolitan area with a population of about 1.1 million. OHV activities within the 253,000-acre ranger district are concentrated along the western slope of the Wasatch Mountain Range in an area known as the Wasatch Front.(Fig. VIII.1 shows, among other things, the location of the Salt Lake Ranger District and of Ward Canyon and the Davis County Front—two sites we reviewed during our visit.) During fiscal year 1993, an estimated $122,000 was available for OHV activities in the Salt Lake Ranger District. Of this amount, about $110,000, or 90 percent, was provided by the Forest Service, and about $12,000, or 10 percent, was provided by the state. According to Salt Lake’s OHV program manager, about $41,000 of the Forest Service funds was spent on recurring items, such as maintenance and salaries, while the remainder was spent on an OHV restoration project in Ward Canyon. All of the state funds were spent on OHV restoration projects. There are no full-time OHV staff in the Salt Lake Ranger District. The OHV program manager said that he and a recreation staff member, however, each spend about 15 percent of their time on OHV activities. In addition, two law enforcement staff spend part of their time on OHV activities. The Salt Lake Ranger District’s OHV use designations were initially based on historic OHV use, according to the OHV program manager. These designations were revised, however, in 1985 after the ranger district’s roads and trails were assessed in the course of developing the Wasatch-Cache National Forest Land and Resource Management Plan. Subsequently, a number of routes were closed. As table VIII.1 shows, 238,000 acres, or 94 percent of the ranger district’s land, is closed to OHV use. Much of this closed land is being protected as wilderness areas or watersheds. OHV use on the remaining 15,000 acres, or 6 percent of the ranger district’s land, is restricted to designated roads and trails. According to Salt Lake’s OHV program manager, the ranger district has no open areas for cross-country OHV travel and allows no special OHV events. All roads and trails within the ranger district are considered closed unless posted as open. Total acres in ranger district Acres designated as— Open to OHV Use Restricted to certain areas Closed to OHV use 0 6 percent (15,000 acres) 94 percent (238,000 acres) Special OHV events (annually) Although the ranger district has no accurate inventory of its roads and trails, the OHV program manager estimated that about 11 percent are available for OHV use. The manager also told us that posting of the ranger district’s OHV travel routes was about 80 percent complete at the time of our review and that an OHV travel map, called for in the 1985 Wasatch-Cache National Forest Land and Resource Management Plan, was completed and issued in 1994. The Salt Lake Ranger District does not systematically monitor OHV use to identify and document its adverse effects. According to the OHV program manager, the ranger district does not have the staff and funding needed to do systematic monitoring. Casual, undocumented observations, however, are made on an ad hoc basis when staff are in the field. The frequency of field visits to a particular location varies greatly, from weekly visits when a project or activity is under way to monthly visits after it has been completed. Two Salt Lake Ranger District staff are engaged in OHV law enforcement activities, including issuing citations. Together, they issued about 100 OHV citations in fiscal year 1993. Most of the citations were written for vehicles trespassing off of designated routes. In addition to these enforcement activities, the ranger district maintains agreements with local law enforcement agencies for cooperative law enforcement on Forest Service lands. Despite the lack of systematic, documented OHV monitoring in the Salt Lake Ranger District, the OHV program manager identified several adverse effects of OHV use on resources. Problems considered significant were (1) trespassing by OHV users who travel off of designated roads or trails and (2) vandalism of signs, gates, and other facilities by OHV users. A variety of actions have been taken within the Salt Lake Ranger District to correct the damage that has been done, including blocking access to trails with boulders and signs and obliterating, restoring, or closing trails. The Salt Lake OHV program manager identified Ward Canyon for us as an area where corrective actions have been taken to address the adverse effects of OHV use. This particular area encompasses about 5,000 acres and contains about 18 miles of OHV roads and trails used annually by an estimated 15,000 to 20,000 OHV enthusiasts, according to the manager. Trespassing by numerous OHVs had displaced and subsequently eroded soil, causing visual scarring and rutting. A major effort was undertaken in 1993 to restore the area by posting signs, closing routes with boulders, and replanting vegetation (see fig. VIII.2). At the time of our review, about $60,000 had been spent to mitigate the adverse effects of OHV use in this area. The work was about 75 percent complete. The Davis County Front, covering about 3,200 acres in the Salt Lake Ranger District, is considered to be a problem, yet because of limited resources within the ranger district, according to the OHV program manager, corrective actions remain to be taken. Although no routes have been designated on the Front, trespassing is occurring because OHV users are able to gain access to the area through an old fire-line road that traverses almost the entire length of the Front. Although the fire-line road itself is not open to OHV use, it does, in fact, provide easy access to the entire Davis County Front area. As figure VIII.3 shows, numerous trails and tracks, created by trespassing vehicles, have caused devegetation, erosion, and aesthetic damage. In addition, local teenagers use the area for partying. According to the Salt Lake Ranger District’s OHV program manager, the problems occurring along the Davis County Front are intensifying because more OHV users are coming to the ranger district from nearby, rapidly growing urban communities. According to the program manager, some monitoring in this area was begun in the summer of 1994 and some corrective actions have also recently begun. The manager told us that corrective actions in this area had not been taken earlier because the ranger district’s limited staff and funds were initially directed toward the Ward Canyon area—a more heavily used OHV area. At the Salt Lake Ranger District, we interviewed an OHV enthusiast who is a member of both the Utah All-Terrain Vehicle Association and the Utah State OHV Advisory Council and is very familiar with OHV activities in the ranger district. When we discussed OHV use in this ranger district with him, he expressed concern that, until recently, there was no mapping of, and little posting of signs on, OHV trails. He told us that it was very difficult for OHV users to know which roads and trails were available to them and, as a result, they did not always travel on designated OHV routes. He noted, however, that the ranger district’s efforts to map routes and post signs, as well as rehabilitate trails, had improved recently. We also interviewed a member of a large environmental organization and who is familiar with OHV use in the Salt Lake Ranger District. He expressed concern that the ranger district is planning to restore an OHV trail that runs parallel to the Deseret Peak Wilderness Area, which is within the ranger district. Although several places along the trail are currently in need of repair, the environmentalist objects to the restoration because he believes that it will attract OHV enthusiasts who may stray off the trail into the adjacent wilderness area. The Upper Lake Ranger District is part of the Mendocino National Forest, within the Forest Service’s Pacific Southwest Region. It consists of about 250,000 acres and is located about a 2-hour drive north of the San Francisco metropolitan area and its population of 6 million. The Upper Lake OHV program manager estimated that about 80,000 OHV enthusiasts use the ranger district’s roads and trails annually. OHV activities are among the ranger district’s most popular recreational activities, which also include camping, backpacking, and fishing. (Fig. IX.1 shows, among other things, the location of the Upper Lake Ranger District and of Sled Ridge Trail and Streeter Ridge Trail—two sites we reviewed during our visit.) During fiscal year 1993, the Upper Lake Ranger District had an estimated $152,000 available for its OHV program. According to Upper Lake’s OHV program staff, an estimated $35,000, or 23 percent of the total, was provided by the Forest Service and about $117,000, or 77 percent, was provided by the state. The OHV program staff told us that all of the Forest Service funds were spent on salaries, while state funds were spent on salaries and maintenance and construction. The OHV program staff consists of (1) one full-time OHV specialist who spends her time in resource protection, law enforcement, and other OHV program activities and (2) three other staff who spend about 10 to 15 percent of their time on OHV program activities—an OHV program manager, a recreation staff person, and a law enforcement staff. All lands in the Upper Lake Ranger District have been designated as either closed to OHV use (41,327 acres) or restricted to designated roads and trails (208,000 acres). See table IX.1. The ranger district’s OHV designations were originally based on historic use. They were recently reviewed during the development of the Mendocino National Forest Land and Resource Management Plan, which was in draft form at the time of our review. The draft plan confirmed the need to prohibit cross-country OHV use within the ranger district and called for an ongoing analysis of the existing OHV trail system and the closing of OHV trails that adversely affect the sensitive Northern Spotted Owl or other wildlife. Total acres in ranger district Acres designated as— Open to OHV use Restricted to certain areas Closed to OHV use 0 83 percent (208,000 acres) 17 percent (41,327 acres) Special OHV events (annually) According to OHV program staff, an official inventory of OHV roads and trails had not been prepared because of the ranger district’s limited resources and other work priorities. The ranger district had, however, developed a map of its roads and trails that is available for OHV use, and we were told that signs had been posted for all of the OHV roads and trails listed on the map. We were further told that OHV users can explore about 420 miles of roads and trails in the ranger district. Four special events for motorcycles are allowed each year in this ranger district, for which a Forest Service permit is required. The Upper Lake Ranger District does not systematically monitor OHV use to identify and document its adverse effects except for four special motorcycle events that take place each year. These events use about 120 miles of the roads and trails within the ranger district. The monitoring of these special events is documented and includes (1) riding the route beforehand to determine its condition and ensure that it is correctly marked and (2) riding the route afterwards to check for damage to resources. In addition, two special studies have been conducted to assess the impact of OHV use on water quality and noise level. Monitoring to identify and document the adverse effects of general OHV use is not done, primarily because the ranger district has limited staffing and funding and other higher-priority work. However, according to the Upper Lake OHV specialist, the effects of OHV use are observed casually during a normal work day. She and other ranger district staff then attempt to correct problems on the spot or have them corrected within a few days. The OHV specialist said, for example, that she rides all OHV roads and trails at least once every 6 weeks, heavy-use trails about two to three times each week, and private property trails once a week, to observe OHV use and identify its impact on resources. Comments from the public also help the ranger district identify problems. Enforcement is a part of the OHV specialist’s responsibilities. She said that she issues between 10 and 25 citations each year for such things as vehicle license or equipment violations. In addition, she can request assistance from the ranger district’s law enforcement staff or the county sheriff’s department, with which the ranger district has a cooperative agreement. The specialist said that, in her opinion, enforcement is not a big problem in the Upper Lake Ranger District. She said that some users may be a bit careless, while others may be confused about where they can ride. Although the Upper Lake Ranger District maintains no official listing of the areas where corrective actions have been or need to be taken to address the adverse effects of OHV use, the OHV program specialist identified (1) Sled Ridge Trail as an area where corrective actions have been taken to address such effects and (2) Streeter Ridge Trail as an area where, although corrective actions have been taken, the potential for problems from OHV use still exists. Sled Ridge Trail provides the only access for OHVs from one of the busiest campgrounds in the Upper Lake Ranger District, up and over Elk Mountain, to the heart of the ranger district’s designated OHV trail system. Sled Ridge Trail had become known as an OHV users’ playground, where a growing number of unauthorized trails and other effects of OHV use, such as erosion and stripped vegetation, were occurring, particularly around the campground and on Elk Mountain (a sensitive watershed area). As a result of the erosion and subsequent rutting from constant OHV use, Sled Ridge Trail had become impossible to negotiate for all but the most experienced riders; thus, less experienced riders were being restricted to the area immediately adjacent to the campground. Since 1987, the Upper Lake Ranger District has spent over $156,000 to correct the adverse effects of OHV use on Sled Ridge Trail and in the campground area, and OHV users can now travel from the campground, over Elk Mountain, to other OHV trails in the ranger district. Corrective activities included posting routes, barricading unauthorized routes, looping the remaining trails to deter trespassing when riders reach a dead end, and constructing barricades and a fence in strategic places to ensure that riders stay on the trail. About 100 erosion control devices, including water bars, catch ponds to retain water and trap moving soils, rolling dips, drains, and banked elevated turns were installed throughout the trail. In addition, on a steep part of the trail where severe erosion had occurred, the trail’s surface was hardened, through a process called armoring, by installing interlocking concrete bricks (see fig. IX.2). Streeter Ridge Trail, located within critical habitat for the sensitive Northern Spotted Owl, crosses Bucknell Creek, a tributary to the Eel River and a spawning area for anadromous salmon. On the section of trail that crosses the creek, some corrective actions have been taken, but the potential for problems still exists. Because this section of the trail is extremely steep, attempts by many OHV users to negotiate the 25 to 40 percent grade have caused deep ruts and other damage to the trail and negatively affected both the creek and the recreational experience at this location. The Upper Lake Ranger District monitored the creek’s water quality during the winters of 1991 and 1992 and found sedimentation levels to be within state limits. Nevertheless, the ranger district staff decided to reduce sedimentation by adding water bars to slow and divert the flow of water and by rerouting a steep section of the trail. These actions have reduced both sedimentation and trail proliferation and damage. Ultimately, however, OHV program staff said that further relocation of the trail is the best solution to the problem. The staff said that about $15,000 has been made available for this purpose and that work is scheduled to begin in August 1995. At the Upper Lake Ranger District, we interviewed an OHV enthusiast who is active in several local user groups and participates in meetings sponsored by the Forest Service for users twice each year. He told us that he has ridden all of the trails in the Upper Lake Ranger District and considers himself knowledgeable about OHV use in this area. A motorcycle club to which he belongs sponsors one special event each year, using trails in the Pine Mountain area of the ranger district. This event regularly draws 300 to 400 participants. Together with the Upper Lake OHV specialist, he and other club members monitor the race route before and after the event and agree on any damage caused by the event that the club needs to correct. The OHV enthusiast believes that even though OHV users cannot do everything they want to do in the Upper Lake Ranger District and the ranger district has limited funds to work with, the ranger district is well posted, has good maps, and is well managed. We also interviewed a member of a wildlife coalition who grew up in the area and hikes the trails of Upper Lake. Although this environmentalist has family members who are OHV enthusiasts, he said that he would like to see all OHV use prohibited in national forests. He realizes, however, that this is not a realistic approach. In his opinion, an increase in the number of unauthorized trails and the resulting resource degradation are the most significant problems in the Upper Lake Ranger District. He identified a sensitive watershed area, which includes Streeter Ridge Trail, as an area that he believes should be closed to OHV activity. Stanley G. Feinstein 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 Bureau of Land Management's (BLM) and the Forest Service's implementation of executive orders regulating the use of off-highway vehicles (OHV) on federal lands, focusing on the agencies': (1) designation of federal lands for OHV use; (2) monitoring of OHV use to identify adverse effects and any needed corrective actions; and (3) compliance with OHV regulations. GAO found that: (1) at the 8 locations reviewed, BLM and the Forest Service restricted OHV use in their management plans, but they generally gave lower funding and staffing priority to OHV activities than to other programs; (2) in fiscal year 1993, approximately two-thirds of the estimated total funding for OHV monitoring activities came from the states; (3) only 36 percent of the agency staff assigned to OHV activities worked full-time on such activities; (4) local communities and organizations provided additional funds and volunteer services and material to support OHV activities; (5) BLM and Forest Service compliance with the executive orders at the 8 locations was mixed because of limited staff and funding and higher priority activities; (6) although all 8 locations had lands prescribed for OHV use, 5 locations did not have maps and signs ready to show the public where and under what conditions OHV could be used; (7) at all locations, OHV monitoring was casual, adverse effects were seldom documented, and needed corrective actions had not been prioritized; and (8) although citations were written for violations at all the locations, enforcement was hampered by confusion over where and when OHV restrictions applied. |
DOD has made significant progress in reducing delays in personnel security clearance decisions and in meeting statutory timeliness objectives since we first designated DOD’s personnel security clearance program as a high-risk area in 2005. In 2007, we found that initial clearances for DOD industry personnel took an average of 325 days to complete. With the passage of IRTPA in 2004, timeliness requirements were established in law under which executive branch agencies were initially required to make decisions on at least 80 percent of initial clearances within an average of 120 days. We found that by 2008, DOD had made significant improvements in reducing delays. For example, in examining fiscal year 2008 data, we reported that the average of the fastest 80 percent of initial DOD clearances, including military, civilians, and industry personnel, took an average of 87 days to complete, well below what was required by law. However, despite these improvements, we continued to designate this program as a high-risk area due to more stringent timeliness objectives that were to take effect in December 2009. IRTPA required the Performance Accountability Council to develop a plan under which, to the extent practical, each authorized adjudicative agency would be required to make a determination on at least 90 percent of all applications for a personnel security clearance within an average of 60 days from the date of receipt of the completed application by an authorized investigative agency. Although the government is required to only report on the average of the fastest 90 percent of cases, we previously identified that the absence of comprehensive reporting limits full visibility over the timeliness of initial clearance decisions. Consistent with GAO’s recommendation, the government now reports on the remaining 10 percent. Our ongoing work has shown that DOD has continued to improve its timeliness and DOD reports that it is meeting the new statutory timeliness requirements. According to data provided by the Performance Accountability Council, DOD initial personnel security clearances met the 60 day IRTPA overall timeliness objective and the 20 day objective for the timeliness of adjudications for each of the first, second, and third quarters of fiscal year 2010, as shown in Table 1. Over this same period, average timeliness for the fastest 90 percent of DOD industry personnel security clearances ranged from 64 days to 69 days. In addition, DOD reported meeting the IRTPA 40 day timeliness objective for investigations in the third quarter of fiscal year 2010. However, timeliness data for investigations is a reflection of OPM as the investigative service provider for DOD. DOD’s Defense Industrial Security Clearance Office adjudicates clearances for industrial personnel. When the Defense Industrial Security Clearance Office identifies issues with these cases that may potentially affect the adjudicative decision, they sumit the cases to the Defense Office of Hearings and Appeals. The time it takes the Defense Industrial Security Clearance Office to arrive at the initial decision is included in DOD timeliness. However, timeliness information is not reported for cases sent to the Defense Office of Hearings and Appeals. ”DOD other” includes 1) all secret and confidential clearances and initial top secret clearances adjudicated y the DOD Central Adjudication Facilities for the Joint Chiefs of Staff and the Washington Headuarters Services and 2) the initial Sensitive Compartmented Information clearance cases adjudicated on their ehalf y elements of the intelligence community, such as the Defense Intelligence Agency. Although DOD has made significant progress in reducing delays in making personnel security clearance decisions, it is important that DOD sustain this progress. Reducing delays in the security clearance process will enable DOD to reduce risks to national security, expedite the start of classified work, hire the best-qualified workers, and decrease the government’s cost of national security-related contracts. We are also encouraged by a number of recent developments that are intended to enhance visibility over the quality of the security clearance process. In our prior work, we have stated that timeliness alone does not provide a complete picture of the clearance process and we emphasized the need for attention to quality. However, we found an uneven attention to quality within DOD’s process; specifically, we found missing documentation in reports prepared by OPM that DOD adjudicators had used to make clearance decisions. In May 2009, for example, we estimated that 87 percent of OPM investigative reports provided to DOD at three Central Adjudication Facilities in July 2008 were missing required documentation. Because neither OPM nor DOD measured the completeness of their investigative reports or adjudicative files, we reported that both agencies were limited in their ability to explain the extent to which, or the reasons why, some documents were incomplete. Incomplete documentation may increase the time needed to complete the clearance process, increase the overall costs of the process, and reduce the assurance that appropriate safeguards are in place to prevent DOD from granting clearances to untrustworthy individuals. We emphasized that building quality throughout DOD’s process could promote positive outcomes, such as facilitating reciprocity with other agencies. DOD has taken a number of positive steps to integrate quality into its investigative and adjudicative processes and demonstrated the commitment of senior leadership to reforming the personnel security process within DOD. For example, according to DOD officials, DOD recently initiated the creation of a Performance Accountability Directorate within USD(I)’s Directorate of Security to provide oversight and accountability for the DOD Central Adjudication Facilities that process DOD adjudicative decisions. Most importantly, DOD has also issued guidance and developed tools to measure quality. For example: Guidance. DOD has taken steps to issue guidance on adjudication standards. On November 8, 2009, the USD(I) issued guidance on adjudication standards that outline the minimum documentation requirements adjudicators must adhere to when documenting personnel security clearance adjudication rationales in the Joint Adjudication Management System. These standards are for cases with significant derogatory information and for Single Scope Background Investigations that are missing standard investigative scope items but were still adjudicated. In response to our recommendation, the USD(I) issued additional guidance on March 10, 2010 that clarifies when adjudicators may use incomplete investigative reports as the basis for granting clearances. This guidance provides standards that can be used for the sufficient explanation of missing or incomplete scope items. Tools. DOD has taken steps to measure the frequency with which documentation for investigations and adjudications meets federal standards. DOD developed two tracking tools—the Rapid Assessment of Incomplete Security Evaluations (RAISE) and the Review of Adjudication Documentation Accuracy and Rationales (RADAR)— to assess the quality of investigative and adjudication documentation. These tracking tools are embedded capabilities in DOD’s Clearance Adjudication Tracking System (CATS), which is used by all non-intelligence DOD Central Adjudication Facilities. Although these are positive steps, it is too early to assess the effectiveness of these tools as they have not yet been fully deployed. The RAISE tracking tool will document the instances of missing case information or unresolved case issues for records of investigation provided by OPM. In July 2010, DOD issued guidance requiring that each DOD Central Adjudication Facility that utilizes the Clearance Adjudication Tracking System use the RAISE tracking tool on all incomplete national security investigations and on random samples of other clearance cases accounting for 7 percent of their respective Single Scope Background Investigations and 14 percent of both their Periodic Reinvestigations and National Agency Check with Local Agency Check and Credit Check investigations. The results are to be reported to the DNI who, as Security Executive Agent of the Performance Accountability Council, will arbitrate disagreements between OPM and DOD and clarify policy questions. DOD deployed the RAISE tracking tool to four Central Adjudication Facilities between July and October 2010 and plans to complete deployment to the remaining Central Adjudication Facilities by the beginning of calendar year 2011. The RADAR tracking tool will enable DOD to independently evaluate the quality of adjudicative decisions against the adjudicative standards. The USD(I) has directed DOD Central Adjudication Facilities to provide adjudication case records to the Defense Personnel Research Center for analysis. The USD(I) plans to use results of the RADAR tracking tool assessments to monitor Central Adjudication Facilities’ compliance with documentation policies, communicate performance to the Central Adjudication Facilities, identify potential weaknesses and training needs, increase compliance, and establish trend data. DOD has completed a pilot program for the use of the RADAR tracking tool and has begun its implementation for the Army, Defense Industrial Security Clearance Office, and Navy Central Adjudication Facilities in September 2010. Further, implementation is scheduled for the Air Force and Washington Headquarters Services by November 2010. Beyond these steps, DOD has participated in the development and tracking of quality metrics through the Performance Accountability Council. On March 17, 2010, the leaders of the reform effort—the OMB, OPM, DNI, and DOD—along with GAO, briefed this Subcommittee’s chairman and ranking member on the status of security clearance reform efforts. Subsequent to this briefing, this Subcommittee requested that the Joint Reform Team and GAO engage in an effort to develop metrics to measure the quality of security clearance investigations and adjudications in order to address GAO’s concerns about quality. In May 2010, the leaders of the reform effort provided this Subcommittee with 15 metrics assessing the timeliness and quality of investigations, adjudications, reciprocity, and automation. According to Joint Reform Team officials, these metrics were communicated to executive agencies in June 2010. Given the role of the executive branch and the need for GAO to remain independent in carrying out its auditing responsibilities, decisions related to performance measures and their effective implementation are fundamentally an executive branch management responsibility. However, we are encouraged by the Joint Reform Team’s collaborative efforts to develop these quality measures. We have previously reported that successful performance measures should meet nine criteria. For example, successful measures should clearly link to agency goals, have measurable targets, and be reasonably free from bias. GAO has been examining the Performance Accountability Council metrics and our preliminary observations show that many of the quality metrics appear to address attributes of a successful performance measure, such as being objective, quantifiable, and are linked to reform effort goals. We view the quality metrics as a positive step towards identifying specific quantifiable targets linked to goals that can be measured objectively and used by leaders and others to gauge progress and assess the quality of the personnel security clearance process. Although these are positive developments that can contribute to greater visibility over the clearance process, these measures have not yet been fully implemented and we are continuing to examine these efforts as part of our ongoing work. In conclusion, Mr. Chairman, we are strongly encouraged by the progress that the Performance Accountability Council, and in particular, DOD, has made over the last few years to implement recommendations, reduce overall timeliness, and take steps to integrate quality into its processes. As I have already noted, based on Performance Accountability Council data, DOD has reported that it is meeting IRTPA timeliness requirements for the first three quarters of fiscal year 2010, which represents significant and noteworthy progress. Moreover, the progress that has been made with respect to the overall governmentwide reform efforts would not be possible without committed and sustained leadership of Congress and by the senior leaders involved in the Performance Accountability Council. Their continued oversight and stewardship of the reform efforts is the cornerstone to sustaining momentum and making future progress. Although DOD has taken steps to develop and implement quality assessment tools, these tools have not yet been fully implemented. Therefore, it is important that management focus is sustained to ensure that these efforts are implemented and continuously evaluated. We are continuing to track timeliness and monitor the implementation and results of DOD’s quality assessment tools. This work will help inform the Comptroller General’s high-risk update decision in January 2011. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond at this time to any questions that you or members of the Subcommittee may have at this time. For further information regarding this testimony, please contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Liz McNally, Assistant Director; James Ashley; Joseph M. Capuano; Sara Cradic; Cindy Gilbert; Linda Keefer; James Krustapentus; Greg Marchand; Richard Powelson; and Jillena Roberts. Privacy: OPM Should Better Monitor Implementation of Privacy-Related Policies and Procedures for Background Investigations, GAO-10-849. Washington, D.C.: September 7, 2010. Personnel Security Clearances: An Outcome-Focused Strategy and Comprehensive Reporting of Timeliness and Quality Would Provide Greater Visibility over the Clearance Process. GAO-10-117T. Washington, D.C.: October 1, 2009. Personnel Security Clearances: Progress Has Been Made to Reduce Delays But Further Actions Are Needed to Enhance Quality and Sustain Reform Efforts. GAO-09-684T. Washington, D.C.: September 15, 2009. Personnel Security Clearances: An Outcome-Focused Strategy Is Needed to Guide Implementation of the Reformed Clearance Process. GAO-09-488. Washington, D.C.: May 19, 2009. DOD Personnel Clearances: Comprehensive Timeliness Reporting, Complete Clearance Documentation, and Quality Measures Are Needed to Further Improve the Clearance Process. GAO-09-400. Washington, D.C.: May 19, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22, 2009. DOD Personnel Clearances: Preliminary Observations about Timeliness and Quality. GAO-09-261R. Washington, D.C.: December 19, 2008. Personnel Security Clearances: Preliminary Observations on Joint Reform Efforts to Improve the Governmentwide Clearance Eligibility Process. GAO-08-1050T. Washington, D.C.: July 30, 2008. Personnel Clearances: Questions for the Record Regarding Security Clearance Reform. GAO-08-965R. Washington, D.C.: July 14, 2008. Personnel Clearances: Key Factors for Reforming the Security Clearance Process. GAO-08-776T. Washington, D.C.: May 22, 2008. Employee Security: Implementation of Identification Cards and DOD’s Personnel Security Clearance Program Need Improvement. GAO-08-551T. Washington, D.C.: April 9, 2008. DOD Personnel Clearances: Questions for the Record Related to the Quality and Timeliness of Clearances. GAO-08-580R. Washington D.C.: March 25, 2008. DOD Personnel Clearances: DOD Faces Multiple Challenges in Its Efforts to Improve Clearance Processes for Industry Personnel. GAO-08-470T. Washington, D.C.: February 12, 2008. Personnel Clearances: Key Factors to Consider in Efforts to Reform Security Clearance Processes. GAO-08-352T. Washington, D.C.: February 27, 2008. DOD Personnel Clearances: Improved Annual Reporting Would Enable More Informed Congressional Oversight. GAO-08-350. Washington, D.C.: February 13, 2008. DOD Personnel Clearances: Delays and Inadequate Documentation Found For Industry Personnel. GAO-07-842T. Washington, D.C.: May 17, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. DOD Personnel Clearances: Additional OMB Actions Are Needed To Improve The Security Clearance Process. GAO-06-1070. Washington, D.C.: September 28, 2006. DOD Personnel Clearances: Questions and Answers for the Record Following the Second in a Series of Hearings on Fixing the Security Clearance Process. GAO-06-693R. Washington, D.C.: June 14, 2006. DOD Personnel Clearances: New Concerns Slow Processing of Clearances for Industry Personnel. GAO-06-748T. Washington, D.C.: May 17, 2006. DOD Personnel Clearances: Funding Challenges and Other Impediments Slow Clearances for Industry Personnel. GAO-06-747T. Washington, D.C.: May 17, 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. 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. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In light of longstanding problems with delays and backlogs, Congress mandated personnel security clearance reforms through the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA), which requires, among other things, that executive agencies meet objectives for the timeliness of the investigative and adjudicative phases of the security clearance process. Since 2005, the Department of Defense's (DOD) clearance program has been on GAO's high-risk list due to timeliness delays and GAO continued that designation in 2007 and 2009 also due to concerns about quality. Based on prior and ongoing work, this statement addresses DOD's progress in (1) reducing the timeliness of initial personnel security clearances at DOD and (2) building quality into the processes used to investigate and adjudicate security clearances. GAO reviewed Performance Accountability Council timeliness data and has begun a preliminary analysis of available DOD data, examined key clearance reform documents, and conducted interviews with DOD and the Performance Accountability Council officials about timeliness and efforts to improve the quality of investigations and adjudications. GAO plans to continue examining the timeliness and quality of personnel security clearances in DOD. This work will help inform the Comptroller General's high risk update decision in January 2011. DOD, which comprises the vast majority of clearances, has made significant progress in reducing delays in making personnel security clearance decisions and meeting statutory timeliness objectives since GAO first designated DOD's personnel security clearance program as a high risk area in 2005. In 2007, GAO found that initial clearances for DOD industry personnel took an average of 325 days to complete. With the passage of IRTPA in 2004, timeliness requirements were established in law and executive branch agencies were required to make decisions on at least 80 percent of initial clearances within an average of 120 days. In 2008, GAO found that DOD had made significant improvements in reducing delays, with the fastest 80 percent of clearances taking an average of 87 days to complete. As of December 2009, IRTPA's timeliness objective is for each federal agency to process the fastest 90 percent of initial security clearances within an average of 60 days, including a period of not longer than 40 days to complete the investigative phase and 20 days to complete the adjudicative phase. DOD met the 60 day IRTPA timeliness objective for initial personnel security clearances, as well as the 20 day objective for the timeliness of adjudications, for each of the first, second, and third quarters of fiscal year 2010, according to data provided by the Performance Accountability Council. GAO's ongoing work continues to examine the timeliness of personnel security clearances in DOD. DOD has taken a number of positive steps to integrate quality into its investigative and adjudicative processes, including issuing guidance and developing tools to measure quality. For example, in November 2009, the Under Secretary for Defense for Intelligence (USD(I)) issued guidance to outline the requirements that adjudicators must adhere to when documenting personnel security clearance adjudication rationales. Similarly, in March 2010, the USD(I) issued guidance to clarify when adjudicators may use incomplete investigative reports as the basis for granting clearances. In addition, DOD created two electronic quality assessment tools--the Rapid Assessment of Incomplete Security Evaluations (RAISE) and the Review of Adjudication Documentation Accuracy and Rationales (RADAR)--to track the quality of investigative and adjudicative documentation. These tools are embedded in DOD's Clearance Adjudication Tracking System (CATS), a system used by all non-intelligence DOD Central Adjudication Facilities. Although these are positive developments that can contribute to greater visibility over the clearance process, these tools have not been fully implemented. GAO's ongoing work continues to examine the implementation of these tools and other efforts to ensure that momentum is sustained. |
The decennial census is mandated by the U.S. Constitution and provides data that are vital to the nation. This information is used to apportion the seats of the U.S. House of Representatives; realign the boundaries of the legislative districts of each state; allocate billions of dollars in federal financial assistance; and provide social, demographic, and economic profiles of the nation’s people to guide policy decisions at each level of government. As shown in figure 1, the cost of enumerating each housing unit has escalated from around $16 in 1970 to around $94 in 2010, in constant 2010 dollars (an increase of over 500 percent). At the same time, the mail response rate—a key indicator of a cost-effective enumeration—has declined from 78 percent in 1970 to 63 percent in 2010. In many ways, the Bureau has had to invest substantially more resources each decade just to try and match the results of prior enumerations. Beginning in 1990, we reported that rising costs, difficulties in securing public participation, and other long-standing challenges required a revised census methodology—a view that was shared by other stakeholders. We and other organizations—including the Bureau itself—have stated that fundamental changes to the design, implementation, and management of the census must be made in order to address operational and organizational challenges. Accordingly, in preparation for the 2020 Census, the Bureau has been researching and testing new methods and technologies to more cost- effectively count the population while maintaining high-quality results. This includes conducting several major field tests that are intended to inform the September 2015 preliminary design decision. For example, in 2014 the Bureau tested new methods for conducting self-response and non-response follow-up (referred to as the 2014 Census Test) in the Maryland and Washington, D.C., area. The Bureau is also conducting tests in 2015 that are expected to inform the design decision, including the Address Validation Test, which was completed in early 2015 and was used to examine new methods for updating the Bureau’s address list; the 2015 Census Test, which is currently being conducted in Arizona to test, among other things, reengineered non-response follow-up field operations, as well as enabling enumerators to use their personally owned mobile devices to collect census data; and the Optimizing Self Response Test, which is currently being conducted in Savannah, Georgia, and the surrounding area and is intended to further explore methods of encouraging households to respond using the Internet, such as using advertizing and outreach to motivate respondents, and enabling households to respond without a Bureau-issued identification number. Following its design decision, the Bureau plans to conduct additional research and testing and further refine the design through 2018. By September 2018, the Bureau plans to have fully implemented the design so that it can begin operational readiness testing. Figure 2 provides the timeline for planned 2020 Census research and testing. The Bureau has been making important progress in researching and testing various design options associated with four interrelated cost- savings initiatives: using data previously provided to the government to help enumerate the population, updating the Bureau’s address list and maps of the nation, only where needed, reengineering management of field work, and maximizing self-response. Combined, the Bureau estimates these efforts could generate up to $5 billion in cost savings and that the total life-cycle cost for the 2020 Census will be approximately $12.7 billion. However, we have identified various challenges and unanswered questions in these areas that, if unresolved, could affect the accuracy of the count and put the estimated cost savings at risk. The Bureau has identified or acknowledged many of these issues and is working to address them. The Bureau incurs a large part of the census’ cost while following up at residences that did not return a census questionnaire. To ensure a complete count, Bureau guidance in 2010 had enumerators visit some places up to six times to try to obtain a response. In addition to being costly, such follow-up can also affect the accuracy of the count, because when census enumerators cannot contact a household, they may turn to a neighbor or some other person knowledgeable about the household to obtain the data. However, this information may be less reliable than information provided by a household member. In addition, many residences are subsequently found to be vacant or nonexistent. For example, in one operation in 2010 with the purpose of verifying whether some housing units were vacant or should be deleted from the Bureau’s address list, the Bureau visited nearly 9 million housing units at a cost of about $280 million in labor and other expenses. To reduce the need for these costly operations and to increase accuracy, the Bureau is testing how it might be able to expand its use of information the government already has from the administration of other programs— administrative records. The Bureau is conducting these tests in Maricopa County, Arizona, this month and has further testing planned for 2016. Examples of administrative records include Social Security Administration data and Medicare records, as well as records from state, local, and tribal governments and commercial sources. The Bureau has previously made limited use of administrative records. For example, it used U.S. Postal Service files to update its address list. The Bureau estimates that using administrative records for the 2020 Census to reduce the number of in- person visits, local census offices, and operations needed has the potential to save $1.2 billion. Our ongoing work and our December 2010 reportBureau will need to resolve a number of questions before it will be able to realize cost savings or improvements in data reliability from the use of such records, including the following: What records will meet the Bureau’s needs? The Bureau is exploring questions about the quality of other records and their completeness. Information contained in those records was collected for other purposes, so it may not always provide exactly what the Bureau needs. For example, while race and ethnicity data are collected in the census, the records available to the Bureau may not record this information. Likewise, while the Bureau needs the location of a residence for apportionment and other purposes, available records may only provide locations where people receive mail such as a post office box. To what extent does the Bureau have access to these records for operational purposes? Some of the data the Bureau may want to use is personally identifiable information collected for other specific purposes. In some cases, the Bureau may need to enter into agreements with other agencies or levels of government to obtain access. In other cases, legislative changes may be needed to provide the Bureau with the necessary access authority. The Bureau will need to be sensitive to the time involved for these efforts so that it has the access it may need in time for 2020. To what extent will the public accept the sharing of personal data across government agencies for purposes of the census? The Bureau and others have ongoing research exploring public perceptions on topics such as trust, the potential for decreased burden on respondents, and the social benefits of sharing data. This research is also exploring the factors relating to public outreach that the Bureau may need to focus on in order to enhance the public’s acceptance of greater use of administrative records. We have ongoing work examining the Bureau’s efforts to research the use of administrative records for the 2020 Census, including the test in Maricopa County, Arizona. We anticipate issuing the results this fall. The Bureau relies on a complete and accurate address list to identify all households that are to receive a census questionnaire. The address list also serves as the control mechanism for following up with non- responding households. Accurate addresses and precise maps are critical for counting the population in the proper locations—the basis of congressional reapportionment, redistricting, and allocations of federal aid to state and local governments. In prior decades the Bureau employed field staff to walk almost every street in the nation as one of several operations to update the Bureau’s inventory of addresses and geography—in 2013, we testified that the Bureau’s 2010 address canvassing operation required 140,000 temporary workers to verify 145 million addresses at a cost of $444 million. The Bureau has relied on this operation to help identify hidden housing units—that is, people living in, for example, converted basements or lofts—as well as changes to the address list such as from newly constructed or demolished residences. To reduce the scope of this operation, the Bureau is focusing on areas that it believes have experienced change, such as rapid recent housing development, and for which the Bureau has no data sources capturing those changes. The Bureau is working with the U.S. Postal Service, other federal agencies, and state, local, and tribal governments on an initiative that allows government agencies at all levels to regularly share and continuously update their address lists and road data with the Bureau. To help fill in gaps and better target reduced resources, in January 2015 the Bureau solicited information from commercial firms on their capabilities to detect changes in addresses in local areas. Additionally, in February 2015 the Bureau solicited commercial proposals to provide national address or imagery datasets. The Bureau recently completed tests of some modeling methods to help identify where updates are most needed, and has additional tests planned for 2016. The Bureau estimates it will save up to $1 billion with the successful implementation of this initiative. Going forward, the Bureau’s success at more efficiently updating its address list and maps depends on how it resolves questions such as the following: Which map and address data sources are the most cost- effective? In October 2014, we found that the Bureau needed to implement processes for reviewing the cost and quality of data source selections and for documenting support for those decisions while documenting management approval of key data source decisions. The Bureau agreed with our corrective recommendations and is taking steps to address them. The Bureau has ongoing research to determine how best to measure cost and quality trade-offs in data sources. Will the Bureau be able to complete a nationwide continuous update of its addresses and maps in time for 2020? With over 3,200 counties in the country, in addition to other local and state governments the Bureau might be partnering with, the Bureau has much work to do. In October 2014, we recommended that the Bureau develop a detailed plan with measurable goals for the updating initiative and track performance against these goals.agreed with our recommendations and is taking steps to address them. In November 2013, we also reported on weaknesses in the Bureau’s scheduling practices related to its address list development activity. The Bureau recently announced it had improved the organization of its entire 2020 Census schedule to at least in part respond to these concerns. How will the Bureau decide where to conduct door-to-door canvassing? Removing geographic areas from the possible door-to- door canvassing workload requires being able to predict which areas are stable and which areas have undetected change. The Bureau is investigating a variety of statistical models and other novel approaches, such as the use of automated tools to scan aerial imagery for new developments, to inform how to target resources. The Bureau is researching and testing ways to more efficiently and effectively manage its multiple field operations for the 2020 Census. For example, the Bureau is researching ways to use an operational control system that automatically manages tasks and decisionmaking, such as case assignment and prioritization. The Bureau is also researching use of mobile devices to collect data in the field, automated human resources functions (e.g., payroll, recruiting), automated training, and reorganization of the roles of field managers. The Bureau is actively testing each of these changes alongside more traditional methods in its ongoing test in Arizona. These changes could reduce the costs for staff, training, and paper processing as well as the number of temporary census offices. The Bureau estimates it could save up to $2.3 billion with the implementation of this initiative. We have previously testified to this Committee about the importance of the Bureau’s organizational culture and human capital planning in enabling management to achieve cost savings with its business practices The Bureau is taking many steps that show promise, such and systems.as with its internal reorganization, and its efforts to identify critical skills gaps as we discuss later in the statement. If the Bureau is to attain the tremendous cost savings that it estimates from its field management reengineering efforts, it will need to resolve questions such as: Will the Bureau be able to fully test systems, procedures, field operations and people in time for 2020? Prior to the 2010 Census, concerns about the testing of key operations under census-like conditions led us to designate that census a high-risk program. It will be important for the Bureau to make progress in all areas of field reengineering so that it is ready for its planned end-to-end testing in 2018. Later this year, we plan to review the Bureau’s efforts in this cost-savings area, as well as the IT systems that will heavily support this initiative. To hold down costs, the Bureau will need higher rates of public participation, because that will reduce the need for enumerators to visit non-responding households. According to the Bureau, for the 2010 Census, approximately 635,000 employees were hired for non-response follow-up at a cost of more than $1.6 billion. As previously mentioned, the Bureau is conducting a test in Savannah, Georgia, and the surrounding area to explore ways to encourage households to respond using the Internet with advertising and outreach. These efforts have the potential to save money by reducing the need for enumerators, printing, postage, and paper, and can speed up data collection. The Bureau estimates these efforts could save around $500 million. We reported in February 2015 that the Bureau’s efforts to deliver an Internet response option were under way. These efforts included developing a web application for use in major field tests, as well as researching methods for promoting the Internet response option and allowing households to respond online without a Bureau-issued identification number (to authenticate respondents). However, the Bureau had yet to establish reliable estimates of how much it will cost to deliver an Internet response option. Moreover, the Bureau did not have integrated schedules for completing the work, nor did it have plans and time frames for addressing IT infrastructure scalability needs. For example, the Internet response option for the 2020 Census is expected to require a much greater data processing and storage capacity than the Bureau’s existing IT infrastructure can support, and Bureau officials stated that they plan to use a cloud environment to provide the increased IT infrastructure. The Bureau was not positioned to answer research questions critical to determining how much larger it should scale its IT infrastructure in time for the upcoming September 2015 design decision. We also found the Bureau had not yet established high-level time frames for when key cloud computing decisions needed to be made. Bureau IT Directorate officials stated that they had not yet established time frames due to a lack of internal cloud computing expertise and that they were planning to use a contractor to assist in assessing cloud computing technologies for the 2020 Census. While this assistance may be helpful, without, at a minimum, high-level time frames, the Bureau will not know whether there is enough time to successfully acquire and implement a cloud solution for the 2020 Census. In our February 2015 report, we recommended that the Bureau update estimated costs for the Internet response option and ensure future cost estimates are reliable, develop methodologies for answering key research questions, and establish high-level time frames for cloud computing decisions. The Bureau neither agreed nor disagreed with the recommendations but identified actions to address some of them. For example, the Bureau stated that it planned to revise the 2020 Census cost estimate once the September 2015 design decision is made. The Bureau also stated that it had established a plan and implementation team—the 2020 Census Concept of Operations—to document results of the design decision, including the Internet self-response rate and key dates for making decisions. In addition to these challenges, the Bureau will need to resolve other operational questions before it can realize cost savings in this area, including the following: What methods work best to convince diverse audiences to self- respond in a digital environment? In the Savannah, Georgia, test, the Bureau is exploring how to target various audiences through social media, such as Twitter and Facebook, and the effect on response rates over the Internet. How can non-Internet response options be improved, for those without access to the Internet? The Bureau has historically provided support for completing questionnaires at locations within communities and over the telephone. The Bureau will need to examine how if at all it can improve such efforts to help people complete their questionnaires. In October 2014, the Bureau initiated an enterprise-wide IT initiative called the Census Enterprise Data Collection and Processing (CEDCAP) program, which is intended to deliver a “system of systems” to serve all of the Bureau’s survey data collection and processing functions—rather than continuing to build and maintain unique, survey-specific systems with redundant capabilities. Most importantly for the 2020 Census, CEDCAP is expected to deliver the systems and IT infrastructure needed to implement the Bureau’s cost-savings initiatives. For example: To reengineer field work, CEDCAP is expected to implement a new dynamic operational control system to track and manage field work that can make decisions on which visits enumerators should attempt on a daily basis using real-time data, as well as provide automated route planning to make enumerator travel more efficient. CEDCAP also includes testing the use of mobile devices, either government- furnished or employee-owned, to automate data collection in the field. To maximize self-response with the use of the Internet response option, CEDCAP is responsible for developing and testing a web- based survey application and exploring options for establishing the IT infrastructure to support the increased volume of data processing and storage. CEDCAP is a large and complex modernization program, consisting of 14 projects that are to deliver CEDCAP capabilities incrementally, through the deployment of over 10 versions. The Bureau expects to reuse selected systems, make modifications to other systems, and develop or acquire additional systems and infrastructure. As of March 2015, the CEDCAP program was projected to cost about $548 million through 2020. The September 2015 design decision that is expected to result from the Bureau’s ongoing research and testing is also intended to drive the business requirements for the systems and infrastructure that CEDCAP will be expected to deliver. However, as noted in our April 2014 report, the Bureau had not prioritized key IT research and testing needed for the fast-approaching September 2015 design decision. Specifically, the Bureau was not completing the necessary plans and schedules for research and testing efforts and prioritizing what needs to be done by September 2015—a milestone that had already been pushed back by a year (see fig. 3) and cannot afford to slip further. We concluded that, given the current trajectory and the lack of supporting schedules and plans, it was unlikely that all planned IT-related research and testing activities would be completed in time to support the September 2015 design decision. These findings were particularly concerning since we had reported in November 2012 that, during the early stages of research and testing, key research and testing project plans were incomplete.recommended at that time that the Bureau ensure that documentation for projects was complete and the Bureau agreed, incomplete project plans continued to be an issue 2 years later. In light of these ongoing challenges, we recommended in our April 2014 report that the Bureau prioritize its IT-related research and testing projects that need to be completed to support the design decision and develop schedules and plans to reflect the new prioritized approach. The Bureau agreed with our recommendations and has taken steps to address them. For example, in September 2014, the Bureau released a plan that identified inputs, such as research questions, design components, and testing, that was needed to inform the September 2015 design decision. However, as we reported in February 2015,determined how key IT research questions that had been identified as critical inputs into the design decision—estimating the Internet self- response rate and determining the IT infrastructure for security and scalability needed to support Internet response—were to be answered. Bureau officials stated that they had begun to establish projects responsible for addressing these questions, but they did not have time frames for when these new projects would develop a planned research methodology. We emphasized that, with 8 months remaining until the design decision was to be made and major tests already designed or completed, the Bureau had limited time to determine how these critical questions would be answered to inform a key design decision. the Bureau had not yet Given the Bureau’s prior and existing challenges, as well as the importance of CEDCAP to the successful delivery of an accurate, efficient, and secure 2020 Census, we identified CEDCAP as an IT investment in need of attention in our February 2015 High-Risk report.We plan to conduct a review of the CEDCAP program for this Committee later this year. As we have previously reported, the Bureau’s past efforts to implement new approaches and IT systems have not always gone well. For example, leading up to the 2010 Census, fundamental weaknesses in key IT management practices contributed to the Bureau not being able to successfully deploy custom-developed handheld enumeration devices for non-response follow-up, which increased the cost of that Census by up to $3 billion. The Bureau has made progress in practices related to IT governance and requirements management, but more work is needed to address critical workforce gaps and information security. Institutionalizing key IT management controls, such as IT governance, system development methodology, and requirements management processes, helps establish a consistent and repeatable process for managing and overseeing IT investments and reduces the risk of experiencing cost overruns, schedule slippages, and performance shortfalls, like those that affected the previous census. The Bureau has made progress in strengthening these areas in response to recommendations we made in September 2012. Specifically, we found that the Bureau lacked a sufficiently mature IT governance process to ensure that investments are properly controlled and monitored, and did not have a comprehensive system development methodology, and that effective requirements management continued to be a long-standing challenge for the Bureau. We made several recommendations to address these issues, and the Bureau took actions to fully implement all of them. For example, the Bureau addressed gaps in policies and procedures related to IT governance, such as establishing guidelines on the frequency of investment review board meetings and thresholds for escalation of cost, risk, or impact issues; finalized its adoption of an enterprise system development life-cycle methodology, which included the short incremental development model, referred to as Agile, and a process for continuously improving the methodology based on lessons learned; and implemented a consistent requirements development tool that includes guidance for developing requirements at the strategic mission, business, and project levels and is integrated with its enterprise system development life-cycle methodology. As a result, the Bureau has established a consistent process for managing and overseeing its IT investments. Effective workforce planning is essential to ensure organizations have the proper skills, abilities, and capacity for effective management. While the Bureau has made progress in IT workforce planning efforts, many critical IT competency gaps remain to be filled. In September 2012 we reported, among other things, that the Bureau had not developed a Bureau-wide IT workforce plan; identified gaps in mission-critical IT occupations, skills, and competencies; or developed strategies to address gaps. Accordingly, we recommended that the Bureau establish a repeatable process for performing IT skills assessments and gap analyses and establish a process for directorates to coordinate on IT workforce planning. In response, in 2013 the Bureau completed an enterprise-wide competency assessment and identified several mission-critical gaps in technical competencies. In 2014 the Bureau established documents to institutionalize a strategic workforce planning process, identified actions and targets to close the competency gaps by December 2015, and established a process to monitor quarterly status reports on the implementation of these actions. These are positive steps in establishing strategic workforce planning capabilities; however, more work remains for the Bureau to close competency gaps critical to the implementation of its IT efforts. As we reported in February 2015, the Bureau’s workforce competency assessment identified several mission-critical gaps that would challenge its ability to deliver IT-related initiatives, such as the IT systems that are For example, the Bureau found expected to be delivered by CEDCAP. that competency gaps existed in cloud computing, security integration and engineering, enterprise/mission engineering life-cycle, requirements development, and Internet data collection. The Bureau also found that enterprise-level competency gaps existed in program and project management, budget and cost estimation, systems development, data analytics, and shared services. The Bureau’s efforts to monitor the status of its efforts to close these competency gaps will be critical to ensuring the Bureau has the skills it needs to effectively deliver IT solutions for the 2020 Census. GAO, 2020 Census: Key Challenges Need to Be Addressed to Successfully Enable Internet Response, GAO-15-225 (Washington, D.C.: Feb. 5, 2015). Critical to the Bureau’s ability to perform its data collection and analysis duties are its information systems and the protection of the information they contain. A data breach could result in the public’s loss of confidence in the Bureau, thus affecting its ability to collect census data. To ensure the reliability of their computerized information, agencies should design and implement controls to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Inadequate design or implementation of access controls increases the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. In January 2013, we reported on the Bureau’s implementation of information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. We concluded that the Bureau had a number of weaknesses in controls intended to limit access to its systems and information, as well as those related to managing system configurations and unplanned events. We attributed these weaknesses to the fact that the Bureau had not fully implemented a comprehensive information security program, and made The 115 recommendations aimed at addressing these deficiencies.Bureau expressed broad agreement with the report and said it would work to find the best ways to address our recommendations. However, to date, the Bureau has fully addressed only 19 of the 115 recommendations, and while it is making progress on others, significant work remains. For example, the Bureau has implemented elements of a comprehensive information security program, such as establishing appropriate policies and procedures, providing security awareness training, and addressing incident response weaknesses; however, among many other things, it is not yet comprehensively assessing risk. Given that the Bureau is considering using IT systems to collect the public’s personal information for the 2020 Census in ways that it has not in previous censuses (e.g., web-based surveys, cloud computing, and enabling enumerators to use their personally owned mobile devices to collect census data), implementing our security recommendations from over 2 years ago must be a high priority. Until then, the Bureau will have limited assurance that its information and systems, including those needed for the 2020 Census, are being adequately protected against unauthorized access, use, disclosure, modification, disruption, or loss. In summary, the Bureau is pursuing initiatives to significantly reform its outdated and inefficient methods of conducting decennial censuses. However, with only 3-and-a-half years remaining until the Bureau plans to have all systems and processes for the 2020 Census developed and ready for end-to-end system testing, the magnitude of the planned changes, the Bureau’s prior track record, and existing challenges, the 2020 Census program faces significant risk. As the Bureau approaches the September 2015 preliminary decision deadline, it needs to ensure that it only commits to what its capacity can truly accommodate. In addition, the Bureau will need to ensure that quality and information security are effectively managed in a census design that may entail significant change. Moreover, the Bureau needs to take action to address the specific challenges we have highlighted in prior reports. If these actions are not taken, cost overruns, schedules delays, and performance shortfalls may diminish the potentially significant cost savings that the Bureau estimates will result from redesigning the census for 2020. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this completes our prepared statement. We would be pleased to respond to any questions that you may have. If you have any questions concerning this statement, please contact Carol Cha, Director, Information Technology Acquisition Management Issues, at (202) 512-4456 or chac@gao.gov or Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757 or goldenkoffr@gao.gov. Other individuals who made key contributions include Shannin O’Neill and Ty Mitchell, Assistant Directors; Jeffrey DeMarco; Lee McCracken; Jeanne Sung; and Timothy Wexler. 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 cost of the decennial census has steadily increased each decade, with the 2010 Census being the most costly in history, totaling approximately $13 billion. If the growth rate continues, the 2020 Census could cost approximately $25 billion (in constant 2010 dollars). In an effort to contain costs while continuing to ensure an accurate enumeration, the Bureau is researching and testing new methods and technologies. This September, the Bureau plans to announce its preliminary design for the 2020 Census, and in October 2018 the Bureau plans to have all systems and processes for the 2020 Census developed and ready for operational testing. As Census Day 2020 gets closer, the margin for schedule slippages is becoming increasingly narrow. GAO was asked to testify on the Bureau's progress in implementing cost-savings initiatives and associated challenges for the 2020 Census. To prepare this statement, GAO relied on its previously published work in this area over the last several years. The Census Bureau (Bureau) has research and testing efforts well under way to support reforming aspects of the 2020 Census in order to contain costs. The table below briefly describes the four main cost-saving initiatives and the Bureau's associated savings estimates. However, the Bureau faces significant challenges and unanswered questions related to these initiatives and their associated cost savings. For example, the Bureau needs to finalize decisions on: the use of data records from other government agencies; more cost-effectively maintaining complete and accurate map and address data; and the use of technology to more efficiently manage field operations. The Bureau also needs to take action on GAO's recommendations to develop reliable cost estimates and time frames for key decisions related to deploying the Internet self-response option. The successful execution of the 2020 Census also depends on the effective implementation of a large and complex information technology (IT) development effort. This effort—the Census Enterprise Data Collection and Processing program—is intended to result in an interconnected set of systems to serve all the Bureau's data collection and processing functions, including the systems and infrastructure needed to support the 2020 Census cost-savings initiatives. But as GAO has reported, the Bureau has not always prioritized key testing and research activities needed to inform IT system development. GAO has also previously found weaknesses in the Bureau's management of IT , and made recommendations to address them. In response, the Bureau has made important improvements in the areas of governance, system development methodologies, requirements management, and workforce planning. However, more work remains to ensure that it has the critical skills needed to effectively deliver IT solutions and that its systems and information are protected from unauthorized access or tampering. The Bureau needs to take action to address the recommendations GAO has made in prior reports. If these actions are not taken, cost overruns, schedule delays, and performance shortfalls will likely diminish the potential cost savings that the Bureau estimates will result from redesigning the census for 2020. In its prior work, GAO made 121 recommendations to, among other things, assist the Bureau in planning for its Internet response option, completing key research and testing activities, and improving its IT management and security. The Bureau generally agreed with these recommendations. |
Over the past year, DOD has substantially restructured the JSF program, taking positive actions that should lead to more achievable and predictable outcomes. Restructuring has consequences—higher development costs, fewer aircraft in the near term, training delays, and extended times for testing and delivering capabilities to warfighters. Key restructuring changes include the following: The total system development cost estimate rose to $56.4 billion and its schedule was extended to 2018. This represents a 26 percent increase in cost and a 5-year slip in schedule compared to the current approved program baseline established in 2007. Resources and time were added to development testing. Testing plans were made more robust by adding another development test aircraft and the use of several production aircraft; increasing the number of test flights by one-third; extending development testing to 2016; and reducing its overlap with initial operational testing. Near-term procurement quantities were reduced by 246 aircraft through 2016; the annual rate of increase in production was lowered; and the full-rate production decision moved to 2018, a 5-year slip from the current baseline. The military services were directed to reexamine their initial operational capability (IOC) requirements, the critical need dates when the warfighter must have in place the first increment of operational forces available for combat. We expect the Marine Corps’ IOC will slip significantly from its current 2012 date and that the Air Force’s and Navy’s IOC dates will also slip from the current dates in 2016. To address technical problems and test deficiencies for the short takeoff and landing (STOVL) variant, the Department significantly scaled back its procurement quantities and directed a 2-year period for evaluating and engineering technical solutions to inform future decisions on this variant. DOD also “decoupled” STOVL testing from the other two variants so as not to delay them and to allow all three to proceed at their own speeds. The fiscal year 2012 Defense Budget reflects the financial effects from restructuring actions through fiscal year 2016. The net effect was increased development funding and decreased procurement funding in the near term. For example, compared to last year’s estimate for the same year, DOD for fiscal year 2012 requested an increase of $520 million for JSF development and a decrease of $2.6 billion for procurement, reflecting the reduction of 13 aircraft and associated spares. Table 1 summarizes the revised procurement funding requirements and annual quantities during this 5-year period following the Secretary’s reductions. Even after decreasing annual quantities and lowering the production rate of increase, JSF procurement still escalates significantly. Annual procurement funding levels more than double and quantities more than triple during this period. These numbers do not include the additional orders expected from the international partners. DOD does not yet know the full impact from restructuring actions on future procurement funding requirements beyond this 5-year period. Cost analysts are still calculating the net effects from deferring the near-term procurement of 246 aircraft to future years and from lowering the annual rate of increased procurement. After a Nunn-McCurdy breach of the critical cost growth threshold and DOD certification, the most recent milestone must be rescinded, the program restructured to address the cause of the breach, and a new acquisition program baseline must be approved that reflects the certification approved by the milestone decision authority. The Secretary has not yet granted new milestone B approval for the JSF nor approved a new acquisition program baseline. Future funding requirements could be higher than projected and the quantities, which are considered affordable by the U.S. and allies, could be reduced, further driving up unit costs. Affordability—in terms of the investment costs to acquire the JSF, the continuing costs to operate and maintain it over the life-cycle, and its impact on other defense programs—is a challenging issue. Including the funding added by the restructuring actions, system development cost estimates have increased 64 percent since program start. (App. II summarizes the increases in target prices on development contracts, and major cost drivers contributing to increased system development funding requirements.) Also, the estimated average unit procurement price for the JSF has about doubled since program start and current forecasts indicate that life-cycle costs will be substantially higher than the legacy aircraft it replaces. Rising JSF costs erode buying power and may make it difficult for the U.S. and its allies to buy and sustain as many aircraft as planned. Going forward, the JSF will require unprecedented demands for funding in a period of more austere defense budgets where it will have to annually compete with other defense and nondefense priorities for the discretionary federal dollar. Figure 1 illustrates the substantive annual development and procurement funding requirements—almost $11 billion on average through program completion in 2035. This reflects the program’s estimate at the time of the fiscal year 2011 budget submission. These funding levels do not include additional funding increases pursuant to the June 2010 Nunn-McCurdy certification nor funding changes in the fiscal year 2012 budget request. As discussed earlier, defense cost analysts are still computing the long-term procurement funding requirements reflecting the deferral of aircraft to future years. The JSF program established 12 clearly stated goals in testing, contracting, and manufacturing for completion in calendar year 2010. It had mixed success, achieving 6 goals and making varying degrees of progress on the other 6. For example, the program exceeded its goal for the number of development flight tests but did not deliver as many test and production aircraft as planned. Also, the program awarded its first fixed-price contract on its fourth lot of production aircraft, but did not award the fixed-price engine contract in 2010 as planned. Table 2 summarizes JSF goals and accomplishments for 2010. Although still hampered by the late delivery of test aircraft to testing sites, the development flight test program significantly ramped up operations in 2010, accomplishing 3 times as many test flights as the previous 3 years combined. The Air Force conventional takeoff and landing variant significantly exceeded the annual plan while initial limited testing of the Navy’s carrier variant was judged satisfactory, below plans for the number and hours of flight but ahead on flight test points flown. The Marine Corps STOVL, however, substantially underperformed in flight tests, experienced significant down times for maintenance, and was challenged by several technical issues unique to this variant that could add to its weight and cost. The STOVL’s problems were a major factor in the Secretary’s decision to give the STOVL a 2-year period to solve engineer issues, assess impacts, and inform a future decision as to whether and h to proceed with this variant. Table 3 summarizes 2010 flight test results fo each variant. After completing 9 years of system development and 4 years of overlapping production activities, the JSF program has been slow to gain adequate knowledge to ensure its design is stable and the manufacturing process ready for greater levels of annual production. The JSF program still lags in achieving critical indicators of success expected from well- performing acquisition programs. Specifically, the program has not yet stabilized aircraft designs—engineering changes continue at higher than expected rates long after critical design reviews and well into procurement, and more changes are expected as testing accelerates. Also, manufacturing cost increases and delays in delivering test and production aircraft indicate need for substantial improvements in factory throughput and performance of the global supply chain. Engineering drawings released since design review and the number and rate of design changes exceed those planned at program outset and are not in line with best practices. Critical design reviews were completed on the three aircraft variants in 2006 and 2007 and the designs declared mature, but the program continues to experience numerous changes. Since 2007, the program has produced 20,000 additional engineering drawings, a 50-percent increase in total drawings and about five times more than best practices suggest. In addition, changes to drawings have not yet decreased and leveled off as planned. Figure 2 tracks and compares monthly design changes and future forecasts against contractor plans in 2007. The monthly rate in 2009 and 2010 was higher than expected and the program now anticipates more changes over a longer period of time— about 10,000 more changes through January 2016. With most of development testing still ahead for the JSF, the risk and impact from required design changes are significant. In addition, emerging concerns about the STOVL lift fan and drive shaft, fatigue cracks in a ground test article, and stealth-related issues may drive additional and substantive design changes. As in prior years, lingering management inefficiencies, including substantial out-of-station work and part shortages, continued to increase the labor needed to manufacture test aircraft. Although there have been improvements in these factors, final acceptance and delivery of test jets were still delayed. Total labor hours required to produce the test aircraft increased over time. The cumulative actual labor hours through 2010 to complete the 12 test aircraft exceeded the budgeted hours estimated in 2007 by more than 1.5 million hours, a 75 percent increase. Figure 3 depicts forecasted and actual labor hours for building test jets. DOD began procuring production jets in 2007 and has now ordered 58 aircraft on the first four low-rate initial production lots. The JSF program anticipated the delivery of 14 production aircraft through 2010, but none have been delivered. Delivery of the first two production jets has been delayed several times since the contract was signed and is now expected in April 2011. The prices on the first three cost-reimbursable production contracts have increased from amounts negotiated at contract award an the completion dates for delivering aircraft have been extended over 9 months on average. We are encouraged by DOD’s award of a fixed-price incentive fee contract for lot 4 production and the prospects for the cos t study to inform lot 5 negotiations, but we have not examined cont specifications. Accumulating a large backlog of jets on order but undelivered is not an efficient use of federal funds, tying up millions of dollars in produce. obligations ahead of the ability of the manufacturing process to The aircraft and engine manufacturers now have significantly more ite in production flow compared to prior years and are making efforts to implement restructuring actions and recommendations from expert defense teams assembled to evaluate and improve production and su operations. Eight of 20 key recommendations from the independent manufacturing review team have been implemented as of Septemb Until improvements are fully implemented and demonstrated, the restructuring actions to reduce near term procurement quantities and establish a more achievable ramp rate are appropriate and will provide more time to fully mature manufacturing and supply processes and catch up with aircraft backlogs. Improving factory throughput and controlling costs—driving down labor and material costs and delivering on time— are o the warfighter essential for efficient manufacturing and timely delivery t at the increased production rates planned for the future. er 2010. Since the first flight in December 2006, only about 4 percent of JSF capabilities have been completely verified by flight tests, lab results, both. The pace of flight testing accelerated significantly in 2010, but overall progress is still much below plans forecast several years ago. Furthermore, only a small portion of the extensive network of ground te labs and simulation models are fully accredited to ensure the fidelity of results. Software development—essential for achieving about 80 percent is significantly behind schedule as it enters its of the JSF functionality— most challenging phase. Development flight testing was much more active in 2010 than prior ye and had some notable successes, but cumulatively still lagged behind previous expectations. The continuing effects from late delivery of test aircraft and an inability to achieve the planned flying rates per aircraft ars substantially reduced the amount and pace of testing planned previously. Consequently, even though the flight test program accelerated its pace la year, the total number of flights accomplished during the first 4 years ofthe test program significantly lagged expectations when the program’s 2007 baseline was established. Figure 4 shows that the cumulative numbe of flights accomplished by the end of 2010 was only number forecast by this time in the 2007 test plan. By the end of 2010, about 10 percent of more than 50,000 planned flight test points had been completed. The majority of the points were earned on airworthiness tests (basic airframe handling characteristics) and in ferrying the planes to test sites. Remaining test points include more complex and stringent requirements, such as mission systems, ship suitability, and weapons integration that have yet to be demonstrated. The JSF test program relies much more heavily than previous weapon systems on its modeling and simulation labs to test and verify aircraft design and subsystem performance. However, only 3 of 32 labs and models have been fully accredited to date. The program had planned to accred it 11 labs and models by now. Accreditation is essential to validate that the models accurately reflect aircraft performance and it largely depends upo flight test data to ground testing for some flight testing is unproven. Contracting officials told us that early results are providing good correlation between ground and flight tests. verify lab results. Moreover, the ability to substitute Software providing essential JSF capability is not mature and releases the test program are behind schedule. Officials underestimated the time and effort needed to develop and integrate the software, substantially nd contributing to the program’s overall cost and schedule problems a testing delays, and requiring the retention of engineers for longer periods Significant learning and development work remains before the program can demonstrate the mature software capabilities needed to meet warfighter requirements. The JSF software development effort is one of the largest and most complex in DOD history, providing functionality essential to capabilities such as sensor fusion, weapons and fire control, maintenance diagnostics, and propulsion. JSF depends on millions more lines of software code than the F-22A Raptor and F/A-18E/F Super Hornet lines While good progress has been reported on the writing of code, total . . of code have grown by 40 percent since preliminary design review and 13 cal design review. The amount of code needed will percent since the criti likely increase as integration and testing efforts intensify. A second software integration line added as part of the restructuring will impr capacity and output. Delays in developing, integrating, and releasing software to the te program have cascading effects hampering flight tests, training, and lab accreditation. While progress is being made, a substantial amount of software work remains before the program can demonstrate full warfighting capability. The program released its second block, or increment, to flight test nearly 2 years later than the plan set in 2006, largely due to integration problems. Each of the remaining three blocks— providing full mission systems and warfighting capabilities—are now projected to slip more than 3 years compared to the 2006 plan. Figure 5 st ates the actual and projected slips for each of the 5 software blocks g software to the test program. The JSF program is at a critical juncture—9 years in development and 4 years in limited production–but still early in flight testing to verify aircraft design and performance. If effectively implemented and sustaine the restructuring DOD is conducting should place the JSF program on a firmer footing and lead to more achievable and predictable outcomes. However, restructuring comes with a price—higher development costs, fewer aircraft received in the near term, training delays, prolonged times for testing and delivering the capabilities required by the warfighter, and impacts on other defense programs and priorities. Reducing near-term d, procurement quantities lessens, but does not eliminate the still substant and risky concurrency of development and production. Development testing activities will now overlap 11 years of procurement. Flight testing and production activities are increasing and contractors are improving supply and manufacturing processes, but deliveries are still lagging. Slowed deliveries have led to a growing backlog of jets on order but not delivered. This is not a good use of federal funds, obligating millions of dollars well before the manufacturing process can deliver aircraft. We agree with defense leadership that a renewed and sustained focus on affordability by contractors and the government is critical to mo ving this important program forward and enabling our military services and our allies to acquire and sustain JSF forces in needed quantities. Maintainin senior leadership’s increased focus on program results, holding government and contractors accountable for improving performance bringing a more responsible management approach to the JSF to “live within its means” may help limit future cost growth and the consequence for other programs in the portfolio. The JSF acquisition demands an unprecedented share of the Department’s future investment funding. The program’s size and priority are such that its cost overruns and extended schedules must either be borne by funding cuts to other programs or else drive increases in the top line of defense spending; the latter may not be n a period of more austere budgets. Given the other priorities that option i DOD must address in a finite budget, JSF affordability is critical and DOD m future. ust plan ahead to address and manage JSF challenges and risks in the Chairman Bartlett, Ranking Member Reyes, and members of the Tactical Air and Land Forces Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have. For further information on this statement, please contact Michael Sullivan at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement are Bruce Fairbairn, Charlie Shivers, Julie Hadley, W. Kendal Roberts, LeAnna Parkey, and Matt Lea. development start) December 2003 (2004 replan) baseline) April 2010 (initial program restructure) June 2010 (Nunn-McCurdy) Cost estimates (then-year dollars in billions) Unit cost estimates (then-year dollars in millions) Projected costs for three contracts comprise about 80 percent of total system development funding requirements. The airframe and primary engine development contracts have experienced significant price increases since contract awards—79 percent and 69 percent respectively. The alternate, or second, engine contract price has increased about 12 percent. By design, it began about 4 years after the primary engine contract and has a more limited scope. The primary engine contract includes development of both the common engine and the STOVL lift system while the alternate engine contract develops its version of the conventional common engine. Figures 6, 7, and 8 depict the price histories for these three contracts and the reasons behind major price increases. Table 4 shows changes in engine development schedules. The initial service release milestone usually coincides with low rate initial production. The engine should have completed required verification activities and meet specification requirements. The operational capability release milestone is generally associated with the start of full-rate production when the engine is acceptable for full production release. Tactical Aircraft: Air Force Fighter Force Structure Reports Generally Addressed Congressional Mandates, but Reflected Dated Plans and Guidance, and Limited Analyses. GAO-11-323R. Washington, D.C.: February 24, 2011. Defense Management: DOD Needs to Monitor and Assess Corrective Actions Resulting from Its Corrosion Study of the F-35 Joint Strike Fighter. GAO-11-171R. Washington D.C.: December 16, 2010. Joint Strike Fighter: Assessment of DOD’s Funding Projection for the F136 Alternate Engine. GAO-10-1020R. Washington, D.C.: September 15, 2010. Tactical Aircraft: DOD’s Ability to Meet Future Requirements is Uncertain, with Key Analyses Needed to Inform Upcoming Investment Decisions. GAO-10-789. Washington, D.C.: July 29, 2010. Joint Strike Fighter: Significant Challenges and Decisions Ahead. GAO-10-478T. Washington, D.C.: March 24, 2010. Joint Strike Fighter: Additional Costs and Delays Risk Not Meeting Warfighter Requirements on Time. GAO-10-382. Washington, D.C.: March 19, 2010. Joint Strike Fighter: Significant Challenges Remain as DOD Restructures Program. GAO-10-520T. Washington, D.C.: March 11, 2010. Joint Strike Fighter: Strong Risk Management Essential as Program Enters Most Challenging Phase. GAO-09-711T. Washington, D.C.: May 20, 2009. Joint Strike Fighter: Accelerating Procurement before Completing Development Increases the Government's Financial Risk. GAO-09-303. Washington D.C.: March 12, 2009. Joint Strike Fighter: Impact of Recent Decisions on Program Risks. GAO-08-569T. Washington, D.C.: March 11, 2008. Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks. GAO-08-388. Washington, D.C.: March 11, 2008. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Joint Strike Fighter: Progress Made and Challenges Remain. GAO-07-360. Washington, D.C.: March 15, 2007. Tactical Aircraft: DOD’s Cancellation of the Joint Strike Fighter Alternate Engine Program Was Not Based on a Comprehensive Analysis. GAO-06-717R. Washington, D.C.: May 22, 2006. Defense Acquisitions: Major Weapon Systems Continue to Experience Cost and Schedule Problems under DOD’s Revised Policy. GAO-06-368. Washington, D.C.: April 13, 2006. Defense Acquisitions: Actions Needed to Get Better Results on Weapons Systems Investments. GAO-06-585T. Washington, D.C.: April 5, 2006. Tactical Aircraft: Recapitalization Goals Are Not Supported by Knowledge-Based F-22A and JSF Business Cases. GAO-06-487T. Washington, D.C.: March 16, 2006. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance. GAO-06-356. Washington, D.C.: March 15, 2006. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The F-35 Lightning II, also known as the Joint Strike Fighter (JSF), is the Department of Defense's (DOD) most costly and ambitious aircraft acquisition, seeking to simultaneously develop and field three aircraft variants for the Air Force, Navy, Marine Corps, and eight international partners. The JSF is critical for recapitalizing tactical air forces and will require a long-term commitment to very large annual funding outlays. The estimated total investment cost is currently about $385 billion to develop and procure 2,457 aircraft. Because of a history of relatively poor cost and schedule outcomes, defense leadership over the past year has directed a comprehensive restructuring of the JSF program that is continuing. This testimony draws substantially from our extensive body of work on the JSF, including the current annual review mandated in the National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84 244 (2009). Our draft report is being reviewed by the Department and we expect to issue it early next month. That report and this testimony discusses (1) program cost and schedule changes and their implications on affordability; (2) progress made during 2010; (3) design and manufacturing maturity; and (4) test plans and progress. GAO's work included analyses of a wide range of program documents and interviews with defense and contractor officials. DOD continues to restructure the JSF program, taking positive, substantial actions that should lead to more achievable and predictable outcomes. Restructuring has consequences--higher up-front development costs, fewer aircraft bought in the near term, training delays, and extended times for testing and delivering capabilities to warfighters. Total development funding is now estimated at $56.4 billion to complete in 2018, a 26 percent cost increase and a 5-year schedule slip from the current baseline. DOD also reduced procurement quantities by 246 aircraft through 2016, but has not calculated the net effects of restructuring on total procurement costs nor approved a new baseline. Affordability for the U.S. and partners is challenged by a near doubling in average unit prices since program start and higher estimated life-cycle costs. Going forward, the JSF requires unprecedented funding levels in a period of more austere defense budgets. The program had mixed success in 2010, achieving 6 of 12 major goals and progressing in varying degrees on the rest. Successes included the first flight of the carrier variant, award of a fixed-price aircraft procurement contract, and an accelerated pace in development flight tests that accomplished three times as many flights in 2010 as the previous 3 years combined. However, the program did not deliver as many aircraft to test and training sites as planned and made only a partial release of software capabilities. The short takeoff and landing (STOVL) variant had significant technical problems and deficient flight test performance. DOD directed a 2-year period to evaluate and engineer STOVL solutions. After more than 9 years in development and 4 in production, the JSF program has not fully demonstrated that the aircraft design is stable, manufacturing processes are mature, and the system is reliable. Engineering drawings are still being released to the manufacturing floor and design changes continue at higher rates than desired. More changes are expected as testing accelerates. Test and production aircraft cost more and are taking longer to deliver than expected. Manufacturers are improving operations and implemented 8 of 20 recommendations from an expert panel, but have not yet demonstrated a capacity to efficiently produce at higher production rates. Substantial improvements in factory throughput and the global supply chain are needed. Development testing is still early in demonstrating that aircraft will work as intended and meet warfighter requirements. About 4 percent of JSF capabilities have been completely verified by flight tests, lab results, or both. Only 3 of the extensive network of 32 ground test labs and simulation models are fully accredited to ensure the fidelity of results. Software development--essential for achieving about 80 percent of the JSF functionality--is significantly behind schedule as it enters its most challenging phase. |
Radiological sources are used throughout the world for peaceful purposes. Until the 1950s, only naturally occurring radioactive materials, such as radium-226, were available to be used in radiological sources. Since then, sources containing radiological material produced artificially in nuclear reactors and accelerators have become widely available, including cesium-137, cobalt-60, iridium-192, and strontium-90, which are used to treat cancer through radiotherapy and cesium-137, which is also used to treat blood. See figure 2, which shows an example of an americium-241 sealed radiological source. Sealed sources vary in size from the size of a pencil eraser to rods up to several inches in length. Radiological material can be found in various forms, such as metals or powders, and is measured by its level of activity. The greater the activity level—measured in curies—the more radiation emitted, which increases the potential risk to public health and safety if improperly used or controlled. The intensity of radiological materials decays over time at various rates. The term “half-life” is used to indicate the period during which the radioactivity decreases by half as a result of decay. In general, the shorter the half-life and the larger the mass, the more radiation will be emitted within a particular period. According to the International Atomic Energy Agency (IAEA),of protection provided by users of the radiological material should be commensurate with the safety and security risks that it presents if improperly used. For example, radiological materials used for certain diagnostic purposes, such as diagnostic imaging, have low levels of activity and do not present a significant safety or security risk. However, high-risk sealed radiological sources that contain cobalt-60, cesium-137 or iridium-192, could pose a greater threat to the public and the environment and could also pose a potentially more significant security risk, particularly if acquired by terrorists to produce a dirty bomb. Two types of licenses are associated with the use of radioactive materials—general licenses and specific licenses. General licenses are associated with products that contain some radioactive material, such as fixed gauges or exit signs, and the owners of these products do not have to apply to NRC or an Agreement State for a license. A company seeking radiological material for uses that do not qualify for a general license must apply to NRC or, if it conducts business in an Agreement State, to the appropriate state office for a specific license. Specific licenses include those of “limited scope,” in which radioactive materials will be used by a defined number of authorized users, and those of “broad scope,” for facilities that have experience successfully operating under a specific license of limited scope. Officer (RSO), to oversee compliance with applicable NRC and Agreement State regulations, including security controls. NRC has stated that nuclear and radiological materials are critical and beneficial components of global medical, industrial, and academic efforts. However, the possibility that these materials could be used by terrorists is a national security concern. As a result, NRC tracks the number of hospital and medical facility licensees with radionuclides of concern through its National Source Tracking System. This database provides a “cradle-to-grave” account of the origins of each radiological source (manufacture, remanufacturing, or import) and records who used it and eventually disposed of, or exported it. NNSA coordinates with NRC to receive these updated data and has further enhanced the data for its purposes, including identifying which radioactive materials are associated with which licenses and what sources are located in which facilities. At the 26 selected hospitals and medical facilities we visited, NRC’s requirements did not consistently ensure the security of high-risk radiological sources. One reason for this is that the requirements, which are contained in NRC security controls (i.e., the two security orders and implementation guidance) are broadly written and do not prescribe specific measures that licensees must take to secure their equipment containing high-risk radiological sources. Some of the NRC-licensed hospitals and medical facilities we visited are more at risk than others to sabotage and theft because some hospitals developed better security for protecting their radiological sources than others. Licensees have implemented these broad requirements in various ways, leaving some hospitals’ radiological sources more vulnerable than others. In addition, some inspectors said that the NRC-required training is not sufficient, and personnel at hospital and medical facilities are not required to have security training, although they implement NRC requirements at their sites. NRC reviews of Agreement States also found that some Agreement States do not have sufficient staffing and resources to enforce NRC security controls. NRC’s requirements direct licensees possessing high-risk radiological material contained in medical equipment to implement increased security measures. However, these requirements are broadly written and do not prescribe the specific steps hospitals and medical facilities must take to secure the material. Rather, the security controls and their requirements provide a general framework for what constitutes adequate security practices. The officials said that the key elements of the framework include: (1) limiting access to only approved individuals through the use of background checks that include fingerprinting; (2) enhancing physical barriers and intrusion detection systems; (3) coordinating with local law enforcement to respond to an actual or attempted theft, sabotage, or diversion of radiological material; (4) promptly notifying authorities of incidents; and (5) monitoring shipments of radiological material during transit. According to NRC officials, the intent of the security controls is to develop a combination of people, procedures, and equipment that will delay and detect an intruder and initiate a response to the intrusion—not to provide absolute security from theft or unauthorized access. The security controls provide minimum requirements that must be met to ensure adequate security, and licensees may go beyond the minimum requirements. NRC officials told us that they have adopted a risk-based approach to security, in which the level of security should be commensurate with the type and amount of sources they are attempting to protect. In addition, NRC officials said that they take facility costs into consideration when issuing new security requirements. The risk-based approach reflects the agency’s concerns regarding the potential adverse financial effect that additional security measures could have on private medical facilities throughout the United States. As a result, the security controls issued by NRC are intentionally broad to allow licensees flexibility when implementing security upgrades. However, according to NRC officials, NRC requirements relating to the adequate protection of public health and safety do not consider costs. The officials state that this approach aligns with Executive Order 12866, which directs Executive Branch agencies to tailor their regulations to impose the least burden on society, including individuals, businesses of differing sizes, and other entities (including small communities and governmental entities), consistent with obtaining the regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations. However, the Executive Order requirements in pertinent part do not apply to the NRC, but NRC follows many of the provisions voluntarily. In late April 2012, NRC released a document that stated, among other things, that its security program is a multilayered, non prescriptive framework that allows licensees to develop security programs specifically tailored to their facilities. NRC officials told us that due to diverse economic conditions, facility type, layout, and operations of hospital and medical facilities, a “one size fits all” approach to radiological source security is neither practical nor desirable. The officials said that the ability to tailor security to a facility’s needs and resources is particularly important for commercial facilities with limited resources. For example, personnel from one smaller medical facility we visited told us that implementing specific security requirements—such as cameras and other surveillance equipment— could jeopardize their continued operations because of the costs associated with the installation and maintenance of this equipment. NRC’s implementation guidance, which supplements the security orders, provides examples of how hospitals and medical facilities can secure their high-risk radiological material and meet security requirements. In their implementation guidance, NRC provides that facilities may meet the security requirements by, for example, limiting the distribution of keys, key cards, or combinations to doors and gates to approved individuals; activating locked doors and gates by using remote surveillance; using a card reader and electronic locking devices at control points; and having a person approved for unescorted access conduct constant surveillance of the devices containing the radiological material. However, ultimate responsibility for implementing NRC’s security controls is left to the discretion of the hospital and medical facility personnel that possess the materials. The controls do not prescribe the specific measures that licensees must take to secure their sources, such as the use of cameras, alarms, and other physical security measures. The licensee determines, for example, if security cameras are necessary or what types of locks or alarms, if any, are needed to secure doors or windows. For some locations we visited that are staffed 24 hours a day, 7 days a week, such as blood banks, requirements for access control can be met when the room where the medical device containing radiological material is located is continuously staffed by an individual or individuals who are determined to be trustworthy and reliable. As long as the room is staffed at all times, the facility is not required to have any additional physical security, such as cameras or motion detection equipment. NRC’s security controls require hospital and medical facility personnel to conduct background checks to determine the trustworthiness and reliability of individuals requesting unescorted access to radiological material. NRC officials told us that background checks are important for protecting against an “insider threat,” in which someone with access to the radiological material might try to remove, tamper with, or sabotage the source. NRC’s implementation guidance states that the commission’s requirements are not intended to stop determined adversaries intent on malevolent action from gaining access to the radioactive material. Rather, these requirements are designed to provide reasonable assurance that individuals with unescorted access to the radioactive material are trustworthy and reliable and that facilities have a reliable means to rapidly identify events that are potentially malevolent and have a process for prompt police response. Furthermore, hospital and medical facility officials are responsible for appointing a trustworthiness and reliability official (T&R official), who is to determine which employees will be granted unescorted access to the device containing radioactive material. The T&R officials at the 26 hospitals and medical facilities we visited were typically RSOs, security officials, or officials from the human resources department. When granting unescorted access for individuals employed less than 3 years, NRC also requires hospitals and medical facilities to, at a minimum, verify employment history, education, and personal references. For individuals employed for longer than 3 years, facilities are to determine trustworthiness and reliability, at a minimum, by reviewing the employee’s employment history with the facility. Officials at 5 of the 26 hospitals and medical facilities we visited told us they face challenges in determining which individuals are suitable for a trustworthiness and reliability certification. For example, two of these five officials said that the current background examination process places too much emphasis on the judgment of hospital personnel. Performing background checks on foreign nationals is also particularly challenging. Officials at 6 of the 26 hospitals and medical facilities we visited agreed, citing, for example, the difficulty in acquiring relevant background information from different countries, the inability to corroborate written documentation, and language barriers. Administrators at 2 of these 6 hospitals also told us that a more centralized background examination process with uniform criteria and standards should replace the current system, which varies from facility to facility. The 26 hospitals and medical facilities we visited in seven states and Washington, D.C., have implemented NRC’s security controls in a variety of ways that could leave some facilities’ radiological sources more vulnerable than others to possible tampering, sabotage, or outright theft because, on their own initiative, some facilities have decided to implement more stringent security measures than others. Law enforcement personnel from states with significant amounts of high- risk radioactive material told us that NRC’s security controls have an inherent weakness: they do not specify what the facility is protecting against and are not linked to a design basis threat. According to IAEA, a design basis threat includes the attributes and characteristics of a potential insider and/or external adversaries, who might attempt unauthorized removal or sabotage, against which a physical protection system is designed and evaluated. NRC officials noted that, according to IAEA’s Nuclear Security Series Implementation Guide No. 11, “Security of Radioactive Sources,” the design and evaluation of a security system should take into account the current national threat assessment and may include the development and application of a design basis threat, although it is not required. Typically, a design basis threat characterizes the elements of a potential attack, including the number of attackers, their training, and the weapons and tactics they are capable of employing. Instead, NRC relies solely on the amount of curies under the control of a hospital or medical facility when determining if the facility is subject to increased security controls. According to NRC, it would not be feasible to require a design basis threat analysis for U.S. hospitals and medical facilities because of the varied nature of the facilities and the additional resources required to conduct an analysis for individual facilities. NNSA also does not use a design basis threat for its security assessments of hospitals and medical facilities but does employ a threat scenario (known as potential adversary capability) as the basis for its recommendations for security enhancements. NNSA defines Potential Adversary Capabilities as the method for documenting a realistic threat level that the security upgrades must enhance protection against. At VA, which is overseen by NRC under a Master Materials License (MML),radiological security told us that VA initially developed a generic threat scenario for use at its facilities with high-risk radiological materials because NRC did not provide a design basis threat as part of its security controls. Later, VA coordinated closely with NNSA to complete security assessments and install security upgrades at the VA facilities with high risk sources. The assessments were completed from 2009 through 2011, with installation of the agreed upon security upgrades currently ongoing. VA facilities have also participated in the NNSA Alarm Response training program. All of the 26 medical facilities we visited have implemented NRC’s security controls and undergone inspections by either NRC or Agreement State inspectors. At some facilities, the implementation of the controls resulted in significant security upgrades, such as the addition of surveillance cameras, upgrades to locks on doors, and alarms. NRC stated that, although hospitals are open to the public, the specific location housing a radiological source generally is not. These sources are shielded inside medical devices that can weigh thousands of pounds, which make it difficult to remove or tamper with the radiological material, according to NRC. Notwithstanding NRC’s views, we observed potential security weaknesses in several facilities we visited, such as the following: At a hospital in one state, two cesium-137 research irradiators (i.e., used for medical or biological research), that contain approximately 2,000 curies and 6,000 curies, respectively, are housed in the basement of a building that is open to the public. The hallway leading to the irradiator room has a camera, but it is pointed away from the room. The door to the room is opened by a swipe card lock, and there are no cameras or other security measures inside the room. We observed that one of the irradiators was sitting on a wheeled pallet. When we asked the RSO if he had considered removing the wheels, he said no. Furthermore, we observed that the irradiator room is located in close proximity to an external loading dock and that the cameras along the corridor to the loading dock are displayed on a single monitor, making it difficult for someone monitoring the corridor to interpret what activity is occurring. This facility had passed its most recent NRC security inspection, according to a hospital official, because access to the room where the irradiators were located was restricted through use of a swipe card. However, this facility could be vulnerable because of the limited security we observed and the mobility of one of the irradiators. At a hospital in a major U.S. city, we observed that the interior door to the hospital blood bank, which had a cesium-137 blood irradiator of approximately 1,500 curies, had the combination to the lock written on the door frame. The door is in a busy hallway with heavy traffic, and the security administrator for the hospital said that he often walks around erasing door combinations that are written next to the locks. According to NRC officials, a single lock is not necessarily a security weakness; however, failure to control the combination and restrict access to only trustworthy and reliable individuals is a clear violation of NRC requirements. Figure 3 shows the combination written on the door frame to the blood bank. At a blood center in a third state we visited, we observed a cesium- 137 blood irradiator of approximately 1,400 curies in a room that was secured by a conventional key lock. The irradiator was located in the middle of the room and not secured to the floor. The room had an exterior wall with a bank of unalarmed and unsecured windows that looked out onto a publically accessible loading dock. The blood center officials said that, while they met NRC’s security controls, they acknowledged that the center is highly vulnerable to theft or sabotage of their radiological sources. According to NRC officials, an irradiator sitting in the middle of the floor that is not bolted down is not necessarily vulnerable. Figure 4 shows the irradiator that is not bolted to the floor and the bank of unsecured windows looking out onto the loading dock. The RSO at a large university hospital told us that he did not know the exact number of people with unescorted access to the hospital’s radiological sources, although he said that there were at least 500. The hospital’s current data system does not allow for entering records for more than 500 individuals. In the past, he said, the hospital had as many as 800 people with unescorted access to sources. In contrast, at a major medical research facility on a military installation we visited, access was limited to 4 safety and security personnel. NRC and Agreement State inspectors and hospital and medical facility personnel we interviewed said that the NRC training has not prepared them to adequately enforce NRC requirements. Furthermore, personnel at the facilities said that they may not have the resources they need to implement the security controls. Some inspectors from NRC and Agreement States said that they have not received adequate training from NRC on securing high-risk material at hospitals and medical facilities. NRC requires that NRC and Agreement State inspectors take training for implementing the security controls. NRC has developed and provides a 5-day security training course for NRC and Agreement State inspectors on how to implement the security controls. The course takes place at DOE national laboratories, with recent training occurring at Sandia National Laboratory in New Mexico. It includes 17 modules providing information on how to protect against malicious uses of radioactive materials, such as the introduction to physical protection, target identification, intrusion detection, security lighting, access control systems, barriers, locking systems, and response forces. The course also covers NRC security controls associated with the increased security measures. However, even with this training, 6 of the 48 inspectors we spoke with who cover both NRC regions and Agreement States told us that they do not feel comfortable conducting security inspections at hospitals and medical facilities. According to the inspectors, NRC’s training course provides an introduction to security practices for those with limited security experience and trains inspectors generally in how to conduct security inspections. The inspectors typically have educational backgrounds in radiation safety or health physics rather than security. The inspectors said that not having security experience has made it difficult for them to transition to conducting security inspections. Examples are as follows: An Agreement State inspector told us that he attended NRC’s training program, but he did not believe that it sufficiently prepared him to be a security expert and make the kinds of judgments required to determine whether licensees have adequate security. Inspectors from another Agreement State told us that the course did not cover certain topics that they thought were essential to radiological security, such as the use of radiation detectors. They also said that they were placed in the awkward situation of having to enforce NRC’s security orders, which they did not believe they were fully qualified to interpret. Another Agreement State inspector from a third state we visited told us that he was not qualified to do security inspections. However, he said that he was doing the best he could to interpret the NRC security controls and help the licensees implement the requirements. An NRC inspector also said that security inspections were particularly difficult for him because he is trained as a physicist. He said that the security controls were confusing and that he did not understand the nuances of security. NRC’s security controls require hospitals and medical facilities to develop a program for assessing and responding to unauthorized access, including detecting an unauthorized intrusion, assessing the situation, and calling for a response from the local law enforcement agency of an actual or attempted theft of the high-risk radiological materials or the device itself. However, none of the personnel who are responsible for implementing the security controls for high-risk radiological sources at the 26 hospital and medical facilities we visited has been trained in how to implement NRC’s security controls. In addition, 15 officials at the 26 hospitals and medical facilities told us that they have backgrounds in radiological safety and facilities management and have limited security experience, making them responsible for security with limited previous experience to draw from. We found the following examples: At one hospital, the RSO said that when the security controls were instituted in 2005, his new responsibilities included ensuring the security of a cobalt-60 gamma knife of approximately 2,600 curies, which is used to treat cancer patients, and a cesium-137 blood irradiator of about 2,400 curies. He told us that he was not comfortable with his security role because he was trained as a health physicist. One facility manager who oversees the security for an approximately 1,700 curie cesium-137 blood irradiator at a blood bank told us that he has a background in construction, not security. He said that it would have been helpful if NRC’s controls were more prescriptive, including better guidance, so that he would be in a better position to determine what security would be most effective. NRC requires medical facility officials to demonstrate radiation safety expertise through a combination of education and work experience to be eligible to become an RSO. However, the security controls do not require that RSOs or other designated security officials have security experience or that they take NRC security training. For example, NRC regulations state that individuals may meet the eligibility requirements for becoming an RSO by completing a master’s degree or doctoral degree in health physics or a related field, combined with 2 years of full-time experience under the supervision of a board-certified medical physicist. In addition, NRC’s new regulations, when finalized, will require that officials at hospitals and medical facilities provide training on their security program and procedures to personnel involved in securing high-risk radiological material. However, the regulations do not require that the RSO, who is typically responsible for providing the training, has any formal security education or work experience, although the RSO is responsible for the security of radiological sources. Without training and adequate guidance, medical facility officials, including RSOs, who may be responsible for implementing NRC’s security controls, may not have adequate knowledge of securing equipment containing high-risk radiological sources. NRC’s recent reviews of Agreement States’ inspection programs showed a lack of adequate staff, resources, and security training in two states. In its review of one of the state’s inspection programs, NRC reported that the program experienced significant turnover and that inspectors did not have an adequate understanding of the security controls. According to an official in this state, high staff turnover and the resulting lack of security experience affected the quality of the state’s oversight. In addition, staff turnover issues have kept inspectors from receiving needed on-the-job training or mentoring from experienced inspectors. As a result, inspectors have difficulty assessing whether licensees comply with NRC security controls. According to NRC’s review of the state program, the state inspectors took steps to incorporate interviews with appropriate personnel and performance observations into their inspection activities. However, inspectors often did not adequately follow up on potential items of non compliance that were observed during the performance reviews. NRC’s review noted that the state inspectors did not have sufficient familiarity with NRC’s security controls and therefore had difficulty assessing licensee compliance with the requirements. In one case, the inspector did not identify or understand the security significance of an item of noncompliance. In addition, during a final meeting with the facility personnel responsible for managing the license, the inspector could not clearly articulate the applicable requirements and was unable to explain to the licensee what actions could be taken to correct the identified deficiencies. NRC reported that Agreement State inspectors completed some level of preparation, such as reviewing NRC’s security controls, prior to their inspections but, in some cases, their preparation was inadequate. In addition, NRC officials stated that, in accompanying Agreement State inspectors, they identified problems with the completeness of their reviews, technical quality, consistency, and attention to health and safety/security. NRC noted that the deficiencies were indicative of a programmatic and chronic problem rather than an isolated occurrence or a periodic decline in performance. In its review of another Agreement State’s program, NRC stated that new inspectors would have benefitted from additional training on NRC’s security controls. An Agreement State inspector told NRC’s review team that he did not understand the meaning of some of the documents he was reviewing. Another Agreement State inspector stated that he was authorized to inspect a radiological device independently—without being accompanied by a more experienced inspector—before he was ready to do so. In addition, some Agreement State inspectors told NRC’s review team that they sometimes performed inspections without the added benefit of having attended a training class for the type of inspection being performed, primarily because they were unable to get into the classes. One state program manager, who acts as the primary trainer for a state inspection program, acknowledged to the NRC review team that because of her workload she often has to limit the number of training classes offered. As of April 2012, NNSA had completed security upgrades at 321, or one- fifth, of the 1,503 U.S. hospital and medical facilities it had identified as having high-risk radiological material but does not expect to complete all such upgrades until 2025. In addition, the program’s impact is constrained because: (1) it is voluntary, (2) hospitals and medical facilities will have to maintain the upgrades beyond NNSA’s 3- to 5-year warranty period, and (3) the program does not require facilities to sustain the upgrades. NNSA’s Domestic Material Protection program is designed to raise the security at U.S. facilities with high-risk radiological material, including hospitals and medical facilities, to a level that is above NRC and the Agreement State’s regulatory requirements. NNSA’s voluntary program provides these U.S. hospitals and medical facilities with security assessments, but the agency does not share these assessments with NRC and Agreement State inspectors. According to NNSA officials, the agency does not share the assessments because of its concern that hospitals and medical facilities, which are voluntarily cooperating with NNSA, would not provide complete and candid information to NNSA if it shared the assessments with NRC and Agreement State’s regulatory inspection agencies. After completing the assessments, NNSA installs security upgrades, such as remote monitoring systems, biometric access controls, and security cameras, to secure the devices and facilities that contain high-risk radiological sources. NNSA pays the cost for all security upgrades, but hospitals and medical facilities are responsible for maintaining the security systems after a 3- to-5-year warranty period expires. According to NNSA officials, during the warranty period, sustainability costs for the upgrades at each hospital average $40,000 per facility per year, including equipment warranty and maintenance costs, as well as the costs associated with labor and site visits to ensure that the hospitals are properly operating the NNSA upgrades. The NNSA officials estimate that when the hospitals are ready to assume full responsibility for the security upgrades at their facilities, the sustainability costs assumed by the hospitals are approximately $10,000 per facility per year. Of the 1,502 U.S. medical facilities NNSA has identified that contain high- risk radiological sources, the agency has provided security upgrades to 321, or about 21 percent of them. The 1,502 facilities cumulatively contain about 28 million curies of radioactive material, according to NNSA’s estimate. According to NNSA officials, as of March 2012, the Domestic Material Protection program had spent approximately $105 million to provide security upgrades to radiological sources at the 321 facilities. NNSA plans to complete security upgrades at all 1,502 medical facilities it has identified as high risk by 2025, at a projected cost of $608 million. NNSA officials also told us that they estimate the average cost to upgrade a medical facility has been $317,800.goal is universal participation in their program by all licensees holding high-risk radiological sources. NNSA officials told us that their NNSA provided a further breakdown of the approximately $105 million that was spent as of March 1, 2012. As table 1 shows, the majority of program expenditures were to complete security assessments and equipment upgrades—such as cameras, motion detection devices, and alarms—at U.S. hospitals and medical facilities. NNSA spent approximately $99 million, or 95 percent of its total program costs, on equipment, labor, and travel costs associated with the security assessments and upgrades—primarily carried out by personnel from Sandia National Laboratory, Pacific Northwest National Laboratory, and private-sector security vendors. The program spent an additional $975,800, or 1 percent of its total costs, on designing and testing equipment used for security upgrades. The remaining $4.3 million, or 4.1 percent of NNSA’s total costs, was spent on laboratory overhead charges and contract fees. Of the 26 hospitals and medical facilities that we visited in seven states and the District of Columbia, 13 had received NNSA upgrades, and 3 were in the process of receiving upgrades. Officials from 11 of the 16 hospitals and medical facilities told us that the NNSA program enhanced the security of their facilities. We observed a number of security upgrades at these facilities, including remote monitoring systems, surveillance cameras, enhanced security doors, iris scanners, motion detectors, and tamper alarms. In addition, NNSA officials told us that as part of the program they fund the installation of in-device delay kits. These kits are installed in the interior of medical equipment to make it more difficult to remove or tamper with radiological material contained within the equipment. NNSA officials told us that they currently contract with three companies to install the kits in irradiators and have partnered with another company to upgrade the security of new gamma knives. Figures 5, 6, 7, and 8 provide examples of the different NNSA upgrades. The voluntary nature of the NNSA program allows hospitals and medical facilities to decline the upgrades, even though NNSA assumes all up-front capital costs. Most hospitals and medical facilities we visited were amenable to participating in the program, but NNSA officials told us that, as of July 2012, 14 facilities have declined to participate in the voluntary security upgrade program. These 14 facilities contain over 41,000 curies of high-risk radiological material. According to NNSA officials, 9 of these facilities declined to participate because facility management decided not to accept any NNSA assistance; 3 were unwilling to accept the full suite of NNSA security upgrades; and 2 were either facing bankruptcy or were planning to have their radiological sources removed. Four of the 14 facilities are located in large urban areas that NNSA officials consider high risk. We met with officials from one hospital and one medical facility that declined the NNSA upgrades. Both facilities were located in densely populated urban areas. Specifically, we found the following: According to police department officials in a major U.S. city, one hospital with a blood irradiator of approximately 1,700 curies has declined the NNSA upgrades, even though the police department considers it to be a high-risk facility. The hospital officials told us that they decided not to implement the NNSA upgrades because of concerns about maintenance costs associated with the security equipment after the 3- to 5-year NNSA-funded warranty period expired. The RSO said that the security that the hospital has in place is adequate. Furthermore, the RSO told us that the hospital is under serious budget pressure that makes it difficult to justify spending more money to sustain equipment for protecting their radiological sources. Staff at a blood bank with a cesium-137 blood irradiator of approximately 1,400 curies told us that NNSA was prepared to upgrade the facility’s security but that the blood bank decided not to participate. The blood bank officials said that senior management wanted to wait until the blood bank moved to a new location, which it planned to do within the next 3 years. However, we observed that the blood irradiator was vulnerable to theft or tampering and discussed these vulnerabilities with the blood bank officials, who agreed that their device was vulnerable. In February 2012, we contacted NNSA officials about this matter. As a result, the facility decided to volunteer for the NNSA program, and NNSA and national laboratory officials met with facility personnel and developed a plan to increase the security of the irradiator by October 2012. NNSA requires that hospitals and medical facilities sign a sustainability statement, outlining responsibility for the security of high-risk radiological material and stating that they will assume full responsibility for the operation, testing, and maintenance of the security system after the NNSA-funded warranty period expires. However, the agency does not require that hospitals and medical facilities maintain the installed security upgrades beyond the 3- to 5-year warranty period. Nine hospital and law enforcement officials in three states we visited told us that not having such a requirement to sustain NNSA’s upgrades limits the program’s impact. NNSA officials told us that before they agree to implement the security upgrades, they attempt to determine if a site is committed to sustaining them. NNSA requires that hospital and medical facility officials sign the sustainability statement after completion of the design, but prior to the installation of the security upgrades. However, the NNSA officials told us that the sustainability statement is not legally binding. According to our review of NNSA documents and interviews with NNSA officials, NNSA is, for the most part, funding security upgrades in states that have the most high-risk radiological material at hospitals and medical facilities. NNSA has developed a prioritization methodology that ranks different facilities and is designed to assign resources according to the relative risk of the radiological material and the expected risk reduction resulting from the planned security activity. NNSA’s prioritization criteria include four factors: (1) attractiveness level of the radiological material, (2) site security conditions, (3) threat environment, and (4) location or proximity to a target. In addition, NNSA officials told us that when ranking facilities for upgrades, they consider whether the facility has requested or volunteered for a security assessment under the program, if there are multiple high-risk sources in the same facility, and if NNSA can gain access to a number of sites through a partnership with other federal agencies and organizations such as the Department of Agriculture, the National Institutes of Health, and the American Red Cross. Our analysis of NNSA data shows that NNSA is focusing the majority of the program’s resources on states with high curie amounts and large numbers of hospitals and medical buildings with high-risk radiological sources. As of March 1, 2012, NNSA had spent $53 million—or 51 percent of total expenditures for the Domestic Material Protection program—in Massachusetts, New York, Texas, Pennsylvania, and California. These five states contain 37 percent of all hospitals and medical facilities with high-risk radiological sources, and 39 percent of all curies in hospitals in the United States. However, as table 2 shows, some states with large numbers of hospitals and medical facilities—Florida, Indiana, New Jersey, Ohio, and Tennessee—have not received as many upgrades from NNSA. These states received $13 million, or 12 percent of all NNSA expenditures since the program began in 2008. Furthermore, other states with large numbers of medical facilities, such as Alabama, Michigan, and Wisconsin, have received no assessments or upgrades. In addition, some states with relatively few hospitals and medical facilities and a small amount of curies have each received more than $1 million from NNSA to upgrade their facilities. These states were Hawaii and Rhode Island. In the case of Hawaii, NNSA officials told us that the state has over 50,000 curies of non-medical cesium-137, which made doing medical upgrades at the same time cost effective. In addition, NNSA said that Hawaii served as a model for how a network of facilities could be integrated into a centralized security network. As NNSA moves forward with the program, these officials said that they hope to replicate this model in some large cities and additional small states. NNSA officials told us that both the cost efficiencies and the voluntary nature of the Domestic Material Protection program require that they target sites based on their selection criteria and look for opportunities to provide upgrades when hospitals and medical facilities volunteer for assessments and upgrades. These officials stated that budgetary uncertainty makes it necessary to identify states where they can maximize their resources by upgrading a number of facilities in close proximity to each other. In addition, NNSA conducts outreach efforts in partnership with NRC and Agreement States to educate licensees about its program and find hospitals and medical facilities that want to participate. NNSA officials told us their outreach and promotional efforts are constrained because they do not want to enlist more facilities in the program than can be funded in a reasonable period of time. Additionally, NRC has supported NNSA’s program by making licensees aware of the program in a January 2010 NRC Regulatory Issue Summary. In the issue summary, NRC officials encouraged licensees to work cooperatively with manufacturers; regulators; and other federal, state, and local authorities to look for opportunities to further enhance the security of their sources and devices and incorporate best practices, where appropriate. The NRC officials also stated that NNSA staff and contractors have valuable perspectives and experience on best practices from visiting multiple licensees and operations. According to an NNSA official, increased collaboration with NRC and Agreement States to promote the program would be beneficial. However, some Agreement States are more proactive than others in helping NNSA find such hospitals and medical facilities. For example, NNSA has not completed upgrades in some states with a large number of radiological sources, like Michigan and Wisconsin. The opposite is true in some states with fewer sources, such as Hawaii and Rhode Island, where NNSA found enough facilities to participate to make the upgrades cost effective. A dirty bomb attack in the United States would have serious economic and psychological consequences. It is therefore in the interest of the federal government to ensure that all high-risk radiological materials in U.S. hospitals and medical facilities are secured as quickly as possible from potential theft or sabotage. However, NNSA does not expect to complete security upgrades at all hospitals and medical facilities in the United States until 2025; one-fifth of the upgrades are completed to date. In addition, the voluntary nature of NNSA’s security upgrade program allows hospitals and medical facilities that contain high-risk radiological materials to refuse security upgrades, even though they are initially paid for by NNSA. As a result, 14 hospitals and medical facilities, with a combined 41,000 curies of high-risk radiological material, have declined to participate in the program, and several of these facilities are located in or in close proximity to populated urban areas. NNSA has taken steps to promote the program both by speaking at conferences and through other outreach efforts. In addition, NRC and Agreement States have provided support through promotion activities, such as NRC issuing a Regulatory Issue Summary in 2010 that described the NNSA program. These are positive steps, but there are still many hospitals that are not participating in this important program. While we understand that some hospitals and medical facilities may not participate in the program due to cost concerns, the longer the security upgrades remain unimplemented, the greater the risk that potentially dangerous radiological materials from these facilities could be used as a terrorist weapon. NRC has taken a risk-based approach to improve the security of radiological sources at U.S. hospitals and medical facilities, but this approach is not based on facility specific security risks and results in a wide variety of security measures implemented by the medical facilities we visited. The risk-based requirements do not go far enough as several of the medical facilities we visited did not have adequate security measures in place. NRC’s security controls are designed to improve security but do not prescribe the specific measures that licensees should take to secure their sources, such as specific direction on the use of cameras, alarms, and other physical security measures. As a result, these security controls, and the manner in which they are implemented, have left some hospitals and medical facilities we visited vulnerable to possible theft or sabotage of potentially dangerous radiological sources. Furthermore, NRC’s pending regulations will require that licensees choose security measures to implement from a menu of options based on NRC’s earlier implementation guidance. Similar to the current security requirements, the pending regulations do not specify which measures best address the risks posed by hospital radiological sources, allowing medical facilities to potentially choose the least disruptive option for their operations or the most economical option regardless of the risk. The limitations in NRC’s security controls are exacerbated because NRC and Agreement State inspectors may not receive adequate training from the agency on the security of high-risk radiological material at hospitals and medical facilities. According to the views of several inspectors we interviewed—the 5 days of training provided by NRC is not sufficient for inspectors who typically have a health and safety background and limited security experience. According to NRC, the training is one component for qualification to perform independent security inspections. Other components include: 1) qualification as a NRC health and safety inspector, 2) observation of security inspections conducted by other experienced security inspectors, and 3) conducting an inspection under the direct oversight of a qualified security inspector. Nevertheless, the inspectors may not be in the best position to make the most informed decisions and judgments about the security of licensees’ radiological materials. For example, we were told that an irradiator stored on a wheeled pallet located down the hall from a loading dock had not raised inspectors’ concerns during the facility’s most recent NRC security inspection. Moreover, some hospital officials, including RSOs, rely on inspectors for advice on how to implement NRC’s security controls. However, these inspectors have minimal security training, and hospital officials receive limited security guidance from NRC in how to implement the security controls. Additional vulnerabilities are created because NRC security controls do not require that medical facility officials and RSOs have security experience. Without adequate security guidance, medical facility officials, including RSOs, who may be responsible for implementing NRC’s security controls may not have adequate knowledge of securing equipment containing high-risk radiological sources. Finally, ensuring that hospitals only grant unescorted access to trustworthy individuals is critical to strengthening security, especially for securing against an insider threat. However, the current background examination process relies upon the judgment of hospital personnel, who may not have adequate experience to make that determination. For this reason, some hospital administrators told us that NRC should provide them with additional support for conducting background checks and making trustworthiness and reliability determinations as to which employees would have unescorted access to equipment containing high-risk radiological sources. GAO is making four recommendations. Because the security of radiological sources in hospitals and medical facilities has national security implications, and many potentially vulnerable medical facilities with high-risk sources have not received security upgrades, we recommend that the Administrator of NNSA, in consultation with the Chairman of NRC and Agreement State officials, take the following action: Increase outreach efforts to promote awareness of and participation in NNSA’s security upgrade program. Special attention should be given to medical facilities in urban areas or in close proximity to urban areas that contain medical equipment with high-risk radiological sources. In addition, to help address the security vulnerabilities at U.S. hospitals and medical facilities that contain high-risk radiological materials, we recommend that the Chairman of the Nuclear Regulatory Commission take the following three actions: Strengthen NRC security requirements by providing hospitals and medical facilities with specific measures they must take to develop and sustain a more effective security program, including specific direction on the use of cameras, alarms, and other relevant physical security measures. Ensure that NRC and Agreement State inspectors receive more comprehensive training to improve their security awareness and ability to conduct related security inspections. Supplement existing guidance for facility officials, including RSOs, who may be responsible for implementing NRC’s security controls, in how to adequately secure equipment containing high-risk radiological sources and conduct trustworthiness and reliability determinations. We provided a draft of this report to the Chairman of NRC, the Administrator of NNSA, the Secretary of Defense, and the Secretary of Veterans Affairs. NRC provided written comments on the draft report, which are presented in appendix III. In addition, NRC provided technical comments, which we incorporated as appropriate. NNSA and VA did not provide written comments but provided technical comments which we incorporated as appropriate. DOD did not provide comments. In its comments, NRC agreed with one of our four recommendations and neither agreed nor disagreed with the three other recommendations. Specifically, NRC agreed that the Administrator of NNSA, in consultation with NRC and Agreement state officials, increase outreach efforts to promote awareness of NNSA’s security upgrade program, with special attention given to medical facilities in urban areas or in close proximity to urban areas that contain medical equipment with high-risk radiological sources. NRC neither agreed nor disagreed with our other recommendations that it (1) strengthen its security requirements by providing hospital and medical facilities with specific measures they must take to develop and sustain a more effective security program; (2) ensure that NRC and Agreement State inspectors receive more comprehensive training to improve their security awareness and ability to conduct related security inspections; and (3) train facility officials who may be responsible for implementing NRC security controls in how to adequately secure equipment and conduct trustworthiness and reliability determinations. In its comments, NRC provided additional information regarding each of these three recommendations as follows: Strengthening NRC security requirements. NRC stated that per its policy it uses a multilayered risk informed performance-based approach for the security of radioactive materials in the United States. It also stated in its comments that the requirements were developed in consultation with the Agreement States, in consideration of available intelligence reporting and security assessments performed by experts inside and outside the NRC, and are consistent with IAEA security guidelines and Executive Order 12866. We do not take issue with NRC’s statement that its performance- based approach is consistent with IAEA security guidelines and Executive Order 12866. However, we note that a more prescriptive approach for the security of radioactive materials, such as that we are recommending, is also consistent with IAEA security guidelines. In fact, the guidelines point out that a performance-based approach functions most effectively where there are professional advisors with expertise to design and implement the necessary security measures, a situation we found not to exist in many of the medical facilities we visited. With respect to Executive Order 12866, we would also note that NRC states that the requirements of the order do not apply to it. However, even if the order did apply to NRC, the order itself provides only that “to the extent feasible” agencies should adopt a performance-based approach. The order further directs agencies to which the order applies to tailor their regulations to impose the least burden possible “consistent with obtaining regulatory objectives.” We found that NRC’s current performance-based approach does not consistently ensure that NRC is meeting its objective of securing high-risk radiological sources at the 26 selected hospitals and medical facilities we visited. NRC also stated that in its view, our recommendation is based on four security issues identified in the report, two of which they identified as violations of the existing requirements. NRC states that the failure of a licensee to properly implement security controls established under a performance based regulatory requirement is a compliance issue, and does not mean that the intended control itself is inadequate. We recognize in our draft report that NRC has adopted a risk-based approach to radiological security and state that NRC’s security requirements are non-prescriptive, which allows licensees to develop security programs specifically tailored to their facilities. However, as we also noted in our draft report, this risk-based approach is not based on security risks specific to hospitals and medical facilities and results in a wide variety of security measures implemented by the medical facilities we visited during the course of our audit work. Consequently, we found that some of the medical equipment in the facilities we visited was more vulnerable to potential tampering or theft than that of other facilities, even though all the facilities we visited had implemented NRC’s security controls and undergone inspections by either NRC or Agreement State inspectors. Furthermore, we are not basing our recommendation, as NRC states, solely on our observations at 26 medical facilities. Rather, we are also relying on the views of law enforcement personnel from states with significant amounts of high-risk radiological material, who told us that NRC’s security controls have an inherent weakness: the security controls do not specify what the facility is protecting against and are not linked to a design basis threat. In addition, NNSA has developed a specific program to upgrade the physical security at hospitals and medical facilities in the United States, which already meet NRC’s security controls. In our view, it stands to reason that if NNSA has identified security vulnerabilities at 321 hospitals and medical facilities in the United Sates, and taken actions to address them, then NRC’s existing security controls need to be strengthened. This is not merely an issue of how licensees comply with existing security regulations but involves both the security requirements and their implementation. For these reasons, we continue to believe our recommendation that NRC strengthen its security requirements is appropriate. Additional training for inspectors. NRC stated that its training course provides instruction on a performance based methodology to evaluate and assess the adequacy of a physical protection system to protect against theft or sabotage of materials identified in NRC’s security controls. NRC also stated that its one 5-day training course, in combination with on the job training and other requirements, prepares NRC and Agreement State inspectors to complete their required duties. NRC stated that it will evaluate whether any additional training enhancements are needed to its inspector qualification program based on our recommendation, and it plans to review and revise the training associated with the inspector qualification program in conjunction with pending security regulation. We are encouraged that NRC will evaluate whether any additional enhancements are needed to its inspector qualification program in response to our recommendation. We believe that NRC’s review of its training is necessary and should be completed as quickly as possible, with an eye toward adopting a more comprehensive inspector training program, as envisioned in our recommendation. Training for hospital personnel. NRC recognizes our concern that there is a need to improve the licensee’s knowledge of acceptable security practices. According to NRC, as a regulator, it must maintain independent, objective oversight of licensees and may not operate in a consultative role. Therefore, NRC stated that it does not provide training to licensees but provides regulatory guidance documents to aid facility officials as they establish programs and specific controls to meet security requirements, including implementing guidance and over 200 questions and answers for the existing security requirements on its public website. However, as we stated in the draft report, even with this guidance, facility officials at 15 of the 26 hospitals and medical facilities we visited told us that they have limited security experience and no training from NRC on how to implement the security controls. In addition, the current background examination process (trustworthiness and reliability) relies on the judgment of hospital personnel, who may not have adequate experience to make that determination. Therefore, we continue to believe that medical facility officials would benefit from additional support from NRC when implementing the security controls at their facilities. Because NRC believes it cannot provide training to its licensees given its independent role as a regulator, we are modifying the recommendation to encourage NRC to supplement existing guidance and ensure that it is widely disseminated, rather than provide specific training to facility officials. We are sending copies of this report to the Secretaries of the Departments of Defense, Energy, and Veterans Affairs; as well as the Administrator of the National Nuclear Security Administration; the Chairman of the Nuclear Regulatory Commission; the appropriate congressional committees; and other interested parties. In addition, the report is available at no charge on the GAO website at http://gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or gaffiganm@gao.gov. 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. We focused our review primarily on the Nuclear Regulatory Commission (NRC) and the Department of Energy’s National Nuclear Security Administration (NNSA) because they are the principal federal agencies with responsibility for securing radiological material at hospitals and medical facilities in the United States. We also performed work at the Departments of Defense (DOD), Homeland Security (DHS), Justice (DOJ), and Veterans Affairs (VA) because they are also involved in securing radiological material. In addition, we interviewed experts in the field of nuclear security, representatives from state government, and safety and security personnel at hospitals and medical facilities to discuss their views on how radiological material is secured at U.S. hospitals and medical facilities. In August 2011, we attended the Organization of Agreement States (OAS) annual meeting in Richmond, Virginia, where we spoke to Agreement State representatives and attended sessions on how states oversee the security of radiological material. We visited hospitals and medical facilities in California, Maryland, New York, Pennsylvania, Tennessee, Texas, Virginia, and Washington, D.C. We selected these states and Washington D.C., on the basis of geographic dispersion, curies of radiological sources, number of buildings with high-risk radiological sources in the state, and number of sites with NNSA security upgrades completed or in progress. Overall, these seven states and Washington, D.C., contain over 12 million curies, or 43 percent of all curies in U.S. hospitals and medical facilities. In addition, the seven states and Washington, D.C., have 625 hospitals and medical buildings with high-risk radiological sources, or 42 percent of all medical sites with high-risk radiological material in the United States. As of March 1, 2012, NNSA spent almost $56 million in the seven states and Washington, D.C., on assessing sites and completing upgrades, or 53 percent of the program’s total expenditure. During our review, we observed physical security upgrades at 26 hospitals and medical facilities. These sites included university and private hospitals, medical research facilities, blood banks, and cancer treatment facilities. The 26 sites we visited are a non generalizable sample, selected on the basis of the number of radiological devices in the state and the total number of cumulative curies contained in these devices in each state. In addition, we considered if the site had undergone security upgrades funded by NNSA, and whether the site is located in a large urban area. At each location, we interviewed facility staff responsible for implementing procedures to secure radiological sources. We also met with security personnel at each site, when available, and spoke to officials with local law enforcement agencies responsible for responding to security breaches. We also met with local law enforcement personnel in Los Angeles County, New York City, and Washington, D.C., to discuss coordination of security across large urban areas. We received electronic data from NNSA’s G-2 database, which aggregates data from NRC’s National Source Tracking System (NSTS). To determine the reliability of these data, we conducted electronic testing and interviewed staff at NNSA and NRC about the reliability of these data. We tested these data to ensure both their completeness and accuracy, and determined that these data were sufficiently reliable to use in selecting locations to visit and summarizing by state the total number of buildings, number of buildings with completed security upgrades, and total number of curies. To examine how NRC’s regulations direct the security of high-risk radiological material at U.S. hospitals and medical facilities, we reviewed information and interviewed officials responsible for overseeing and securing sources at NRC, NNSA, VA, DOD, DHS, and DOJ. We also reviewed information from Agreement States and NRC regions and interviewed officials at 20 of the 37 Agreement States and the three NRC regional offices with responsibility for overseeing high-risk radiological material. We spoke with officials about how Agreement States implement the NRC security controls from the following 20 of the 37 Agreement States: Alabama, Arizona, Arkansas, California, Colorado, Florida, Kentucky, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Texas, Virginia, Washington, and Wisconsin. We also spoke with officials in NRC Regions I, III, and IV. We selected the Agreement State and NRC Regional Office officials based on their experience with inspecting for the security of high- risk radiological sources across the United States. To learn how NRC security requirement are implemented at the facilities, we visited hospitals, medical facilities, and local law enforcement agencies in the seven states and Washington, D.C., and interviewed officials about NRC’s security requirements. To assess NRC’s new rule, approved by the NRC on March 16, 2012, we reviewed the proposed regulation and spoke with NRC officials about its implementation. To determine the extent to which NRC and Agreement State inspectors receive security training, we discussed training procedures with NRC headquarters staff, reviewed training materials, and interviewed inspectors in NRC regional offices and Agreement States about the effectiveness of the training. To determine the sufficiency of staffing and resources in the 37 Agreement States, we reviewed 40 Integrated Materials Performance Evaluation Program (IMPEP) reports conducted by NRC in 40 state programs or NRC regions from 2006 to 2011. We analyzed the IMPEP reports to assess how Agreement States are implementing NRC’s security controls. To evaluate the extent to which NNSA has enhanced the security of high- risk radiological sources at U.S. hospitals and medical facilities and the challenges they face, we analyzed information and interviewed NNSA officials about the Domestic Material Protection program, which provides voluntary upgrades to facilities with high-risk radiological material. We analyzed NNSA data outlining the number of facilities that have received upgrades or are in the process of receiving upgrades and visited facilities that have received NNSA upgrades and security assessments in California, New York, Pennsylvania, Tennessee, Texas, Virginia, and Washington, D.C. To assess the voluntary nature of the program and sustainability of the upgrades, we spoke with hospital and medical facility officials about the program. To assess NNSA’s prioritization criteria and determine how much money the agency has spent on security enhancements, we gathered cost data from NNSA and contacted the agency officials who oversee the program. We also analyzed NNSA expenditure data to determine in which states NNSA has spent money on upgrades and assessments since the program began. We conducted electronic testing and discussed the reliability of these data with NNSA officials, and we determined that they were sufficiently reliable to summarize the total cost of the upgrades by state. We conducted this performance audit from April 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: NRC Security Controls and Selected Pending Part 37 Regulations Changes (10 C.F.R. Part 37) Relevant Increased Controls and Fingerprint Order Access controls (IC 1) Licensees shall control access to radioactive material at all times and limit access only to trustworthy and reliable individuals, approved by the licensee, who require access to perform their duties. The licensee shall allow only trustworthy and reliable individuals, approved in writing by the licensee, to have unescorted access to radioactive material quantities of concern and devices. The licensee shall approve for unescorted access only those individuals with job duties that require access to such radioactive material and devices. For individuals employed by the licensee for 3 years or less, trustworthiness and reliability shall be determined, at a minimum, by verifying employment history, education, and personal references. The licensee shall also, to the extent possible, obtain independent information to corroborate that provided by the employee (i.e., seeking references not supplied by the individual). For individuals employed by the licensee for longer than 3 years, trustworthiness and reliability shall be determined, at a minimum, by a review of the employees’ employment history with the licensee. In the case of a service provider’s employee, the licensee shall obtain from the service provider written verification attesting to or certifying the employee’s trustworthiness and reliability from an NRC-required background check before granting unescorted access. undergo or have undergone an FBI criminal history check. Individuals who have been determined to be trustworthy and reliable must undergo training in the licensee’s security program and procedures. The background check must cover the past 7 years (or since 18th birthday if shorter) for all employees, whether the individual is a long-time employee or a new hire. Individuals must be reinvestigated every 10 years. Part 37 provides relief from record checks and background investigations for certain categories of service provider employees (emergency response personnel, commercial vehicle drivers, and package handlers at transportation facilities). Monitor and Response (IC 2) Licensees shall have a documented program to monitor and immediately detect, assess, and respond to unauthorized access to radiological sources. A written security plan, rather than a documented program is required. The licensee shall respond immediately to any actual or attempted theft, sabotage, or diversion of such radioactive material or of the devices, including requesting assistance from local law enforcement. The licensee shall have a prearranged plan with their Local Law Enforcement Agency for assistance in response to an actual or attempted theft, sabotage, or diversion of such radioactive material or of the devices consistent with scope and timing with a potential vulnerability. The licensee shall have a dependable means to transmit information between, and among, the various components used to detect and identify an unauthorized intrusion, to inform the assessor, and to summon the appropriate responder. After initiating appropriate response to any actual or attempted theft, sabotage, or diversion of radioactive material or of the devices, the licensee shall, as promptly as possible, notify NRC Operations Center. (i) A monitored intrusion detection system that is linked to an on- site or off-site central monitoring facility; or (ii) Electronic devices for intrusion detection alarms that will alert nearby facility personnel; or (iii) A monitored video surveillance system; or (iv) Direct visual surveillance by approved individuals located within the security zone; or (v) Direct visual surveillance by a licensee designated individual located outside the security zone. Licensees must assess any suspicious activity related to possible theft, sabotage, or diversion of radioactive material and notify NRC and local law enforcement as appropriate. Licensees must implement a maintenance and testing program to ensure that monitoring and detection equipment is functioning properly. Licensees are required to periodically (at least annually) review the security program to ensure its continuing effectiveness. Licensees must have a means to detect unauthorized removal of the radioactive material from the security zone. Individuals with unescorted access must be fingerprinted and undergo a Federal Bureau of Investigations (FBI) criminal history check. The official responsible for determining whether individuals are trustworthy and reliable must also undergo a trustworthiness and reliability determination. In addition to the contact name above, Gene Aloise (Director); Glen Levis (Assistant Director); Jeffrey Barron; Alysia Davis; Will Horton; Karen Keegan; Cheryl Peterson; Rebecca Shea; and Carol Hernstadt Shulman made key contributions to this report. | In the hands of terrorists, radiological material, such as cesium-137, could be used to construct a "dirty bomb." Such material--encapsulated in steel or titanium and called a sealed source--is commonly found in equipment used by U.S. medical facilities to treat, among other things, cancer patients. NRC is responsible for regulating the commercial use of sealed sources and has relinquished its regulatory authority to 37 states, known as Agreement States. In 2008, NNSA established a program to provide security upgrades to U.S. hospitals and medical facilities that use radiological sources. GAO was asked to determine (1) the extent to which NRC's requirements ensure the security of radiological sources at U.S. medical facilities and (2) the status of NNSA's efforts to improve the security of sources at these facilities. GAO reviewed relevant laws, regulations, and guidance; interviewed federal agency and state officials; and visited 26 hospitals and medical facilities in 7 states and Washington, D.C. The Nuclear Regulatory Commission's (NRC) requirements do not consistently ensure the security of high-risk radiological sources at the 26 selected hospitals and medical facilities GAO visited. One reason for this is that the requirements are broadly written and do not prescribe specific measures that hospitals and medical facilities must take to secure medical equipment containing sealed sources, such as the use of cameras or alarms. Rather, the requirements provide a general framework for what constitutes adequate security practices, which is implemented in various ways at different hospitals. Some of the medical equipment in the facilities visited was more vulnerable to potential tampering or theft than that of other facilities because some hospitals developed better security controls than others. Some examples of poor security GAO observed included: an irradiator, used for medical research and containing almost 2,000 curies of cesium-137, was stored on a wheeled pallet down the hall from, and accessible to, a loading dock at one facility; at a second facility, the combination to a locked door, which housed an irradiator containing 1,500 curies of cesium- 137, was clearly written on the door frame; and at a third facility, an official told GAO that the number of people with unescorted access to the facility's radiological sources was estimated to be at least 500. In addition, some NRC and Agreement State inspectors said the training NRC requires is not sufficient. As of March 2012, the National Nuclear Security Administration (NNSA) had spent $105 million to complete security upgrades at 321 of the 1,503 U.S. hospitals and medical facilities it identified as having high-risk radiological sources. Of the 26 hospitals and medical facilities that GAO visited, 13 had volunteered for the NNSA security upgrades and had received security upgrades, such as remote monitoring systems, surveillance cameras, enhanced security doors, iris scanners, motion detectors, and tamper alarms; three others were in the process of receiving upgrades. However, NNSA does not anticipate completing all such security upgrades until 2025, leaving a number of facilities potentially vulnerable. In addition, the program's impact is limited because, among other things, it is voluntary, and facilities can decline to participate. To date, 14 facilities, including 4 in large urban areas, have declined to participate in the program. Combined, those 14 facilities have medical equipment containing over 41,000 curies of high-risk radiological material. According to police department officials in a major city, one hospital with a blood irradiator of approximately 1,700 curies has declined the NNSA upgrades due in part to cost concerns, even though the police department considers it to be a high-risk facility. GAO recommends, among other things, that NRC strengthen its security requirements by providing medical facilities with specific measures they must take to develop and sustain a more effective security program. NRC neither agreed nor disagreed with this recommendation and stated that its existing security requirements are adequate. GAO continues to believe that implementing its recommendation would contribute to increased security at U.S. hospitals and medical facilities. |
The NCLBA of 2001 amended and reauthorized the Elementary and Secondary Education Act, the largest and most comprehensive federal education law. The focus of this legislation is on improving students’ academic performance. A growing body of research has shown that teacher effectiveness is a significant factor in improving students’ academic performance. Research has also shown that many children, especially those in high-poverty and high-minority schools, are assigned to teachers who lack knowledge of the subjects they teach. For example, a 2004 report stated that one out of four high school courses was being taught by teachers without a college major, or even a minor, in the subject taught, and that students in high-poverty classrooms were more likely to be assigned to such teachers than students in low-poverty classrooms. Historically, states have been responsible for developing and administering their education systems, and most states have delegated the authority for operating schools to local governments. States and local governments provide most of the money for public elementary and secondary education. Education reported that 49 percent of the revenue for public elementary and secondary education in the 2001-2002 school year came from state sources, 43 percent came from local sources, and 8 percent came from federal sources. As a result, state and local dollars fund most major expenses, such as teacher salaries, school buildings, and transportation. Although the autonomy of districts varies, states are responsible for monitoring and assisting their districts that, in turn, monitor and assist their schools. The federal government has played a limited but important role in education. Education’s mission is to ensure equal access to education and promote educational excellence throughout the nation by, among other things, supporting state and local educational improvement efforts, gathering statistics and conducting research, and helping to make education a national priority. Education is responsible for providing assistance to states to help them understand the provisions or requirements of applicable laws and oversees and monitors how states implement them. With the passage of NCLBA, which requires public school teachers to be highly qualified in every core academic subject they teach, the federal government for the first time established specific criteria for teachers. The act requires all teachers of core academic subjects to have a bachelor’s degree, state certification, and demonstrable subject matter competency for each core subject taught. Under the act, teachers may not have state certification requirements waived on an emergency, temporary, or provisional basis. According to the Education Commission of the States, every state required 4 years of college preparation for teacher certification as of 1974. However, ensuring that all teachers are certified and can demonstrate competency in the subject matter they teach presents a new challenge for many states. Allowable ways for teachers to demonstrate subject matter competency vary depending upon a teacher’s experience and the grade level being taught. (See fig. 1.) For example, elementary teachers new to the profession must pass a state test to demonstrate subject knowledge and teaching skills. States have the flexibility to identify and approve such tests for new teachers, as well as establish the passing scores on the tests. Middle school and high school teachers have a number of options available to them for demonstration of subject matter competency, including a college major or a state test in the subject taught. In addition to the options available for new teachers, veteran teachers have an additional avenue for demonstrating subject matter competency through their state’s HOUSSE procedures. States can make the HOUSSE option available to veteran teachers at all grade levels. The act sets forth some general criteria for states to use in developing an acceptable evaluation standard. For example, the standard must be developed in a way that provides objective and coherent information about the teacher’s attainment of core content knowledge, must be aligned with state academic content and student achievement standards, and must be uniformly applied to all teachers of the same subject and grade level in the state. In March 2004, Education announced additional flexibilities to help teachers who deliver instruction in multiple core academic subjects and science teachers meet the requirements. Education announced that veteran teachers who provide instruction in multiple core academic subjects will be able to demonstrate their subject matter competency through a single set of procedures, such as a single, streamlined HOUSSE covering multiple academic subjects. Education also announced that teachers in eligible rural areas who teach multiple core academic subjects and meet the requirements in at least one of those subjects would have additional time to demonstrate subject matter competency in the other subjects. Further, Education allowed states to rely on their own certification requirements for science to determine specific science areas in which teachers will be required to demonstrate subject matter competency. For example, if a state certified teachers in the general field of science, then a teacher may demonstrate subject matter competency in the general science area instead of each separate science subject, such as physics or biology. According to Education’s August 2005 nonregulatory guidance, the NCLBA teacher qualification requirements apply to special education teachers who provide instruction in core academic subjects, such as teachers in self-contained classrooms. These teachers may demonstrate subject matter competency by using any of the options allowed to other teachers under NCLBA. Qualification requirements for special education teachers were modified in the December 2004 reauthorization of the Individuals with Disabilities Education Act (IDEA). The reauthorized IDEA allowed some special education teachers additional flexibility in terms of meeting subject matter competency requirements. First, new special education teachers at the elementary level who are teaching exclusively children with significant cognitive disabilities may use the state HOUSSE procedures to demonstrate subject matter competency, an option otherwise reserved under NCLBA to veteran teachers. Second, new special education teachers who teach multiple core academic subjects exclusively to special education students and already meet the requirements in mathematics, language arts, or science, have 2 years after hiring to demonstrate subject matter competency in the other subjects taught. Teachers in this second category may also do this through the HOUSSE process, including a single evaluation covering all academic subjects taught. Finally, veteran special education teachers who teach multiple core academic subjects exclusively to special education students have the option of demonstrating subject matter competency through a multisubject HOUSSE, consolidated to assess teachers’ subject matter knowledge in multiple subjects through a single process. The deadline for teachers to meet the requirements depends on the type of school in which they work. Starting with the first day of the 2002-2003 school year, all new teachers hired into school programs supported with Title I funds must demonstrate compliance with the requirements immediately upon hire. Most other teachers have until the end of 2005- 2006 school year to meet the requirements in the law. The current timelines for teachers to meet the requirements are shown in figure 2. Prior GAO work found that states and districts were experiencing challenges implementing NCLBA’s teacher qualification requirements. Among the most commonly cited challenges were difficulties with teacher recruitment and retention resulting from factors such as low teacher pay, lack of adequate professional development opportunities, and difficulty developing and implementing state data systems for tracking teacher qualifications. We found that challenges were especially acute in small, isolated rural districts where teachers often had to teach multiple subjects across different grade levels. Furthermore, although we found that all states required that special education teachers have a bachelor’s degree and be certified to teach—two of the three NCLBA teacher qualification requirements—many states did not require them to demonstrate subject matter competency. As the result, we concluded that state-certified special education teachers who were assigned to teach core academic subjects might not be positioned to meet NCLBA requirements. In the aftermath of Hurricane Katrina, states and districts faced with large numbers of displaced teachers and students may have additional challenges tracking teacher qualification status and ensuring that all teachers meet the requirements by the deadline. Education indicated that it will work with affected states and school districts to determine what flexibility will be needed with regard to implementing the teacher qualification requirements. Federal funding for teacher initiatives was provided prior to NCLBA, but the act increased the level of funding to help states and districts implement the teacher qualification requirements. Prior to NCLBA, the Eisenhower Professional Development and Class-Size Reduction programs provided funds to the states primarily for professional development in mathematics and science and efforts to reduce class size for students in kindergarten through third grade. Title II replaced these two programs, providing states and districts with approximately $2.85 billion for fiscal year 2002 to help them implement various initiatives for raising teacher and principal qualifications—$740 million more than provided in fiscal year 2001 under the previous two programs. In fiscal year 2004, Title II provided $2.93 billion to states and districts through Improving Teacher Quality State Grants. The formula currently used to allocate funds to states and districts is similar to the formula used under the Eisenhower Professional Development and the Class-Size Reduction programs and takes into account poverty and student enrollment. Specifically, the amount of Title II funds that each state or district receives is based on its 2001 allocation under the two previous programs, the number of children aged 5 to 17, and the number of those children residing in families with incomes below the poverty line. After reserving up to 1 percent of the funds for administrative purposes, states allocate 95 percent of the remaining funds to the districts. They retain 2.5 percent to support state-level teacher initiatives and allocate the remaining 2.5 percent to the state agency for higher education to support partnerships between higher education institutions and high-need districts that work together to provide professional development to teachers. While there is no formula in NCLBA for districts to allocate funds to specific schools, the act requires states to ensure that districts target funds to those schools with the highest number of teachers who are not highly qualified, the largest class sizes, or that have been identified to be in need of improvement. In addition, districts applying for Title II funds from their states are required to conduct a districtwide needs assessment to identify their teacher quality needs. Among other things, the needs assessment should identify those needs that must be addressed if the district is to have all its teachers meeting NCLBA’s requirements by the deadline. The needs assessment should take into account activities needed to provide teachers with the means for helping students meet challenging state and local academic achievement standards. Districts must involve teachers in the development of their needs assessment and may consider a variety of factors, such as teacher and student achievement data and projections of professional development necessary to help all teachers meet NCLBA’s qualification requirements. Under Title II, acceptable uses of funds include teacher certification activities, professional development in a variety of core academic subjects, and recruitment and retention initiatives, including hiring teachers in order to reduce class size. (See app. I for state and district authorized activities.) Some of these activities, such as recruitment of new teachers and professional development in math and science, could be funded under the Eisenhower Professional Development and Class-Size Reduction programs as well. However, states and districts have more flexibility in how to spend Title II funds than was previously possible. For example, while under the Class-Size Reduction Program, funds could be spent on financial incentives and mentoring programs for new teachers only, Title II funds can be used for existing teachers as well, if the district identifies a need. While the Eisenhower program focused primarily on professional development in math and science, allowable activities under Title II may include any subject. Under NCLBA, professional development is considered to be an important component of the overall strategy to improve the quality of teaching and raise student achievement, and the law provides the definition of professional development. In addition to using Title II funds for the purposes of raising teacher qualifications, districts can also transfer these funds to most other NCLBA programs to meet their educational priorities. Specifically, districts are allowed to transfer up to 50 percent of the funds allocated to them under most major NCLBA programs, including Title II, into other programs under NCLBA. Thus, for example, districts may transfer a portion of their Title II funds into Title I for initiatives designed to improve student achievement. Regardless of whether or not districts transfer funds under the transferability option, they can spend non-Title II funds, such as Title I funds, to support teacher initiatives. Under NCLBA, districts are required to spend at least 5 percent of their Title I funds on helping teachers meet the qualification requirements. Additionally, schools in the district that do not meet their student proficiency goals for 2 or more consecutive years are required to spend at least 10 percent of their Title I funds to provide the school’s teachers and principals with high-quality professional development. States must prepare and publicly disseminate an Annual State Report Card with information on the professional qualifications of teachers in the state, the percentage of such teachers on emergency or provisional credentials, and the percentage of core academic classes being taught by teachers who do not meet NCLBA’s teacher qualification requirements. Further, Title I of NCLBA requires districts and schools to inform parents about the qualifications of their children’s teachers. Districts are required to notify parents of all students attending Title I schools that they have the right to request information about the qualifications of their child’s teacher. Schools must further notify parents if their child has been taught by a teacher who did not met NCLBA’s teacher qualification requirements for 4 or more consecutive weeks. The accountability provisions under Title I of NCLBA require every state and district receiving Title I funds to develop and submit a plan for how it intends to meet the teacher qualification requirements, along with other provisions of the act such as adopting challenging academic content and student achievement standards. The state plan must establish each district’s and school’s annual measurable objectives for increasing the number of teachers meeting qualification requirements and receiving high- quality professional development with the goal of ensuring that all teachers meet the requirements by the end of the 2005-2006 school year. In addition, beginning with the 2002-2003 school year, districts receiving Title I funds are required to annually report to the state on their progress toward state-set objectives, and all states are required to submit an annual report to Education detailing state progress in meeting the annual measurable objectives regarding teacher qualification requirements. Under NCLBA, school districts that do not ensure that their teachers meet the qualification requirements must implement certain actions, such as additional professional development. However, their overall funding levels from Education are not affected. If states do not meet the requirements for reporting on the qualifications of their teachers, the Secretary of Education has the authority under NCLBA to withhold state administrative funds. Education monitors states’ progress in implementing the requirements under both Title I and Title II of the act, as well as provides assistance to them. Beginning with the 2002-2003 school year, Title I of the act requires Education to publicly report the annual progress of states, districts, and schools in meeting the measurable objectives for ensuring that all teachers meet the qualification requirements by the deadline. The available data suggest that the majority of core academic courses were taught by qualified teachers in 2003-2004. States have made progress in tracking and reporting teacher qualification data, but challenges remain in reporting precise results. States offered multiple options for veteran teachers to demonstrate subject matter competency as part of their HOUSSE procedures, but the rigor of these procedures varied across the states that we visited. Selected state and district officials told us that certain groups of teachers would likely face challenges meeting the requirements by the 2005-2006 deadline. The data reported by 47 states suggest that the majority of core academic classes were taught by teachers who met NCLBA requirements during the 2003-2004 school year. Most of these states reported that nearly all of their core academic classes were being taught by teachers who met the requirements. However, data for most states appear to show that core academic classes in low-poverty schools were more likely to be taught by teachers who met the requirements than classes in high-poverty schools. The data also suggest that a higher percentage of elementary school classes were taught by teachers who met the requirements than secondary school classes. State-reported percentages for each of the 47 states are shown in appendix II. Data limitations preclude a comparison among states but, on the basis of our work, we determined state-reported percentages could be used to demonstrate how close a particular state was to reaching the goal of having all its teachers meet the requirements. States have improved in their ability to track and report the percentage of core academic classes taught by teachers who met NCLBA qualifications. Reports from 2002 and 2003 from national education organizations, such as the Education Commission of the States, showed that few states were able to track and report these data. Similarly, in our 2003 report on the NCLBA teacher qualification provisions, officials in 7 of the 8 states we visited told us they did not have data systems capable of tracking teacher qualifications for each core subject. But by 2005, 47 states reported teacher qualification data to Education for the 2003-2004 school year. Officials in the 6 states that we visited told us that they had improved their data systems, either by creating a new system or by redesigning their existing system to collect information required under NCLBA. For example, several states merged their state-level teacher qualification systems with their district-level class assignment systems to enable them to determine whether classes were being taught by teachers who met the requirements. Education officials also told us the 2003-2004 data had considerably improved from earlier years and that next year’s data will accurately reflect the status of state efforts to implement the teacher qualification requirements. Despite this progress, several issues limit the quality and precision of state-reported data and make it difficult to determine the exact percentage of core academic classes taught by teachers meeting NCLBA qualification requirements. First, district officials in 3 of the 6 states that we visited told us that they had excluded classes taught by special education teachers from their calculations; state officials in all 6 site visit states said these teachers faced particular challenges in meeting the requirements. Second, states relied on the data districts provided, but state officials generally noted that data collection processes varied by district, and that the quality of the data could vary as well. For example, two districts that we visited in 1 state reported data that were based on an incorrect assumption about which teachers met the requirements, and therefore included some teachers as meeting the requirements when they had not. Education also identified data problems in 13 of the 20 states for which it issued monitoring reports by July 2005. The impact and magnitude of these problems on state reports is unclear; state-reported data may under- or overstate the percentage of classes taught by teachers who met the requirements, depending on the nature of the data problem. Education has contracted with a research organization to follow up with states to identify any data issues that may have affected state-reported data, such as states excluding certain teachers subject to NCLBA’s qualification requirements from their calculations. Five of the 6 site visit states had HOUSSE procedures in place for veteran teachers—those generally with 1 or more years of experience—to demonstrate subject matter competency, and the procedures included many different options for teachers to use as part of HOUSSE. The HOUSSE procedures in these states included the use of a point system that allowed veteran teachers to demonstrate subject matter competency by earning points in categories of experience, academic coursework or professional development, and leadership or service activities, as well as for evidence of publications, presentations, or awards. Colorado officials said they did not have a HOUSSE but allowed teachers to demonstrate subject matter competency through options typically included in other states’ HOUSSE procedures, such as a combination of college coursework and professional development options. Figure 3 presents an overview of HOUSSE point systems from the 5 states we visited that had them in place. (App. III shows HOUSSE point systems from 2 site visit states.) In addition to the categories above, the point systems in two states that we visited also included the option for teachers to demonstrate subject matter competency through advanced certification. Teachers in Maryland and Tennessee could earn all of the required points by achieving National Board Certification. In addition to the point system, the HOUSSE procedures in some site visit states offered alternatives for demonstrating subject matter competency. For example, teachers in Tennessee could demonstrate subject matter competency through multiple observations of their performance completed by trained evaluators or the data showing their effect on student achievement. Teachers in California who were unable to obtain the required number of points through the point system could use evidence of positive evaluations of their performance in the classroom or prepare a portfolio of their work. Our review of HOUSSE procedures in states that we visited, particularly the analysis of the points they allowed teachers to count for different activities, showed that they varied in the weight given to these activities. The extent to which certain activities reflect teachers’ subject matter knowledge may affect the rigor of these procedures. For example, as shown in figure 3, Rhode Island allowed experience to count for about one-fourth of the 100 points required for demonstrating subject matter competency, but the other 4 states with HOUSSE procedures allowed experience to count for about one-half of the points to be earned. Officials in Colorado indicated that they had chosen not to count experience toward teachers’ demonstration of subject matter competency because they did not believe that experience would necessarily translate into improved subject knowledge. However, Colorado permitted relevant travel to count toward demonstration of subject matter competency, whereas the other states did not explicitly include travel in their HOUSSE. Some site visit states also set a minimum number of points to be earned in certain categories, while other states did not require teachers to earn points from those categories. Specifically, Kansas and Maryland required teachers to earn at least a portion of the total number of points they needed to demonstrate subject matter competency through college coursework, while other states did not require a minimum number of points in that category. States also differed in the number of categories in which teachers had to earn points. For example, teachers in Rhode Island were required to earn points from at least three different categories, such as college-level coursework and professional development in the content area. In contrast, teachers in Maryland could earn all points necessary for demonstration of subject matter competency from a single category. California, Kansas, Rhode Island, and Tennessee also set a requirement that some activities had been completed within a recent period of time. For example, Kansas required professional development and service activities to have taken place within the last 6 years to earn points toward demonstrating subject matter competency under HOUSSE. Some of the options that site visit states permitted as part of their HOUSSE procedures relied on improved student performance or observations of teachers’ classroom performance. Tennessee allowed teachers to demonstrate subject matter competency by using data that show their actual contribution to students’ achievement in that subject. To use this option for the purposes of demonstrating subject matter competency, teachers must demonstrate that the most recent 3-year average gain in the achievement of their students is not detectably different from or is better than the average gain for all students in the state. At the same time, Tennessee and California both counted positive evaluations of teachers’ classroom performance as evidence that could be counted toward subject matter competency. Although both states based these evaluations on uniform performance standards established by the state, officials in these states told us that they did not oversee the implementation of these evaluations. As a result, we determined that they could not effectively ensure the quality of evaluations. While we did not conduct an in-depth review of how the evaluations of teachers’ performance were carried out, we identified two areas of concern for using this method as an objective state standard. First, the number and duration of the evaluation sessions may not provide enough information to determine subject matter competency. Second, these evaluations may be conducted by personnel who are also responsible for hiring and retaining teachers in the district, and thus these evaluators may not be objective. In one small rural district that we visited, the assistant superintendent responsible for evaluating the teachers’ subject matter competency told us that the evaluation process was subjective. Finally, while most states that we visited tried to ensure that activities accepted as part of their HOUSSE procedures were connected to the subject area that the teacher taught, Maryland’s HOUSSE procedure awarded points for activities not directly related to the subject matter, such as professional development on instructional strategies and principles. Officials there indicated that the majority of points had to be earned from activities specific to the subject matter, and that the state’s HOUSSE procedure sought to recognize both subject matter knowledge and the teachers’ general teaching expertise. Some educational experts have noted that the rigor of HOUSSE procedures varied across states and expressed concerns that states whose procedures offered less rigorous options may not adequately assess teachers’ subject matter knowledge. The experts we interviewed told us that teachers who are not required to engage in activities directly related to accumulating subject matter knowledge, such as completing college coursework in a subject, may not increase their knowledge of the subject taught. In addition, the experts commented that if experience is heavily emphasized, teachers may not get the subject matter knowledge they need to be effective in the classroom. States with less rigorous procedures may not bring about improvements in teachers’ content knowledge or student performance. Officials from Education confirmed that the rigor of HOUSSE procedures varied across states, as is permitted under NCLBA. Although numerous ways exist for veteran teachers to demonstrate subject matter competency, officials in site visit states and districts and national association representatives told us that some teachers providing instruction in multiple core academic subjects, such as special education teachers and teachers in rural areas and specialized school settings, may not meet the requirements by the deadline. Officials in the states that we visited noted that special education teachers would have the greatest difficulty in meeting the requirements by the deadline, because they were originally certified in special education rather than in a specific academic content area. In addition, special education teachers frequently provide instruction in multiple core academic subjects at the secondary level, creating challenges in meeting the requirements for each subject. Officials also noted that teachers in rural districts may face similar challenges. For example, an official in one state described a rural district landlocked by mountains where three high school teachers were responsible for teaching all classes across all subjects and grades at the high school level, and therefore had to meet the requirements for each subject. Although under IDEA and Education’s guidance certain special education and rural teachers who already meet the requirements in one core academic subject have additional time to meet the requirements for the other subjects, officials were still concerned about whether these teachers will be able to meet the requirements for all of the subjects. Officials also reported challenges for middle school teachers who frequently provide instruction in multiple core academic subjects, as well as teachers in specialized school settings, such as schools for students dismissed from their regular schools as a result of behavioral problems. Officials from two districts in one state that we visited told us that they had a large number of these specialized schools, and officials there indicated that teachers often had to teach multiple subjects to the same group of students, making it difficult for them because they had to meet the subject matter requirements in each subject taught. Education allowed states to streamline HOUSSE procedures by developing a method for veteran teachers of multiple core academic subjects to demonstrate subject matter competency in all those subjects through a single procedure. One of the states that we visited offered a streamlined HOUSSE procedure for its teachers of multiple core academic subjects. However, officials in the other states that we visited did not have a single HOUSSE procedure for teachers of multiple subjects, and some of them indicated that they would like more information on how to develop one. Officials in states and districts that we visited also told us that schools will continue to have difficulty recruiting math and science teachers who meet the requirements. Schools had difficulty recruiting these secondary teachers even before NCLBA. These recruitment shortfalls will likely continue after the 2005-2006 deadline passes, in part because thereafter all newly hired teachers of core academic subjects, not just those in Title I schools, will have to demonstrate their subject matter competency before entering the classroom. Some state and district officials told us that they were unable to restrict hiring to teachers who met the requirements because there were not enough candidates who had met the requirements to fill all of the open positions. One state is altering its emergency certificate to incorporate a time limit; this certificate will allow teachers to provide instruction for up to 2 years before they have to fully meet the subject matter competency requirements. While state officials responsible for teacher licensing in the state acknowledged that the new certificate does not meet the requirements of NCLBA, they indicated that school districts might not be able to fill all their open positions with teachers who meet the requirements. We also found that 8 of the 11 districts either did not notify parents when their children were assigned to teachers who did not meet the requirements, as required under the act, or did not make the notification entirely clear to the parents. Five districts in the states that we visited did not send the letters to the parents, with some district officials stating that they did not know that the letters had to be sent. Officials in one state instructed districts not to send the letters until the 2005-2006 deadline had passed. Three districts in another state sent letters to the parents, but these letters did not explicitly indicate that the teacher did not meet the requirements of the law. For example, one district’s letter said that the teacher “is a dedicated professional who will always work in the best interest of your child” and “holds a probationary certificate” without explaining to the parents that probationary certificates do not meet NCLBA’s requirements. Additionally, some officials did not know about other aspects of the requirements, such as actions required for teachers not meeting the requirements and to whom the requirements applied. For example, officials in two states told us that they did not know what actions districts or schools should take against teachers who did not meet the requirements by the deadline. Officials in one district had fired teachers because they did not meet the requirements. Other districts generally had not fired teachers who did not meet the requirements but wanted to know whether they should. There are no actions specified in the NCLBA with respect to teachers’ conditions of employment for those who do not meet the requirements by the deadline. In addition, officials in one district did not know until our visit that all teachers of core academic subjects—not just those in Title I schools—would have to meet the requirements by the end of 2005-2006 school year. Education acknowledged the challenges that states may face in ensuring that all teachers meet the requirements by the end of 2005-2006 school year. On October 21, 2005, Education announced that states may have until the end of the 2006-2007 school year to ensure that all their teachers meet the requirements if they can demonstrate that they are making good-faith effort toward that goal. As evidence of good-faith efforts, states will need to meet the following four conditions: (1) show that the state’s requirements for teachers to demonstrate that they are highly qualified are consistent with the law, (2) meet the requirements for parental notification and public reporting, (3) provide complete and accurate teacher qualification data to Education in January 2006 for the 2004-2005 school year, and (4) take action to ensure that poor and minority students are not taught by teachers who do not meet the requirements at a higher rate than other students. The letter also stated that no federal funds will be withheld from states if they are unable to ensure that all their teachers meet the requirements by the end of 2005-2006 school year, as long as these states are implementing the law and making a good-faith effort to reach that goal. Despite the challenges experienced, state officials reported progress in better positioning themselves to meet NCLBA requirements. Although our 2003 report showed that states we visited generally did not have data systems capable of tracking teacher qualifications for each core subject teachers taught, officials told us that they had improved their data systems since then. All of the states that we visited had either created a new data system or redesigned their existing data systems to collect information required under NCLBA. For example, several states merged their state-level teacher qualification systems with their district-level class assignment systems to enable states to determine whether classes were being taught by teachers who met the requirements. Another state redesigned its data system so that it would capture teachers’ status in meeting the requirements. In addition to improving data systems, state officials also reported taking steps to help more teachers meet the requirements. For example, one of the states developed HOUSSE procedures that could be used to demonstrate subject matter competency across multiple subjects. Under those HOUSSE procedures, the same allowable activities, such as professional development and leadership positions, could be counted for more than one subject. Most states that we visited made some changes in certification requirements or professional development standards to make them more consistent with the requirements of NCLBA. For example, two states created a separate certificate for middle school teachers that incorporated subject matter competency requirements—a change that would ensure that middle school teachers have demonstrated subject matter competency. District officials also reported taking steps, such as changing their personnel policies, to ensure that more of their teachers meet the requirements. For example, officials in two districts told us that they had encouraged principals to consider dismissing teachers who were not on track to meet the requirements. In another state, districts were reassigning teachers to positions for which they met the requirements, and one district’s officials instituted a policy of preventing teachers from transferring to any positions for which they did not meet the requirements. Officials in most districts also told us that they have incorporated NCLBA’s teacher qualification criteria into their screening of new candidates. Further, officials from 6 of the 11 districts that we visited told us that they were reducing the number of teachers with emergency credentials. The 11 districts that we visited used Title II funds to support professional development for teachers, particularly in core academic subjects. Officials in the majority of these districts indicated that NCLBA had led to improvements in the kinds of professional development they funded with Title II funds. Seven of the 11 districts that we visited also continued to use the funds for class size reduction efforts. However, district officials told us that they have begun shifting emphasis from class size reduction to initiatives focused on improving teacher qualifications. Most districts that we visited considered student achievement needs in identifying appropriate uses of Title II funds and targeted the funds to programs designed to help teachers address those needs. Few initiatives in these districts targeted specific groups of teachers, such as teachers in high- poverty schools. In addition to using Title II, district officials told us they used various other funding sources to support their teacher initiatives, including other federal, state, and local funds. All districts that we visited used Title II funds to provide professional development to teachers and focused their efforts on improving the quality of instruction in core academic subjects such as reading and math. For example, one district used Title II funds to provide summer workshops on research-based instructional strategies in reading and paid for instructional coaches to support classroom teachers throughout the year. Two districts reported spending Title II funds on math coaches who perform tasks such as working with teachers to develop lessons that reflected states’ academic standards and assisting them in using students’ test data to identify and address students’ academic needs. In four districts, Title II professional development expenditures included the cost of instructional materials, and in one district Title II funds paid for substitute teachers while regular teachers attended training. In addition to spending for professional development in core academic subjects, officials in 10 of the 11 districts reported using Title II funds on professional development in other areas, such as on general teaching strategies and professional development for nonteaching staff. Most of these districts used at least some Title II funds for professional development that focused on teaching skills and general teaching strategies. For example, one district used Title II funds to support a program for all teachers during their first 3 years of employment with the district, including biweekly workshops on classroom management, student assessment, and parental involvement. Another district used the funds to help teachers understand the instructional needs of gifted and talented students and to adjust teaching methods to best address those students’ needs. Seven districts also used Title II funds to offer professional development for nonteaching staff, such as school administrative personnel. For example, one district coordinated with a postsecondary institution to train assistant principals on becoming more effective educational leaders, while another district used the funds to develop guidance counselors and social workers employed in the district’s schools. Officials in the majority of the districts that we visited told us that NCLBA’s emphasis on student achievement and on strategies supported by research had led to improvements in the kinds of professional development they funded with Title II funds. Officials said they had become much more selective when approving professional development providers, looking for those programs that focused on intensive, research- based instructional strategies. In one district, for example, officials said that before NCLBA, providers were often selected on the basis of their long-standing relationship with the district, whereas now the district approved only those providers whose programs could be substantiated by research-based evidence of effectiveness. They also indicated that they had moved away from onetime workshops and begun to emphasize ongoing professional development that provided teachers with opportunities to reinforce and apply concepts learned. Furthermore, district officials that we interviewed reported greater emphasis on professional development opportunities in core academic subjects in which NCLBA required students to be assessed. While officials in some districts said that they were moving in the direction of higher-quality professional development even before NCLBA, several of them indicated that the passage of the act added urgency to these efforts. Officials in 7 of the 11 districts that we visited told us that they also used Title II funds to hire additional teachers to reduce class size. Districts focused their class size reduction efforts on specific grades, depending on their needs and other funding sources available. For example, one district visited focused its Title II-funded class size reduction efforts on the eighth grade because the state already provided funding for reducing class size in other grades. Officials in another district told us they planned to spend most of their Title II allocation on class size reduction because class size reduction funding from the state was insufficient. While class size reduction may contribute to teacher retention and result in a more individualized approach to student instruction, it also increases the number of classrooms that need to be staffed. As a result, districts that are already having problems with teacher recruitment may find it difficult to find enough teachers who meet NCLBA’s qualification requirements to staff these classrooms. For example, one district visited used about one- third of Title II funds for class size reduction, but district officials indicated that recruitment difficulties forced them to continue to hire teachers who did not meet NCLBA’s qualification requirements. Our previous work found that classroom reduction expenditures amounted to more than 50 percent of total Title II funds that districts spent during 2002-2003 school year, a finding consistent with Education’s review of districts’ Title II spending during the same time period. Officials in states that we visited and educational organization representatives that we interviewed told us that districts continued to spend funds on activities developed under the previous program. However, some state officials told us that they were encouraging districts to expand their traditional uses of these funds and to place a greater emphasis on initiatives designed to increase teachers’ effectiveness in the classroom. In 6 districts that we visited, officials told us that they had begun shifting away from class size reduction efforts to placing greater emphasis on initiatives for existing teachers. For example, 2 of the districts stopped spending Title II funds on class size reduction efforts, and another district planned to eliminate class size reduction expenditures in the next school year. Officials in 2 other districts told us that while they still funded class size reduction efforts, they had reduced the amount of Title II funds they spent for this purpose. District officials indicated that they were now redirecting funds to support initiatives designed to improve teachers’ subject matter knowledge and instructional skills, such as professional development. In addition to undertaking professional development and class size reduction efforts, 6 of the districts that we visited used Title II funds to support recruitment and retention activities. For example, 2 districts used the funds to advertise open teaching positions, as well as to attend recruitment events outside of the district to identify qualified candidates. Another district used Title II funds to expand its alternative certification program, which allowed qualified candidates to teach while they worked to meet requirements for certification. Two districts used Title II funds for bonuses to attract successful administrators. To promote greater retention among new teachers, 3 districts used Title II funds for mentoring activities. For example, 1 of these districts reported using the funds to provide two trained mentors for every new teacher. Ten of the 11 districts that we visited did not use Title II funds to support programs that offered additional pay to teachers based on their performance or other qualifications. A few officials cited reasons for not using such programs, such as the expense or the difficulties in ensuring that they are implemented fairly. Six of the districts that we visited reported taking advantage of NCLBA’s transferability option, with most of them transferring Title II funds into Title V. Under Title V, districts receive funding to support local education reform efforts in a broad range of areas, including activities to improve the academic achievement of all students and raise teacher effectiveness. For example, one district transferred Title II funds into Title V for initiatives designed to address students’ academic needs, such as assessing their reading skills. Districts officials indicated that they preferred to transfer funds into Title V because it afforded them the most flexibility in spending the funds. However, one district transferred Title II funds into Title I to provide academic services in reading and math to middle school students. In addition to participating in activities funded with districts’ own Title II allocations, teachers also took part in activities supported through Title II grants to universities and in state-level Title II initiatives. Three of the four university-based grantees that we visited focused on providing professional development to teachers in math or science. For example, one program reviewed offered a 2-week summer math workshop to prepare teachers for the subject matter exams that, if passed, could be used to demonstrate subject matter competency. Another university grantee developed a standards-based online math program for middle school teachers based on the math questions that students most frequently missed on the state’s assessment. While university officials administering that program said that it could be used for teachers to earn points toward demonstration of subject matter competency under NCLBA, they did not know how many participants in the program had not yet met the requirements or how many districts allowed teachers to apply their participation toward earning points through the state’s HOUSSE. Additionally, states used a portion of Title II funds retained by state departments of education to support professional development for teachers in core academic subjects. In two states that we visited, officials reported that state Title II initiatives specifically targeted teachers who had not met the subject matter competency requirements of NCLBA; these initiatives either offered them professional development in core academic subjects or reimbursed them for taking college courses in the subjects taught. Officials in the districts that we visited said that in deciding what specific initiatives should be funded with Title II funds, such as the types of professional development programs for teachers, they considered student achievement needs and targeted the funds to programs designed to help teachers address those needs. To identify student achievement needs, these officials said that their districts examined students’ results on state assessments and a school’s progress in meeting annual student proficiency goals in core academic subjects, as required under NCLBA. The districts then targeted their Title II funds to programs for teachers to improve instruction in those subjects in which students were lagging behind. For example, officials in one district said that because math was an area in which schools did not meet annual student proficiency goals, the district’s Title II expenditures were targeted to professional development programs in math. In another district, the superintendent indicated that his district had placed the primary focus of its Title II initiatives on reading in early grades because schools in the district had not met reading proficiency goals for elementary students in the past. Some districts considered student achievement results in combination with other factors to identify most appropriate uses of federal funds. For example, officials in one district said that they looked at both schools’ student assessment results and teacher experience levels when deciding where to place Title II- funded instructional coaches. Officials in the districts that we visited said that they involved a variety of stakeholders, such as teachers and parents, to help them identify district needs that could be addressed with Title II funds. The nature of stakeholder involvement varied across the districts that we visited. For example, several districts administered a survey to teachers, parents, and students, asking them about their perceptions of the district and its needs. Another district administered an online professional development survey to its teachers, asking them to assess the type of professional development activities received. District officials said they used the results of these surveys to decide how to best spend Title II funds. In other districts, officials considered stakeholders’ perspectives in less structured ways. For example, in one district that did not have a separate process for gathering stakeholders’ views prior to making funding decisions, officials said that stakeholders’ perspectives were still considered as the result of the superintendent’s regular meetings with school officials and parent groups across the district. While most districts that we visited targeted Title II funds to subject areas that presented academic challenges to students, only a few of the Title II funded initiatives were directed to specific groups of teachers, such as teachers in high-poverty schools or teachers who had not yet met the requirements of NCLBA. One district that we visited targeted Title II dollars to teachers in high-poverty schools, funding initiatives such as reimbursing these teachers for taking college classes necessary for them to meet state certification requirements and providing tuition for teachers in alternative certification programs who agreed to teach in high-poverty schools. In four districts that we visited, officials reported having initiatives specifically for teachers who had not yet met NCLBA’s qualification requirements. Some of these initiatives offered reimbursement to teachers for taking college courses or other professional development that they could use to demonstrate compliance with NCLBA’s requirements. Other initiatives helped teachers prepare for subject matter exams and reimbursed the registration fees of those who passed them to demonstrate subject matter competency in the subject taught. While many professional development programs supported with Title II funds were not necessarily targeted to teachers who still needed to meet the requirements, teachers who had not met the requirements could count their participation toward demonstration of subject matter competency under NCLBA by earning points through their state’s HOUSSE. In each of the districts that we visited, any teacher could participate in at least some professional development or other programs supported with Title II funds, and district officials indicated that they had made efforts to address district-wide teacher needs. Ten of the 11 districts that we visited had a large number of high-poverty schools, and by focusing on districtwide teacher needs, district officials could also address the needs of teachers who provided instruction to low-income students. For example, the superintendent of 1 district, in which all teachers could participate in Title II initiatives, credited the professional development funded through Title II with the narrowing of the achievement gap between the district’s low-income and other students. The statutory formula that states used to allocate Title II funds to the districts takes into consideration their poverty levels, and several officials we interviewed told us they believed Title II funds were generally reaching districts with the greatest need. Title II funds are generally a small part of total funds available to the districts for teacher initiatives, and visited districts used various non-Title II funds to address their teacher needs, including other federal, state, and local funds. In two districts, for example, officials told us that Title II funds represented less than half of all the funds they spent on teacher initiatives. Moreover, districts received federal funds under different programs, and Title II constitutes a relatively small proportion of all federal funds they could use for teacher initiatives. In one district visited, for example, Title II funds constituted about 13 percent of the total federal funds available, with the bulk of the district’s federal money coming from Title I. Our prior work also showed that districts planned to spend much larger percentages of other federal, state, and local funds than Title II funds on teacher- related activities, but in high-poverty districts Title II funds constituted a larger share of total funds spent on these activities than in low-poverty districts. Although Title II was one of many resources available to the districts, many district officials we interviewed said that Title II funds played a significant role in their teacher improvement efforts. For example, officials in one district credited Title II-funded professional development with helping teachers prepare for subject matter tests they needed to pass in order to demonstrate subject matter competency under NCLBA. In another district, officials said that their initiatives to support teachers, such as coaches, would not have been possible without Title II funding. Districts that we visited supported a variety of teacher programs with non- Title II funds. Among other federal funds, Title I was one of the most frequently cited sources for supporting teacher initiatives. For example, two districts used Title I funds to hire coaches or consultants to help individual teachers in high-poverty schools become more effective in the classroom. A few of the initiatives funded with Title I were specifically designed to help teachers meet NCLBA’s qualification requirements. For example, one district used the funds to reimburse teachers who passed the subject matter exam for their registration fees and for taking additional college coursework to help them meet NCLBA’s subject matter competency requirements. In addition to using federal funds, districts also used state funds for teacher initiatives. For example, districts in one state received funds from the state for activities such as professional development to support all beginning teachers. Finally, districts used local and private funds to support various teacher initiatives. For example, one district used local funds to reimburse teachers for taking additional courses to raise their qualifications, while another district used private foundation funds to provide housing allowances for high-performing teachers who accepted positions in the district’s most struggling inner-city schools. Two districts that we visited had implemented or planned to implement differential compensation programs that offered financial rewards to teachers, such as onetime bonuses or salary increases, based on their performance or other qualifications. One school district in Tennessee made recruitment, retention, and salary bonuses available to teachers who had demonstrated a record of effectiveness and taught in some of the district’s neediest schools. To assess teachers’ eligibility for these bonuses, the district used the data showing teachers’ impact on student performance available through the state’s system of measuring students’ achievement gains from year to year. This initiative is currently supported with both Title I and Title II funds. A school district in Colorado approved a plan for a districtwide differential compensation system that would provide teachers with multiple opportunities to increase their yearly pay, including gaining additional knowledge and skills, assuming positions in hard-to-fill subjects or hard-to-staff schools, earning successful performance evaluations, or meeting annual objectives for students’ performance. This initiative will be funded through a local property tax increase that will create a trust fund to ensure that the new pay system can be permanently sustained. While officials in that district acknowledged that Title II funds could be used to support differential compensation initiatives, they indicated that Title II alone could not sustain this system. Officials in the districts that we visited said that they did not look at Title II funds in isolation from other funds when making funding decisions, but rather they attempted to leverage different funding sources available to address their teacher needs. For example, officials in one district said that the district’s use of Title I funds for teacher recruitment purposes allowed them to focus Title II funds on the coaching program for teachers. Education monitored states and offered assistance to help teachers meet NCLBA’s teacher qualification requirements. In its monitoring reports, Education identified areas of concern related to states’ implementation of the teacher qualification requirements. Education’s assistance efforts included professional development opportunities and information packets on NCLBA’s requirements. The agency also conducted site visits to states to discuss NCLBA’s teacher qualification requirements and offer technical assistance. Although several key resources about NCLBA’s teacher requirements can be reached only through Education’s Web site, officials in most states and districts that we visited told us that they had difficulty locating these resources or were unaware of them. Our review of Education’s Web site showed that several key resources on NCLBA’s teacher qualification requirements were located on different Web pages that were not linked, making it challenging to find them. Education provided written feedback to states on their implementation of NCLBA’s teacher qualification requirements through the Title II monitoring process. Education began Title II monitoring in June 2004 and, as of July 15, 2005, had conducted monitoring visits to 29 states and the District of Columbia and released reports documenting findings to 20 of the states. Reports were generally released to states about 1 to 3 months after the monitoring visit. Education officials reported that states had an opportunity to respond prior to the release of monitoring reports, and to develop a plan to address findings. None of our site visit states received a monitoring report in time to be included in this analysis. In these 20 monitoring reports, Education issued findings to states that did not fully implement NCLBA requirements. States most frequently received findings for not ensuring that teachers hired into Title I schools or with Title II funds met the teacher requirements (14 states), as required by NCLBA. Another frequent finding was that state-reported data did not adequately reflect the status of teachers in meeting the requirements (13 states). For example, several states could not report data on the percentage of classes taught by teachers not meeting NCLBA’s teacher qualification requirements for special education or secondary school classes. In addition, some states received findings for not requiring certain teachers to demonstrate subject matter competency as required under NCLBA. For example, 9 states received findings for allowing teachers of history, geography, civics/government, or economics to demonstrate subject matter competency in the broad area of social studies instead of in each subject taught. Seven states received findings for not requiring new elementary school teachers to demonstrate competency in the manner required by NCLBA. Education found that all 7 states had not implemented a test for new elementary school teachers to demonstrate subject matter competency or the test was optional. Eight states received findings related to the demonstration of competency for middle and high school teachers, and 7 states received findings related to the demonstration of competency for special education teachers. In states that did not require certain teachers to demonstrate competency as required by NCLBA, state data do not fully reflect the percentage of classes taught by teachers who met NCLBA teacher qualification requirements. Table 1 lists the major findings related to NCLBA’s teacher qualification requirements. Of the 20 states that received monitoring reports, 19 states did not receive a finding regarding their HOUSSE procedures, even though some experts have questioned the rigor of HOUSSE procedures in many states. Through the monitoring process, Education is reviewing state HOUSSE procedures to ensure that they are consistent with NCLBA’s criteria. Table 2 lists NCLBA’s criteria for state HOUSSE procedures. As long as their HOUSSE procedures meet each of NCLBA’s criteria, states have had flexibility in developing HOUSSE under NCLBA. Among 19 states with HOUSSE procedures that were determined to meet NCLBA’s criteria were one state with a HOUSSE that allowed for evaluations of teachers’ classroom performance and several states in which teachers meet HOUSSE requirements by being fully certified to teach their subject. Education officials noted that evaluations of teachers’ performance could be accepted as part of state HOUSSSE procedures as long as they are rigorous and objective measures of teachers’ subject matter knowledge that are based on multiple observations and performed by trained evaluators. In addition, Education officials told us that while teacher certification in itself would not be sufficient for demonstration of subject matter competency, several states provided evidence that was accepted by Education showing that their certification requirements met the criteria for HOUSSE in the law. In the one state that received a finding related to its HOUSSE, teachers were allowed to earn more than half of the points necessary to meet HOUSSE requirements through experience. The state received a finding because NCLBA does not allow HOUSSE to be based primarily on teaching experience. Eleven of the 20 state monitoring reports included written commendations from Education for state efforts to improve professional development, strengthen teacher preparation, or develop data systems that track teacher qualifications. Eight states received commendation for improving or offering high-quality professional development for teachers. For example, Arkansas was commended for requiring every teacher to complete 60 hours of professional development each year and devoting considerable state funding to professional development. Seven states were commended for strengthening teacher preparation. For example, Georgia was commended for aligning all teacher preparation to state standards for student learning. Six states were commended for new or improved data systems for tracking teacher qualifications. For example, Mississippi received a commendation for tracking teachers’ qualifications, certifications, and assignments, and linking those factors to individual students’ progress. Education offered several types of assistance to help the nation’s 3 million public school teachers meet NCLBA’s teacher qualification requirements, including professional development opportunities. Education offered professional development opportunities workshops in which about 4,500 teachers have participated since June 2004. These workshops and related materials were also made available online free of charge. Teachers accessed these workshops online through Education’s Web site or through www.teacherquality.us, a Web site Education uses to provide information on Education’s teacher initiatives. In addition, teachers can determine whether their state would accept these workshops as credit toward the state HOUSSE requirement online. As of September 2005, all states and the District of Columbia were awarding points for teachers’ participation in these workshops as part of their HOUSSE procedures or for teacher recertification. Education also offered assistance directly to teachers to help them understand NCLBA’s requirements and gave teachers an opportunity to provide feedback about what additional support they need. Education distributed 255,000 “Toolkit for Teachers” information packets that provide information about NCLBA’s teacher qualification requirements. The toolkit addressed frequently asked questions that are relevant to teachers, such as whether NCLBA’s teacher qualification requirements apply to special education teachers. In addition, Education offered a series of teacher roundtables that gave teachers an opportunity to share their views with Education officials on how Education can support them in the classroom. Education provided technical assistance to state officials from all 50 states through site visits by the Teacher Assistance Corps (TAC). TAC visits, which took place prior to Education’s monitoring of NCLBA’s teacher qualification requirements, were intended to help states implement the requirements, according to Education officials. The TAC teams that conducted site visits were composed of Education officials and experts. Education characterized these visits as “conversations without consequences” and did not provide written feedback to states based on the TAC visits. Education officials said that TAC teams discussed HOUSSE procedures, the collection of data on teacher qualifications, the best use of Title II funds, and other issues. Officials from two of the six states that we visited said that TAC suggestions helped them implement their HOUSSE procedures. Three other states that we visited said that TAC teams’ suggestions were not useful in their circumstances. For example, officials in one state said that Education’s suggestion that small rural districts share teachers to ensure that students are taught by teachers who meet NCLBA’s requirements was impractical given the distance between schools. Based on difficulties that states identified during TAC visits, Education offered science teachers and teachers of multiple subjects, including rural teachers, additional flexibility in meeting NCLBA’s teacher requirements. Through TAC visits, Education officials identified state and local initiatives that they considered to be innovative ways of improving teacher qualifications. Such initiatives addressed teacher certification and licensing, professional development, and other topics. In an effort to share information on these state and local initiatives with policy makers or others, Education posted information about these initiatives on www.teacherquality.us. Education has provided guidance and hosted meetings for state officials on the implementation of NCLBA’s teacher qualification requirements. Education’s guidance answered questions about NCLBA’s teacher qualification requirements and Title II, such as when teachers with alternative certification can be considered as having met NCLBA’s teacher requirements. Education officials reported that they update their guidance periodically to answer new questions about the teacher requirements, most recently in August 2005. In addition, Education convenes state Title II directors once a year to provide updates on the implementation of NCLBA’s teacher requirements. Education has also funded several projects that work to improve the preparation and increase the numbers of special education teachers. For example, one center compared special education teachers prepared in alternative certification programs with their counterparts from traditional preparation programs. According to Education officials, Education’s Web site has been an important part of their outreach efforts regarding NCLBA’s teacher qualification requirements. Several of the resources related to implementation of the teacher qualification requirements, such as the Teacher Toolkit and state innovative practices, are now available only through Education’s Web site. However, officials from most states and districts that we visited who use Education’s Web site to access information on teacher programs or requirements told us that they were unaware of some of Education’s teacher resources or had difficulty accessing those resources. For example, although all of the states we visited accepted Education’s professional development for credit toward recertification or HOUSSE, district officials from only 3 of the 11 districts we spoke with were aware of these opportunities or that they were available online. Moreover, officials in 4 of the states that we visited told us that they wanted to know more about other states’ initiatives to improve teacher qualifications but were not aware that Education had made this information available online or did not know how to access the information. In the states that we visited, several state and local officials mentioned that they attempted to find information by using Education’s search function but often had trouble finding what they needed. In our review of Education’s Web site, we found that information and resources on the teacher qualification requirements were located on several different Web pages that sometimes were not linked, making the information difficult to locate. For example, state initiatives were available through the “Teachers” section of Education’s Web site and not through the “Administrators” section, even though state and local administrators would likely find this information more useful than teachers would. See figure 4 for the description of teacher qualification information included on different sections of Education’s Web site. Since we last reported on the status of implementing the teacher qualification requirements in our 2003 report, state and district officials have taken steps to implement these requirements, such as reducing the number of uncertified teachers and developing data systems to track teachers’ qualifications. In addition, Education officials indicated that states have taken steps to raise teacher qualifications through changes in state certification systems. Although states have made progress in tracking teacher qualifications data and reporting on their status in meeting the requirements, difficulties remain in identifying teachers who do not meet the requirements. This may be a challenge, particularly because a number of states did not include all teachers in their calculations or faced other data issues. Where data challenges exist, Education and the states may not have the information necessary to direct assistance to where it is most needed. This may result in some teachers not receiving appropriate support to help them meet the requirements. Education is working on identifying data challenges and addressing them through its monitoring visits and other technical assistance to states. Until these data issues are resolved, state reports on their status in meeting the teacher qualification requirements should be viewed as preliminary. To facilitate state and district implementation efforts, Education relies extensively on its Web site as one of its principal means for providing information and implementation resources for states and districts. However, state and district officials told us that they were unaware of some of the information resources that Education made available and had difficulty locating other known sources of information on Education’s Web site. Consequently, states and districts may not be taking full advantage of the opportunities and flexibilities made available by Education that would help them meet teacher qualification goals. Further, without this information, some states and districts may not be correctly applying the requirements, thus jeopardizing the ability of their teachers to meet the requirements by the deadline. This may impede efforts to increase student performance and ensure that all students reach state standards. Finally, even when all teachers have met NCLBA’s qualification requirements, it is unclear whether their doing so will have the expected effect on student performance. Under the law, states have considerable flexibility in developing requirements for teachers to demonstrate subject matter competency. The rigor of these requirements varied across states. Consequently, it remains to be seen how different state requirements will affect the quality of instruction and student performance. We recommend that the Secretary of Education explore ways to make the Web-based information on teacher qualification requirements more accessible to users of its Web site. Specifically, the Secretary may want to more prominently display the link to state teacher initiatives, as well as consider enhancing the capability of the search function. We provided a draft of this report to Education for review and comment. In its letter, Education agreed with our recommendation, indicating that the department has already taken steps to address it. Specifically, the department is reviewing how teacher qualification information on the “Teachers” section of its Web site can be better integrated with related information on other Web sites, including teacherquality.us. Education’s written comments are reproduced in appendix IV. We are sending copies of this report to the Secretary of Education, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-7215 if you or your staff have any questions about this report. Other contacts and major contributors are listed in appendix V. Table 3 lists our summaries of the authorized activities on which states can spend Title II funds and shows the five categories we used to group them. After reserving 1 percent of the total Title II allocation to the state for administrative activities, states retain only 2.5 percent of the remaining 99 percent for state activities. Table 4 lists our summaries of the authorized activities on which districts can spend Title II funds and shows the two categories we used to group them. After reserving 1 percent of the total Title II allocation to the state for administrative activities, states allocate 95 percent of the remaining 99 percent to the districts. These data exclude classes that have students from both elementary and secondary grades. Np = data were not provided by the states. Harriet Ganson (Assistant Director) and Natalya Barden (Analyst-in- Charge) managed all aspects of the assignment. Scott Spicer, Katharine Leavitt, and Deborah Edwards made significant contributions to this report. Other key contributors to this report included Jessica Botsford, Richard Burkard, Emily Leventhal, Jonathan McMurray, Jean McSween, John Mingus, and Shannon VanCleave. No Child Left Behind Act: Education Could Do More to Help States Better Define Graduation Rates and Improve Knowledge about Intervention Strategies. GAO-05-879. Washington, D.C.: Sept. 20, 2005. No Child Left Behind Act: Most Students with Disabilities Participated in Statewide Assessments, but Inclusion Options Could Be Improved. GAO-05-618. Washington, D.C.: July 20, 2005. Charter Schools: To Enhance Education’s Monitoring and Research, More Charter School-Level Data Are Needed. GAO-05-5. Washington, D.C.: Jan. 12, 2005. No Child Left Behind Act: Education Needs to Provide Additional Technical Assistance and Conduct Implementation Studies for School Choice Provision. GAO-05-7. Washington, D.C.: Dec. 10, 2004. No Child Left Behind Act: Improvements Needed in Education’s Process for Tracking States’ Implementation of Key Provisions. GAO-04-734. Washington, D.C.: Sept. 30, 2004. No Child Left Behind Act: Additional Assistance and Research on Effective Strategies Would Help Small Rural Districts. GAO-04-909. Washington, D.C.: Sept. 23, 2004. Special Education: Additional Assistance and Better Coordination Needed among Education Offices to Help States Meet the NCLBA Teacher Requirements. GAO-04-659. Washington, D.C.: July 15, 2004. Student Mentoring Programs: Education’s Monitoring and Information Sharing Could Be Improved. GAO-04-581. Washington, D.C.: June 25, 2004. No Child Left Behind: More Information Would Help States Determine Which Teachers Are Highly Qualified. GAO-03-631. Washington, D.C.: July 17, 2003. Title I Characteristics of Tests Will Influence Expenses; Information Sharing May Help States Realize Efficiencies. GAO-03-389. Washington, D.C.: May 8, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. 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 No Child Left Behind Act (NCLBA) of 2001 established qualification requirements that teachers of core academic subjects must meet by the end of the 2005-2006 school year. Congress has appropriated approximately $3 billion a year through the Title II, Part A (Title II), of NCLBA for teacher improvement programs since the law was passed. With the deadline approaching for all teachers to meet the requirements, GAO was asked to examine (1) the status of state efforts to meet NCLBA's teacher qualification requirements, (2) the use of Title II funds in selected districts, and (3) how the U.S. Department of Education (Education) monitors states and assists them with implementation of the requirements. To obtain this information, GAO reviewed teacher qualifications data submitted to Education by 47 states, conducted site visits to 6 states selected for variance in factors such as teacher requirements and geographic location, visited 11 school districts across these states identified as high-need, and interviewed national experts and Education officials. Data reported to Education by 47 states suggest that the majority of core academic classes were taught by teachers who met NCLBA requirements during the 2003-2004 school year. States have improved in their ability to track and report the percentage of core academic classes taught by teachers who met NCLBA qualification requirements, but several limitations on the quality and precision of state-reported data make it difficult to determine the exact percentage of core academic classes taught by teachers meeting the requirements. Five of the 6 states that we visited allowed veteran teachers to demonstrate subject matter competency through a state-developed procedure called High Objective Uniform State Standard of Evaluation (HOUSSE). Officials in states and districts that we visited said that teachers of multiple subjects, such as teachers in rural schools with a small teaching staff, would likely face challenges meeting the requirements by the 2005-2006 deadline. The 11 school districts that we visited all used Title II funds to provide professional development, and most used Title II funds to reduce class size. Officials in the majority of these districts indicated that NCLBA had led to improvements in the kinds of professional development they funded with Title II funds. Although officials in over half of the districts indicated that they continued to use Title II funds to reduce class size, an activity that was supported under a federal program that predated NCLBA, some district officials told us that they had shifted funds away from class size reduction to initiatives designed to improve teachers' subject matter knowledge and instructional skills, such as professional development. All districts that we visited reported considering student achievement data and targeting Title II funds to improve instruction in the academic subjects in which students were lagging behind. In the 11 districts, few efforts funded with Title II targeted specific groups of teachers, such as teachers in high-poverty schools. Title II funds constituted a small proportion of total funds that districts could use for teacher improvement initiatives, and all districts that we visited used several other funding sources to support their teacher programs. Education monitored state efforts to meet the teacher qualification requirements and offered multiple types of assistance to help teachers meet the requirements. In monitoring states, Education has found several areas of concern, such as states not ensuring that certain newly hired teachers met NCLBA's requirements. Education's assistance has included professional development for teachers and site visits to provide technical assistance to state officials. Education officials said that their Web site has been an important tool for disseminating resources about the requirements, but officials from most states and districts that we visited told us that they were unaware of some of these resources or had difficulty locating them, despite frequently using the Web site. |
The three stamps issued thus far in the nation’s semipostal program have all been authorized through separate congressional acts pertaining solely to those stamps. The Stamp Out Breast Cancer Act required that the Service issue a Breast Cancer Research stamp, the nation’s first semipostal. Two additional semipostals—the Heroes of 2001 and Stop Family Violence stamps—were mandated by Congress in the 9/11 Heroes Stamp Act of 2001 and the Stamp Out Domestic Violence Act of 2001. Figure 2 shows the three semipostals. Following the authorization of these semipostals by Congress, a number of stakeholders became involved with the semipostals, including the Service, designated federal agencies, and advocacy groups. For example, after Congress mandated the semipostals, the Service issued the stamps and then transferred semipostal proceeds to the designated federal agencies, which then directed the funds toward the identified causes. Additionally, advocacy groups involved with the charitable causes have assisted in promoting the semipostals. Table 1 identifies the various stakeholders and summarizes their primary roles related to the semipostals. Authorized for 2 years in 1998, the Breast Cancer Research stamp has subsequently been reauthorized three times, and there are proposals in Congress to further extend the sales period through December 31, 2007. The Breast Cancer Research stamp raises money for breast cancer research programs at NIH and DOD, with the former receiving 70 percent of the funds raised and the latter receiving the remaining 30 percent. The Heroes of 2001 stamp was offered for sale from June 7, 2002, to December 31, 2004, and funds raised were transferred to FEMA to provide assistance to the families of emergency relief personnel who were killed or permanently disabled in the line of duty in connection with the terrorist attacks against the United States on September 11, 2001. The Service started selling the Stop Family Violence stamp on October 8, 2003, and it is scheduled to expire on December 31, 2006. Proceeds from the Stop Family Violence stamp are being transferred to HHS for domestic violence programs. For a period of just over 1 year, between October 8, 2003, and December 31, 2004, all three semipostals were on sale simultaneously. Figure 3 shows the authorized sales periods for each of the semipostals. Separately from the provisions that authorized the three semipostals, the Semipostal Authorization Act gave the Service the authority to issue semipostals that it considers to be appropriate and in the national public interest; however, the Service has not yet exercised this authority. Further, the Service has indicated that it does not plan to issue any semipostals under its own authority until sales of the Breast Cancer Research stamp and other congressionally authorized semipostals have concluded. However, legislative proposals to establish new semipostals continue to be made. In the 109th Congress, for example, a bill has been introduced to establish a new semipostal to benefit the Peace Corps. In February 2005, the House Committee on Government Reform, the oversight committee for the Service, adopted a rule that stated that the Committee will not give consideration to legislative proposals specifying the subject matter of new semipostals. That rule also stated that the Service should determine the subject matter of new semipostals. In September 2005, a bill was introduced to establish a semipostal to provide disaster relief for residents of Louisiana, Mississippi, and Alabama who were affected by Hurricane Katrina. The proceeds are to be transferred to the American Red Cross Disaster Relief Fund for Hurricane Katrina, which is not a government entity. This contrasts with the existing semipostals that transfer their proceeds to designated federal agencies. In our previous work, we reported that the Breast Cancer Research stamp has been an effective fund-raiser and that funds raised through sales of the stamp had contributed to key insights and approaches for the treatment of breast cancer. Most of the key stakeholders we spoke with and, according to our survey, members of the public viewed the stamp as an appropriate way of raising funds for a nonpostal purpose. We expressed some concerns, however, about the Service’s identification and recovery of costs associated with carrying out the act. We recommended that the Service reexamine and, as necessary, revise its Breast Cancer Research stamp cost- recovery regulations. We also suggested that Congress consider establishing annual reporting requirements for NIH and DOD. Semipostals have raised over $56 million to date, and sales were likely impacted by several factors. In addition to variations in the amounts raised by each of the semipostals, sales patterns were also different, and on the basis of our discussions with Service officials, advocacy groups, and other stakeholders, we identified four key factors that affected sales, including (1) fund-raising cause, (2) support of advocacy groups, (3) stamp design, and (4) Service promotional activities. The funds raised by the semipostals vary from $44 million for the Breast Cancer Research stamp to over $10.5 million for the Heroes of 2001 stamp and nearly $2 million for the Stop Family Violence stamp, totaling over $56 million. The length of time that each semipostal has been sold affected the amounts raised: the Breast Cancer Research stamp has been available for 7 years, the Heroes of 2001 stamp was available for just over 2½ years, and the Stop Family Violence stamp has been available for under 2 years. Semipostal sales patterns reveal marked differences. Breast Cancer Research stamp sales have fluctuated since the semipostal’s issuance in 1998 but have remained at a comparably high level over time (see fig. 4). The Heroes of 2001 and Stop Family Violence stamps each had initial sales surges—although at much different levels—with subsequent declines. Sales of the Breast Cancer Research stamp have averaged over 22 million semipostals per quarter since it was issued in 1998, with total sales of 606.8 million semipostals by May 31, 2005. Sales of the Heroes of 2001 stamp averaged over 13 million semipostals per quarter throughout its sales period and totaled 132.9 million, although over 50 percent of total sales occurred in the first two-quarters after issuance in 2002. Finally, as of May 31, 2005, sales of the Stop Family Violence stamp have averaged over 4 million semipostals per quarter and total 25.3 million since issuance. Public awareness about the fund-raising causes represented by the semipostals likely affected sales levels. The two semipostals addressing causes with high levels of public awareness—finding a cure for breast cancer and supporting the families of September 11 emergency personnel—had higher sales than the Stop Family Violence stamp, which raises funds for domestic violence programs, a cause that, while well known, has a lower profile. An official with the Komen Foundation pointed out that in the case of the Breast Cancer Research stamp, the fact that about one in eight women are affected by breast cancer keeps the subject in the public spotlight. Likewise, the national significance of the events surrounding the September 11 terrorist attacks ensured a high level of public awareness regarding the cause represented by the Heroes of 2001 stamp. In contrast, Service officials pointed to the lack of general coverage about domestic violence, which may have limited sales of the Stop Family Violence stamp. The appeal of the particular fund-raising cause was also a factor affecting semipostal sales. While the Breast Cancer Research and Heroes of 2001 stamps were associated with causes that generate a strong and supportive response, the Stop Family Violence stamp deals with a cause that may evoke a more complex response. Officials with the Association of Fundraising Professionals noted that certain causes generate a greater response than others, regardless of fund-raising methods. According to an official with the BBB Wise Giving Alliance, for example, four popular fund- raising causes currently are cancer, children’s issues, relief efforts, and animals, although the popularity of fund-raising causes fluctuates over time. Such an impact can be particularly acute for campaigns that use affinity fund-raising, whereby donors demonstrate their support for a specific cause with a public sign of their commitment. Fund-raising experts we spoke with at the Association of Fundraising Professionals stated that semipostals are examples of this kind of effort, and officials with the American Red Cross noted that other well-known examples of such marketing include the Lance Armstrong Foundation’s LiveStrong yellow bracelets and pink breast cancer awareness ribbons. Such branding can be problematic, however, for causes that, for a variety of reasons, may be more difficult to embrace. For example, officials with the National Coalition Against Domestic Violence and the Service mentioned that consumers may be reluctant to use the Stop Family Violence stamp given that the fund-raising cause is particularly sensitive. Service officials noted that some consumers pay close attention to the ways in which stamps can send intended or unintended messages about the sender or receiver of letters. The difference in appeal between fund-raising causes can also be seen in the degree to which they readily attract support or promotion by businesses or organizations. In the case of the semipostals, American Express and NASCAR approached the Service about partnership promotions for the Breast Cancer Research and Heroes of 2001 stamps, respectively. The partnerships resulted in promotion for the semipostals, done largely at the expense of the Service’s partners, who were able to affiliate themselves with these popular causes. American Express advertised the Breast Cancer Research stamp in print and inserts, while NASCAR placed an image of the Heroes of 2001 stamp prominently on a stock car at very little cost to the Service (see fig. 5). The Service did not receive any comparable offers in support of the Stop Family Violence stamp. While awareness and appeal may affect the size of the response, the length of the response may be related to another characteristic: whether the fund- raising cause is for an episodic event, such as a disaster, or for an ongoing concern, such as finding a cure for a disease. The Heroes of 2001 stamp sales reflected the dramatic emotional spike typically associated with episodic events, with fund-raising efforts building quickly and then declining as events begin to retreat from the public spotlight or become affected by subsequent developments, according to officials with the American Red Cross and the BBB Wise Giving Alliance. These organizations pointed to the fund-raising efforts generated by the December 2004 tsunami as an example of another episodic event, noting that the tsunami fund-raising surge lasted about 30 days. Officials with the Association of Fundraising Professionals told us that such fund-raising spikes are common for one-time events. More specifically, many September 11 fund-raising efforts experienced the same initial surge and the subsequent decline that the Heroes of 2001 stamp experienced, according to representatives with the New York City Police Foundation, the September 11th Families Association, and the National Association of Fallen Firefighters. By contrast, ongoing causes, such as finding a cure for breast cancer, are more likely to have staying power over time, according to fund-raising experts. Sales of the semipostals were likely affected by the capacity of advocacy groups working to promote them. Several of the breast cancer advocacy groups supporting the Breast Cancer Research stamp have large networks of members and have promoted the semipostal at events involving thousands of participants. For example, the Komen Foundation, an active supporter of the semipostal, has more than 80,000 individuals in an online advocacy group involved in lobbying to extend sale of the semipostal. The foundation also conducts “Race for the Cure” events around the world, with more than 1 million walkers or runners participating each year since 2000; and a partnership effort between the Komen Foundation and Yoplait (and its parent company General Mills) has contributed over $14 million to the breast cancer cause over 7 years. In contrast, family violence prevention groups tend to be smaller, according to officials with the Association of Fundraising Professionals. The National Resource Center on Domestic Violence noted that it has a mailing list of about 5,000 to which it has sent information about the Stop Family Violence stamp; and another group, the National Domestic Violence Hotline, provided information about the semipostal to over 100 local domestic violence programs. Further, an official with the National Coalition Against Domestic Violence described a cell phone donation program that earned about $2 million over 6 or 7 years. Finally, Service officials noted that there were no organized groups to coordinate with when the Heroes of 2001 stamp was developed. Beyond the capacity of advocacy groups, the specific efforts undertaken in support of the semipostals by such groups over time likely affected sales. Several breast cancer advocacy groups have actively supported the Breast Cancer Research stamp since its issuance, while comparatively less was done by advocacy groups to support the Heroes of 2001 or Stop Family Violence stamps, which may account for their declining sales trends. Service officials link semipostal sales to the support of advocacy groups. Several breast cancer advocacy groups that we spoke with mentioned carrying on activities to promote the Breast Cancer Research stamp. (Table 2 provides examples of these activities.) Likewise, Service officials stated that grassroots support given to the Breast Cancer Research stamp helps to explain its long-term success, pointing to the organized support of the semipostal by breast cancer advocacy groups and individuals, which has included use by doctors’ offices, sponsored walks and runs, and activities surrounding Breast Cancer Awareness Month. None of the advocacy groups affiliated with emergency personnel affected by the terrorist attacks of September 11 that we spoke with regarding the Heroes of 2001 stamp had engaged in promotional activities for the semipostal. The advocacy groups we spoke with were aware that the funds raised through sales of the semipostal were to be directed to September 11 emergency responders in some capacity, but they were unaware of the specifics of how the proceeds would be used. Like the Stop Family Violence stamp, sales of the Heroes of 2001 stamp did not have the boosts in sales seen periodically with the Breast Cancer Research stamp, although its initial sales were higher. The semipostal’s limited staying power may have reflected the lack of advocacy group activity on behalf of the semipostal. Several domestic and family violence advocacy groups mentioned that while they had intended to support the Stop Family Violence stamp with promotional activities, they have done less than originally planned. Confusion about how Stop Family Violence stamp proceeds would be used led some domestic and family violence advocacy groups to limit their promotional activities on behalf of the semipostal. As a result, although some local advocacy groups carried out promotional activities with local post offices, such as semipostal unveiling ceremonies, the national domestic or family violence groups that we spoke with typically limited their promotional activities to articles in newsletters or features on group Web sites. Some domestic and family violence advocacy groups acknowledged that they could have done more to promote the Stop Family Violence stamp and that the semipostal’s sales were likely adversely affected by this lack of promotion. The designs of both the Breast Cancer Research and Heroes of 2001 stamps were lauded by stakeholders; however, there was concern that the design of the Stop Family Violence stamp may have negatively affected sales of that semipostal. Both the Breast Cancer Research and Heroes of 2001 stamps had designs that were praised by stakeholders as having inspiring images that conveyed some information about where proceeds would be directed. Consumers could assume that funds would go to breast cancer research or September 11 emergency personnel in some capacity, according to officials with the American Red Cross. However, officials with the Association of Fundraising Professionals noted that the exact use of the funds was not clearly spelled out on either semipostal. Further, in-store messaging also provided limited information. (See fig. 6 for an example of an in-store counter card featuring the semipostals.) In contrast, although the design of the Stop Family Violence stamp won an international award, and the story behind the design was described as inspiring by some advocacy groups, advocates with such organizations as the Family Violence Prevention Fund and the National Network to End Domestic Violence questioned how likely postal customers would be to buy the stamp to use on their mail, given the image of a crying child. In addition, the semipostal’s design and information provided by the Service on in-store materials are less clear regarding how semipostal proceeds are to be used,referring to both domestic and family violence, which are viewed by some as separate causes. Both the Breast Cancer Research and Heroes of 2001 stamps had extensive Service advertising campaigns. The Service spent nearly $900,000 to advertise the Breast Cancer Research stamp and more than $1.1 million for the Heroes of 2001 stamp. This advertising included a billboard in Times Square for the Breast Cancer Research stamp and a national print advertising campaign for the Heroes of 2001 stamp. The Service also received the Gold “Reggie” award from the Promotion Marketing Association for the Service’s efforts in promoting the Breast Cancer Research stamp. As the result of an overall reduction in the Service’s budget, advertising for all stamps, including semipostals, has been limited to in-store messaging since 2003. As a consequence, Service officials determined that all funds spent to advertise semipostals would be deducted from the totals raised through their sales. This policy change had a marked impact on promotional activities for the Stop Family Violence stamp, which was issued in October 2003. While advertising costs associated with the Breast Cancer Research and Heroes of 2001 stamps had been paid by the Service, all advertising costs for the Stop Family Violence stamp were to be deducted from the stamp’s proceeds. In light of these limitations, the Service met with HHS before the Stop Family Violence stamp was issued. At this meeting the Service proposed spending $1.5 million or more on an advertising campaign that would be funded by the future semipostal proceeds. Because of uncertainty about how much money would be raised through sales of the Stop Family Violence stamp, HHS decided that the proposed advertising campaign not be pursued. In lieu of such a campaign, the Service and HHS looked to the advocacy groups to promote the semipostal. The Service and HHS officials met with advocacy group representatives and provided them with examples of the types of promotional activities that breast cancer advocacy groups had done to help publicize the Breast Cancer Research stamp and a poster for use in promotional activities. Through March 31, 2005, the Service spent about $77,000 to advertise the Stop Family Violence stamp, and this amount was recovered from semipostal proceeds. Table 3 provides examples of Service promotional efforts and partnerships in support of the semipostals. Service officials said that differences in sales among the three semipostals were not the result of the level of actions on the part of the Service. They said a semipostal’s success is dependent on the support provided by external groups or individuals. Service officials point out that for each semipostal, the Service issued a field and press kit and met with officials from the agencies receiving semipostal proceeds. In addition, the Service initiated kickoff events for each of the semipostals at the White House, with involvement from either the President or First Lady (see fig. 7). Finally, Service officials noted that local post offices are available to sponsor local events at the discretion of the postmaster. For example, the Service’s South Georgia District employees established the “Circle of Hope” campaign to promote and raise funds for the Breast Cancer Research stamp. In 2004, the campaign raised an estimated $21,000 in proceeds through stamp sales. Likewise, the Cardiss Collins Postal Facility in Chicago held a rededication ceremony for the Stop Family Violence stamp on August 2, 2005, in collaboration with the Illinois Secretary of State and officials from the Chicago Abused Women Coalition and the Chicago Police Department. The federal agencies receiving semipostal proceeds currently award or plan to award these funds using grants, and although each agency has collected and maintained information on semipostal proceeds, none has reported specifically on their use of proceeds thus far. NIH and DOD use Breast Cancer Research stamp proceeds to award research grants under existing programs. HHS has not distributed any proceeds from the Stop Family Violence stamp, but officials reported that they have established new grants within an existing program to award grants for domestic violence programs. While the other semipostals address ongoing causes, the Heroes of 2001 stamp raised funds for an episodic event without an established mechanism for distributing such funds. As a result, FEMA is establishing a new program and accompanying regulations for distributing Heroes of 2001 stamp proceeds to families of emergency relief personnel who were killed or permanently disabled in the line of duty in connection with the September 11 terrorist attacks. The laws authorizing these three specific semipostals do not include reporting requirements such as those of the Semipostal Authorization Act. Of the four agencies, FEMA and HHS have plans to report specifically as to the use of semipostal proceeds. Both NIH and DOD reported that they began receiving Breast Cancer Research stamp proceeds from the Service in November 1998, and breast cancer research grants have been awarded using established programs at both agencies since June 2000 and June 1999, respectively. NIH initially directed these proceeds to the National Cancer Institute (NCI) to award high-risk research grants through the “Insight Awards to Stamp Out Breast Cancer” initiative. This initiative was specifically designed for the Breast Cancer Research stamp proceeds, but exists within NCI’s grants program. One example of these grants includes funding research related to the development of a potential antitumor drug. In 2003, NIH approved new Breast Cancer Research stamp grants through the “Exceptional Opportunities in Breast Cancer Research” initiative, also administered by NCI, which uses semipostal proceeds to fund more traditional research. According to NIH officials, this change was made when it was determined that there were highly meritorious research applications outside the funding ability of NCI, and they noted that many outstanding grant applications would remain unfunded without the use of semipostal proceeds. Exceptional Opportunities awards have covered breast cancer research areas that include prevention, diagnosis, biology, and treatment. DOD uses Breast Cancer Research stamp proceeds to fund innovative approaches to breast cancer research through “Idea Award” grants under its existing Breast Cancer Research Program, which is administered by the U.S. Army Medical Research and Materiel Command. The scope of the grants has not changed since DOD began awarding them in 1999. Table 4 contains additional information about these initiatives and the size and number of grants awarded with Breast Cancer Research stamp proceeds. Since NIH and DOD both apply Breast Cancer Research stamp proceeds to established grant programs the agencies used existing procedures and regulations for awarding grants funded with the proceeds. For example, both agencies use existing review procedures to evaluate grant applications with input from advocacy groups. NIH and DOD officials stated that advocacy groups play an important role, and both agencies involve advocacy groups in their grants processes. Grants funded by NIH and DOD using Breast Cancer Research stamp proceeds have produced significant findings in breast cancer research. The first NIH Exceptional Opportunities Awards funded with Breast Cancer Research stamp proceeds were distributed in fiscal year 2003 and are awarded for a maximum of 4 years; therefore, it is still too early to report results from these awards. Both NIH and DOD use existing programs and processes such as monitoring grantees and requiring annual grantee reporting, which has made measuring grant performance and tracking grant outcomes relatively straightforward. Officials at each agency were pleased to gain new sources of funding and pleased that there have been some significant findings in the field of breast cancer research resulting from these awards. Table 5 provides select examples of research findings from NIH Insight Awards and DOD Idea Awards funded with Breast Cancer Research stamp proceeds. HHS began receiving Stop Family Violence stamp proceeds from the Service in May 2004, and, as of July 2005, HHS has not yet awarded any grants using semipostal proceeds. HHS is using an established grant program, the Family Violence and Prevention Services Program, to make the proceeds available at the end of fiscal year 2005 for grants aimed at enhancing services to children exposed to domestic violence. As of June 30, 2005, the Service had transferred about $1.8 million to HHS, and the agency has directed these proceeds to ACF, which is responsible for distributing the funds. In June 2005, ACF released an announcement for the grants, and ACF officials stated that they expect the first grants to be awarded during the end of fiscal year 2005. The purpose of the grants is to provide enhanced services and support to children who have been exposed to domestic violence in order to mitigate the impact of such exposure and increase the opportunities for these children to lead healthy lives as adults. Grant applicants are required to collaborate with a state’s domestic violence coalition and the state agency responsible for administering family violence programs. According to agency officials, it has always been ACF’s intention to use Stop Family Violence proceeds for enhanced services to children. Table 6 provides additional information about the ACF grants, to be awared including the size and number of awards. According to ACF officials, the agency used an established program to develop its grants to award Stop Family Violence stamp proceeds. The officials stated that ACF is using existing competitive review procedures to evaluate grant applications. These review procedures are described in the grant announcement, which was developed through ACF’s existing grant application process and made available on ACF’s Web site. ACF also plans to use its existing project grant reporting system to monitor grantee performance (see table 6). ACF consulted with domestic violence advocacy groups, state agencies, and state domestic violence coalitions on the current distribution of children’s services offered by domestic violence organizations and solicited their input on a fair and equitable method for grant participation. Although ACF involved advocacy groups in developing the way that semipostal funds could be used initially, many groups that we spoke with in the spring of 2005 expressed concern about how the Stop Family Violence stamp proceeds would be spent. Some national domestic violence groups reported that they were unaware of ACF’s intentions for semipostal proceeds because no semipostal grants have been announced and no funds had been spent. FEMA started receiving Heroes of 2001 stamp proceeds from the Service in November 2002, and FEMA has not yet distributed any of the semipostal proceeds. To determine the total amount of funds available, FEMA officials stated that the agency made a decision to wait until the Service had transferred all semipostal proceeds—in May 2005—before finalizing its grants program. Following the final transfer, FEMA had received over $10.5 million in semipostal proceeds. FEMA is establishing a program to make grants available to eligible emergency relief personnel who are permanently disabled or to the families of emergency relief personnel who were killed as a result of the terrorist attacks of September 11. According to FEMA officials, while distributing funds to disaster victims is within the scope of FEMA’s mission, distributing the semipostal proceeds is not within the scope of its disaster authority. As a result, FEMA has had to establish a new program with new regulations for semipostal proceeds, which includes establishing the mechanism through which the funds would be distributed. After undergoing regulatory review at the Office of Management and Budget (OMB), FEMA’s interim rule for their assistance program under the 9/11 Heroes Stamp Act of 2001 was made publicly available on July 26, 2005. The interim rule states that FEMA intends to distribute all Heroes of 2001 stamp proceeds equally among all eligible claimants. Table 7 provides additional information about the FEMA grants. When designing its program and regulations, FEMA officials stated that the agency considered the findings resulting from the Department of Justice September 11th Victim Compensation Fund of 2001, which provided over $7 billion in compensation to victims of the terrorist attacks. One of the observations detailed in the Final Report of the Special Master for the September 11th Victim Compensation Fund of 2001 is that there are serious problems posed by a statutory approach mandating individualized awards for each eligible claimant and that a better approach might be to provide the same amount for all eligible claimants. Prior to publicizing its interim rule, FEMA had informal discussions with stakeholder groups, and FEMA officials also stated that the program regulation would be available for public comment. New York City police, firefighter, and representatives of victims’ foundations whom we spoke with expressed some concern regarding FEMA’s use of the proceeds, because they were unaware if FEMA planned to allocate the Heroes of 2001 stamp proceeds through assistance programs or grants to individual families. These groups also noted that since the September 11 terrorist attacks, there has been an evolving set of needs that have little funding support, including long-term programs such as counseling and health care for emergency relief personnel involved in the September 11 recovery and clean-up efforts. None of the designated federal agencies receiving semipostal proceeds is required to issue a report to Congress detailing how these funds are used or any accomplishments resulting from semipostal-funded grants. The agencies would face such a reporting requirement if the three existing semipostals had been authorized under the Semipostal Authorization Act. Specifically, the act contains an accountability mechanism consisting of annual reports to include (1) the total amount of funding received by the agency, (2) an accounting of how proceeds were allocated or otherwise used, and (3) a description of any significant advances or accomplishments during the year that were funded—in whole or in part—with funds received. However, the laws that created the three semipostals did not specify any reporting requirements, and the agencies themselves have decided to take varying actions in this regard. NIH and DOD do not report specifically on the use of semipostal proceeds, though the agencies do collect information that, if necessary, could be assembled for such a report. To help manage their respective grant programs, NIH and DOD require award recipients to provide periodic reports on research progress and any breakthroughs achieved. Research findings from grants funded by Breast Cancer Research stamp proceeds can be found in some NIH publications, but the agency does not report specifically on its use of these funds. DOD provides limited information on its Idea Awards through annual reports on its Congressionally Directed Medical Research Programs. This reporting is limited to the number of Idea Awards and does not provide information on which awards are funded with Breast Cancer Research stamp proceeds. ACF plans to monitor grantee performance and to report on its use of semipostal proceeds through HHS’ grants system and will make an additional report available to Congress. Although FEMA initially indicated to us that the agency was not required to report on its use of semipostal proceeds, FEMA recently provided information to Congress—in part as a result of our work—on the total proceeds received from the sales of the Heroes of 2001 stamp. FEMA officials have indicated that once proceeds have been distributed, a report will be provided to Congress on the status of the 9/11 Heroes Stamp Act of 2001. According to FEMA officials, the report will summarize the agency’s Heroes of 2001 stamp program including information on its development, the process undertaken, and who is receiving the semipostal proceeds. Various fund-raising organizations that we spoke with indicated that program reporting is a useful accountability tool and may lead to greater fund-raising success. For example, the BBB Wise Giving Alliance, a charity watchdog group, recommends reporting requirements, in the form of annual reports, for charitable organizations to ensure that representations to the public are accurate, complete, and respectful. These reports should be made available to all, on request, and should include the organization’s mission, a summary of the past year’s accomplishments, and financial information. Further, officials with the American Red Cross stated that disclosure provides transparency, allowing consumers to determine if the cause is the best use of their money, and Association of Fundraising Professional officials noted that such reporting can even secure additional support by encouraging more people to contribute to the effort. While many of the agency officials, fund-raising groups, and charitable organizations that we contacted believe that the semipostals have been good fund-raisers, nearly all of them also believe that there were lessons learned. For the past several years, there have been multiple proposals introduced in Congress to establish new semipostals. For example in the 108th Congress, proposals had been introduced for semipostals promoting childhood literacy, the Peace Corps, and prevention of childhood drinking. Each of these proposals expired in committee, and—so far—the Peace Corps semipostal proposal has been reintroduced in the 109th Congress. Any lessons learned from the existing semipostals may be especially relevant for any future semipostals, whether congressionally mandated or issued under the Service’s authority. The lessons we identified from these three semipostals related primarily to five areas: use of funds raised, and agency reporting. The existing semipostals have been issued for a minimum 2-year sales period, and one—the Breast Cancer Research stamp—has been extended 3 times. The experience with the three existing semipostals indicates that the particular nature of the charitable causes may be important in how much money is raised, how long consumers continue to purchase the semipostal, and other results achieved. Among these differences are the following: One-time charitable causes, such as response to a major disaster, may provide a substantial immediate response but may also have limited staying power as ongoing fund-raisers. The Heroes of 2001 stamp was issued in 2002, while various national organizations were still raising funds for victims of the families of emergency relief personnel killed or disabled in the line of duty. Sales were highest for the initial two- quarters, followed by a dramatic drop. By contrast, the Breast Cancer Research stamp, which raises funds for an ongoing health issue, has had sales that have remained at a high level over its entire sales period. Considering a cause’s appeal in drawing affinity support is important in setting fund-raising expectations. Some charitable causes are simply less popular than others, and recognition of these differences can aid in forming assumptions about how much money will be raised through semipostal sales. For some consumers, applying a postage stamp serves as a symbol of loyalty to a particular charitable cause; therefore, it can be anticipated that the magnitude of a particular cause’s base of support will be reflected in semipostal sales. Association of Fundraising Professionals officials noted that certain causes generate a greater response than others, regardless of fund-raising methods. That is, breast cancer is a pervasive and ongoing concern; the September 11 terrorist attacks were a popular concern, but also an event likely to fade in intensity over time; and family violence, while an ongoing concern, is likely to engender less appeal. According to Association of Fundraising Professionals officials, the amounts raised by each semipostal are consistent with the popularity of the type of fund-raising cause represented on the stamps. In some cases, a growth in cause awareness may be a success that transcends the amount of money raised. In addition to raising funds, the semipostal program provides an avenue for increased exposure for particular charitable causes. While the amount of funds raised may not be as high for some causes, there are additional benefits of having a semipostal representing a particular cause visible and for sale in post offices throughout the country. Organizations and individuals whom we spoke with agreed that for all of the semipostals, heightened awareness of the cause was one benefit of having a semipostal. One Breast Cancer Research stamp supporter commented that the contribution that the semipostal has made to breast cancer awareness is priceless and more precious than the funds raised. Likewise an official from the National Fallen Firefighters Foundation stated that the Heroes of 2001 stamp has helped raise public awareness about the fire service. Support of advocacy groups is an important marketing device for semipostals. American Red Cross and BBB Wise Giving Alliance officials told us that advocacy groups are the most useful tool for getting the word out about charitable causes and fund-raising efforts, and Service officials agreed. Broad supportive networks of private organizations that are willing and capable of assisting in local and national marketing help sustain semipostal awareness and sales. Where it is not possible to do aggressive private-sector style marketing, as is the case with semipostals, advocacy groups can fill this gap. In the case of the Breast Cancer Research stamp, for example, the Service no longer has a budget to advertise stamps, which includes semipostals, but there are numerous advocacy groups that publicize the Breast Cancer Research stamp on their Web sites, at events they sponsor, and through letters to members and legislators. To sustain support from advocacy groups, the Service must cultivate this support, and the agency receiving the semipostal proceeds must sustain this support. Organizations involved with charitable causes told us that due to their multitude of priorities, if their input and support are not solicited and they are not kept informed about issues related to the relevant semipostal, including fund usage and program outcomes, group support for the semipostal will wane. For example, several advocacy groups associated with the domestic violence cause told us that immediately following launch of the Stop Family Violence stamp there was uncertainty as to how HHS was going to use the proceeds because the public announcement at the stamp’s kickoff event differed from the groups’ expectations. These advocacy groups told us that as a result of this confusion, they did not aggressively promote the semipostal. Semipostal design is one of the variables that can affect whether consumers are willing to signal their support for a cause. We received comments from numerous stakeholders, for example, that the design of the Stop Family Violence stamp, while certainly drawing attention, may not create a positive response—or affinity—because of its tone. A semipostal’s design can evoke emotion, and the emotional reaction to the image may be important in a consumer’s decision to purchase a semipostal and use it on a letter to make a statement. For example, the Heroes of 2001 stamp provided an image that was not only recognizable but inspiring. By contrast, the image on the Stop Family Violence stamp may create a more complex reaction, and result in a consumer’s decision not to buy the semipostal. The extent of promotion and advertising of a semipostal can also greatly affect sales. Fund-raising organizations that we spoke with agreed that in most cases, there is a connection between the amount invested in a fund- raising effort and the amounts raised. Although a direct correlation has not been determined, it should be noted that as a result of a Service budget reduction, which eliminated stamp advertising, the Stop Family Violence stamp did not benefit from a million-dollar promotional campaign as the two other semipostals did, and sales have remained lower in comparison for the stamp. Support may be further enhanced if the semipostal or the available marketing information clearly indicates how the proceeds will be used. Transparency is critical to fund-raising efforts, and semipostals are no exception. According to the BBB Wise Giving Alliance, one of the standards for charity accountability is to clearly disclose how the charity benefits from the sale of product or services. American Red Cross officials also emphasized that providing this information to consumers is critical to fund- raising efforts like semipostals. We found widespread confusion among advocacy groups about specifically how the Stop Family Violence stamp proceeds would be used. Officials added that the disclosure of where funding is to be directed is particularly important, given that consumers are increasingly savvy, and people have become increasingly skeptical about the distribution of charitable funds. The time lag between when funds are first raised and when they are distributed can be considerable, depending on the type of program that the agency implements for distributing semipostal proceeds. Semipostal sales generate revenues immediately upon going on sale at post offices, and semipostal revenues are distributed by the Service to designated agencies biannually, after the Service’s reasonable costs are deducted. However, it can then take an additional 2 years, or longer, for the funds to be used. For example, the Breast Cancer Research stamp, which was authorized in August 1997, was first sold in July of 1998, and the initial grants resulting from the proceeds were awarded by DOD in June of 1999 and by NIH in June of 2000 (nearly 1 and 2 years after issuance); the Heroes of 2001 stamp was first sold in June of 2002, and the proceeds raised have not yet been awarded by FEMA (3 years after the stamp was issued); and the Stop Family Violence stamp was first available in October of 2003, and no funds have yet been awarded by ACF (nearly 2 years after issuance). When semipostals are used as a fund-raising vehicle, the time lag is a consideration. Agencies awarding semipostal proceeds may need to consider this time lag in deciding how to apply the funds, particularly for episodic events that may involve a fund-raising surge and short-term or evolving needs. For example, program and funding priorities may change from the time that a semipostal is launched to the time proceeds are actually distributed. This time lag can result in consumer skepticism of or disagreement with the original program selection, resulting from changing or new funding priorities. For example, FEMA’s plan for distributing the Heroes of 2001 stamp proceeds has taken about 3 years to finalize, and while it is clear that the initial intent of the semipostal was to “provide financial assistance to the families of emergency relief personnel killed or permanently disabled in the terrorist attacks of September 11,” other organizations working with these families suggested that currently, the most prevalent needs of this group are programs and services directed at addressing the long-term effects of the terrorist attacks. The amounts raised by semipostals vary, and it is difficult to determine how much money will be raised by semipostal sales. For example, FEMA and ACF, which receive proceeds from the Heroes of 2001 and Stop Family Violence stamps respectively, reported to us that they delayed spending in these programs due to the uncertainty of how much money would be raised. ACF officials told us they initially expected the Stop Family Violence stamp to raise considerably more than it has. Once ACF officials realized that the amounts raised may not be sufficient to cover the planned programs, officials revisited their plans for the proceeds. Further, FEMA waited until all semipostal proceeds were received from the Service before pursuing its grant program. Due to the uncertainties surrounding how much money will be raised by semipostals, establishing a program that will be funded solely by semipostal proceeds may present challenges. In addition, attaching funds to already established mechanisms, such as existing grant guidelines or programs, may ease administration and allow for additional flexibility. For example, both the Breast Cancer Research and Stop Family Violence stamp proceeds are being used to distribute new grants within existing programs, which has allowed the agencies to make grants available using semipostal proceeds without developing and establishing the rules and regulations for new programs. Program reporting is an important standard for ensuring accountability. In general, we found that organizations we spoke with were unclear as to how semipostal proceeds were being used or would be used, and we found that none knew of any outcomes resulting from these funds. The Semipostal Authorization Act, which does not specifically apply to these three existing semipostals, requires that the agencies receiving funds under the act report to the congressional committees with jurisdiction over the Service about the semipostal funds received and used. Fund-raising organizations we spoke with, including the American Red Cross and the BBB Wise Giving Alliance, also recommend such reporting, pointing to the need to inform consumers about how proceeds have been used. Additionally, annual reporting may make information about program goals, plans, or funding mechanisms available to Congress, advocacy groups, and others earlier, thereby addressing some of the uncertainty that may arise between the initial issuance of the semipostal and the actual distribution of funds. Currently, none of the agencies administering the three semipostals are providing this degree of disclosure for semipostal programs. Agency reporting for these semipostals is either subsumed in reports about the larger programs to which the proceeds are applied or has not yet been produced. However, these agencies do collect and track this information and could report it with little difficulty. We found widespread agreement among most parties involved that the Breast Cancer Research, Heroes of 2001, and Stop Family Violence stamps were a success. Success can be measured in terms of funds raised, but also in less tangible ways, such as increased public awareness of an important issue. If the definition of semipostals success is narrowed specifically to the funds raised, however, the differences among these three make it all the more important to pay attention to the lessons learned, which can help in setting expectations for further semipostal sales. Given that new semipostals have been proposed in Congress and the Service is authorized to issue additional semipostals, the potential is always there for new semipostals, and therefore the lessons learned may be helpful in any future considerations. One of these lessons—the need for accountability—involves actions that can still be taken on these semipostals, rather than just applied to future semipostals. Through the Semipostal Act and its related regulations, Congress and the Service have taken measures to develop criteria for the selection of semipostal issues, identification of recipient agencies, and reporting of program operations, but these criteria have thus far been largely bypassed due to the provisions that have authorized these three semipostals. These three semipostals lie outside the Semipostal Authorization Act, and may benefit from applying the reporting requirement. Additionally, if any future semipostals are authorized by Congress separately from this act, this type of requirement could be included as part of the legislation in order to ensure greater accountability and greater support for the semipostals. To enhance accountability for semipostal proceeds, we recommend that the Secretary of Defense, Secretary of Homeland Security, and Secretary of Health and Human Services annually issue reports to the congressional committees with jurisdiction over the Service, as is currently required for agencies that are to receive semipostal proceeds under the Semipostal Authorization Act. Reports should include information on the amount of funding received, accounting for how the funds were allocated or otherwise used, and any significant advances or accomplishments that were funded, in whole or in part, out of the funds received through the semipostal program. We requested comments on a draft of this report from the Service, ACF, DOD, FEMA, HHS, and NIH. The Service and DOD provided written comments, which are summarized below and reprinted in appendix VI and VII, respectively. ACF, FEMA, HHS, and NIH did not provide comments on this report. The Service stated in its comments on the draft report that it generally agreed with the four key factors that we cited as affecting stamp sales. The Service agreed that the fund-raising cause and support of advocacy groups were key factors in the stamps’ success. However, the Service suggested that stamp design and its promotion of the stamps seem to be of less importance to a semipostal stamp’s success as a fund-raiser. The Service said that its experience indicates that a semipostal’s design plays little role in its effectiveness as a fund-raiser. We based our conclusion, that stamp design affects the extent to which consumers support the semipostal, on our discussions with advocacy groups and fund-raising experts who expressed concern that the design of the Stop Family Violence stamp—an image of a crying child—may have negatively affected the sales of that semipostal. Therefore, we continue to believe that the design was a factor in the stamp’s sales. Regarding promotional activities for specific semipostals, the Service correctly noted that its current policy requires that promotional costs be deducted from the funds raised, which can lead to the federal agencies receiving less semipostal proceeds. We acknowledge that HHS chose not to have the Service develop an extensive advertising campaign after the Service changed its policy on semipostal promotional costs, and our finding is not meant as a criticism of the Service. Nevertheless, the striking differences in results leads us to conclude that the Service’s promotional efforts can make a difference: the Service spent about $1 million to promote the Breast Cancer Research stamp, which raised $44 million in 7 years; it spent about $1 million to promote the Heroes of 2001 stamp, which raised over $10.5 million in 2.5 years; and it spent about $77,000 to promote the Stop Family Violence stamp, which has raised nearly $2 million in 1.6 years. Our conclusion was reinforced by the fund-raising experts that we spoke with who agreed that in most cases there is a connection between the amount invested in a fund-raising effort and the amounts raised. DOD concurred with our recommendation to improve reporting of how semipostal proceeds are used. DOD explained that the Army will include in its annual report to Congress on “Congressionally Directed Medical Research Programs” a section on DOD’s use of Breast Cancer Research stamp proceeds. It noted that this report will highlight significant advances or accomplishments that were funded, in whole or in part, through these proceeds. We are sending copies of this report to Senators Dianne Feinstein and Kay Bailey Hutchison and Representative Joe Baca because of their interest in the Breast Cancer Research stamp; Senators Hillary Rodham Clinton and Charles E. Schumer because of their interest in the Heroes of 2001 stamp; the Postmaster General; the Chairman of the Postal Rate Commission; and other interested parties. We will make copies available to others upon request. This report will also be available on our Web site at no charge at http://www.gao.gov. If you have any question about this report, please contact me at (202) 512-2834 or at siggerudk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report included Gerald P. Barnes, Assistant Director; Kathleen Gilhooly; Molly Laster; Heather MacLeod; Joshua Margraf; Stan Stenersen; and Gregory Wilmoth. To determine the amount of money raised by the semipostals, we analyzed semipostal sales data provided to us by the U.S. Postal Service (Service). For each semipostal, these data included the amount of quarterly stamp sales and the amount of proceeds transferred to the designated federal agencies. The data also included administrative costs deducted by the Service from the total sales amounts, which we have reported in appendix II. To determine the reliability of the data we received, we obtained and reviewed specific information on the Service’s data collection methods, including data storage and system controls. We determined that the data were sufficiently reliable for the purpose of this report. To identify potential factors affecting the patterns of fund-raising sales for each of the semipostals, we asked stakeholders for their opinions regarding such factors and identified common trends. As part of this effort, we spoke with Service officials; the American Philatelic Society; professional fund- raising organizations; and national advocacy groups affiliated with breast cancer, emergency relief personnel affected by the terrorist attacks of September 11, and domestic violence. We also spoke with Dr. Ernie Bodai, who is credited with conceiving the idea for the Breast Cancer Research stamp, and Ms. Betsy Mullen, who along with Dr. Bodai lobbied Congress for the stamp. Additionally, we gathered information about Service and advocacy group efforts to promote each of the semipostals. Table 8 identifies the stakeholders whom we spoke with. To determine how the designated federal agencies have used semipostal proceeds and reported results, we interviewed key officials from each agency receiving funds. These agencies included the National Cancer Institute (NCI) within the National Institutes of Health (NIH), the Army Medical Research and Materiel Command within the Department of Defense (DOD), the Federal Emergency Management Agency within the Department of Homeland Security, and the Administration for Children and Families within the Department of Health and Human Services. We also obtained and reviewed available agency documentation about grant programs funded with semipostal proceeds, including grant program development, purpose and goals, award and program guidelines, the number and amounts of awards, reporting requirements, performance measures, and grant outcomes. We did not assess each agency’s semipostal grant program as this was not included in the scope of our work, nor did we evaluate grant performance measures that might be included in agency reporting. Finally, to describe the monetary and other resources expended by the Service in operating and administering the semipostal program, we obtained and analyzed the Service’s data on costs of administering semipostals as well as what costs the Service has recovered. We also interviewed officials in the Service’s Offices of Stamp Services and Finance to determine what progress the Service has made in revising its regulations. We spoke with officials from the Service’s Legal Counsel to determine whether the Service has established baseline costs for the semipostal program as per our prior recommendation. The Service has incurred over $16.5 million on operating and administering the Breast Cancer Research, Heroes of 2001, and Stop Family Violence stamps. Of this amount, the Service has recovered about $1.8 million from semipostal proceeds, with the remainder recovered through the First-Class postage rate. The Service’s costs related to the Breast Cancer Research stamp have by far eclipsed costs of the other two semipostals, reflecting the amount of time that the stamp has been offered for sale and other factors. In our previous work, we expressed concern over the Service’s cost recovery regulations. Since our 2003 report, the Service has taken several steps to revise its cost recovery regulations, and has established baseline costs to identify and recover the Service’s reasonable costs related to the semipostals. According to Service policy, cost items recoverable from the funds raised by semipostals include, but are not limited to, packaging costs in excess of those for comparable stamps, printing costs for flyers or special receipts, costs of changes to equipment, costs of developing and executing marketing and promotional plans in excess of those for comparable stamps, and other costs that would not normally have been incurred for comparable stamps. Specifically, the Service has identified 13 cost categories that it uses to track semipostal costs. These categories include the following: stamp production and printing; withdrawing stamps from sale; destroying unsold stamps; printing flyers and special receipts; developing and executing marketing and promotional plans; and other costs (legal, market research, and consulting). Costs reported by the Service totaled $16.5 million through March 31, 2005 (see table 9). Costs for the Breast Cancer Research stamp accounted for more than $11 million of this amount. The Service determined that about $1.8 million of the total costs related to the three stamps represented costs that were attributable specifically to the semipostals and would not normally have been incurred for comparable stamps, and therefore needed to be recovered. The recovered amounts ranged from over $1 million for the Breast Cancer Research stamp, to just over $200,000 for the Stop Family Violence stamp. The Service reported that the majority of costs incurred by the semipostals were covered by the First-Class postage rate, and not recovered from the proceeds. Table 9 describes the semipostal costs incurred and recovered by the Service. The specific costs recovered from surcharge revenues varied by semipostal not only in amount, but to a degree, in the type of expenditure as well (see tables 10 to 12, which show costs for each semipostal). For example, when the Breast Cancer Research and Heroes of 2001 stamps were issued, the Service had a budget to advertise stamps. Both semipostals incurred advertising costs of about $1 million, and because advertising costs would be incurred for comparable stamps, the Service did not recover those costs. When the Stop Family Violence stamp was issued, the Service reduced its overall budget and eliminated, among other things, all stamp advertising, including that for semipostals. Subsequently, the Service established a policy that all costs incurred for advertising semipostals would be deducted from the applicable semipostal’s surcharge revenue. Therefore, the advertising costs incurred ($77,000) for this semipostal were recovered from the surcharge revenue. While policies changed for some cost categories, they remained consistent for others such as design and production and printing. In our September 2003 report on the Breast Cancer Research stamp, we recommended that the Service reexamine and, as necessary revise its cost- recovery regulations to ensure that the Service establishes baseline costs for comparable stamps and uses these baselines to identify and recover costs from the Breast Cancer Research stamp’s surcharge revenue. The Service has taken several steps to revise its regulations including the following: 1. The final rule in 39 C.F.R. §551.8, in effect since February 5, 2004, clarifies Service cost offset policies and procedures for the semipostal program. Specific changes include expanding the types of “comparable stamps” that could be used in conducting cost comparisons to allow other types of stamps (such as definitive or special issue stamps) to serve as a baseline for cost comparisons; allowing for the use of different comparable stamps for specific cost clarifying that costs that do not need to be tracked include not only costs that are too burdensome to track, but also those costs that are too burdensome to estimate; and clarifying that several types of costs could be recovered when they materially exceed the costs of comparable stamps. 2. The Service also amended the regulation 39 C.F.R. §551.8(e) effective February 9, 2005, to delete the word “may” from the cost items recoverable from the surcharge revenue, making the recovery of the costs listed mandatory rather than optional. Additionally, we have recommended that the Service establish and publish baseline costs to provide assurance that the Service is recovering all reasonable costs of the Breast Cancer Research stamp from the surcharge revenue. In response, on June 25, 2004, the Service provided a copy of its baseline analysis to both Congress and GAO in a report entitled United States Postal Service: Response to the General Accounting Office Recommendations on the Breast Cancer Research Stamp. In this analysis, the Office of Stamp Services and Office of Accounting identified comparable stamps and created a profile of the typical costs characteristics, thereby establishing a baseline for Breast Cancer Research stamp cost recovery. Additionally, Service officials reported that they would use the baseline for the other semipostals. Congress has selected the subject matter for the three semipostals issued to date. In each case, the Service has then applied the same design process used for regular commemorative stamps. According to Service officials, most subjects that appear on commemorative stamps are the result of suggestions sent in by the public, which number about 50,000 annually. In the case of commemorative stamps, the Postmaster General determines what stamps will be produced with the assistance of the Citizens’ Stamp Advisory Committee (CSAC), which works on behalf of the Postmaster General to evaluate the merits of all stamp proposals and selects artwork that best represents the subject matter. Since the three existing semipostals were mandated by Congress, the Service and CSAC were not involved in selecting the subject matter. However, the rest of the stamp design process was the same, with CSAC determining what design would be used, and the Postmaster General giving final approval. Figure 8 shows the three semipostals. The Breast Cancer Research stamp was designed by Ethel Kessler of Bethesda, MD, and features the phrases "Fund the Fight" and "Find a Cure." Whitney Sherman of Baltimore provided the illustration of Diana, mythical goddess of the hunt, who is reaching behind her head to pull an arrow from her quiver to fend off an enemy—in this case, breast cancer. This image reflects the same position that a woman assumes for a breast self examination and mammography. The various colors represent the diversity of Americans affected by breast cancer. The Heroes of 2001 stamp was designed by Derry Noyes of Washington, D.C., and features a detail of a photograph by Thomas E. Franklin. The photograph shows three firefighters, each of whom participated in the September 11 rescue efforts, raising the U.S. flag in the ruins of the World Trade Center at Ground Zero in New York. The flag had been discovered in a boat near the area and was raised on a pole found in the rubble. The space between the foreground and background of the picture, which was about 100 yards, helps convey the enormity of the debris and the task at hand. According to the photographer, the raising of the flag symbolizes the strength of the firefighters and of the American people battling the unimaginable. All three firefighters and the photographer attended the stamp’s unveiling ceremony, which marked the 6-month anniversary of the September 11 terrorist attacks. Stop Family Violence Stamp When art director Carl T. Herrman selected Monique Blais, a six-year-old from Santa Barbara, CA, to model for a photograph that was to be the original design of the Stop Family Violence stamp, his intention was to photograph Blais erasing a domestic violence image from a chalkboard— symbolizing eradication of the issue. During a break in the photo session, however, and without prompting, Blais began drawing her own picture of what she thought best represented domestic violence. Photographed by Philip Channing, Blais’s drawing became the basis for the final Stop Family Violence stamp design, which was later selected by a jury at the 34th Asiago International Prize for Philatelic Art, in Asiago, Italy as the most beautiful social awareness-themed stamp issued during 2003. The young artist attended the stamp’s unveiling ceremony at the White House in 2003. As of April 2005, NIH had awarded 106 breast cancer research grants totaling about $16.1 million using proceeds from the Breast Cancer Research stamp. Individual awards ranged from $47,250 to $616,010 and averaged about $151,652. Funds received from sales of the Breast Cancer Research stamp were initially used to fund breast cancer research under NCI’s “Insight Awards to Stamp Out Breast Cancer” initiative, according to NIH officials. In 2003, NCI’s Executive Committee decided to direct the funds to a newly approved Breast Cancer Research stamp initiative entitled “Exceptional Opportunities in Breast Cancer Research.” Grants awarded under each program are listed below. The Insight Awards were designed to fund high-risk exploration by scientists who are employed outside the federal government and who conduct breast cancer research at their institutions. NCI distributed 86 Insight Awards at a total of about $9.5 million. Most of the awards were for 2-year periods. Individual awards ranged from $47,250 to $142,500 and averaged $111,242, discounting a one-time supplement of $4,300. Table 13 provides information about each Insight Award funded with Breast Cancer Research stamp proceeds, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. The Exceptional Opportunities were designed to advance breast cancer research by funding high-quality, peer-reviewed, breast cancer grant applications that are outside the current funding ability of NCI. When NIH began awarding these grants, the number of annual awards decreased from about 29 per year to 10, while the average amount tripled. In all, NCI dispersed Breast Cancer Research stamp proceeds to 20 Exceptional Opportunities awards, each funded for a maximum of 4 years. The awards totaled about $6.6 million and covered research areas that included prevention, diagnosis, biology, and treatment. Individual awards ranged from $81,000 to $616,010 and averaged $330,763. Table 14 provides information about each Exceptional Opportunities Award, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. As of April 2005, DOD had awarded 27 breast cancer research grants totaling about $11 million using proceeds from the Breast Cancer Research stamp. Individual awards ranged from $5,000 to $767,171 and averaged $400,405. DOD applies Breast Cancer Research stamp proceeds to its Breast Cancer Research Program in order to fund Idea Awards, which are grants that focus on innovative approaches to breast cancer research and cover research areas such as genetics, biology, imaging, epidemiology, immunology, and therapy. According to DOD officials, about $500,000 of the transferred funds had been used for overhead costs. Table 15 provides information about each Idea Award funded with Breast Cancer Research stamp proceeds, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. | Congress has directed the U.S. Postal Service to issue three fund-raising stamps, also called semipostals, since 1998. These stamps are sold at a higher price than First-Class stamps, with the difference going to federal agencies for specific causes. The proceeds from the three stamps address breast cancer research, assistance to families of emergency personnel killed or permanently disabled in the terrorist attacks of September 11, and domestic violence. The law authorizing the Breast Cancer Research stamp directed GAO to report on the fund-raising results. To provide additional information to the Congress, GAO expanded the study to include all three semipostals. GAO's study addressed (1) the amounts raised and the factors affecting sales, (2) how the designated agencies used the proceeds and reported the results, and (3) lessons learned for the Postal Service, agencies receiving the proceeds, and others. Over $56 million has been raised through semipostal sales as of June 2005, and sales were likely affected by several key factors. Individually, proceeds totaled $44 million for the Breast Cancer Research stamp, over $10.5 million for the Heroes of 2001 stamp, and nearly $2 million for the Stop Family Violence stamp. Sales patterns and levels differed greatly, with four key factors affecting sales patterns: (1) fund-raising cause, (2) support of advocacy groups, (3) stamp design, and (4) promotion by the Postal Service. The designated federal agencies currently award or plan to award grants with the proceeds; none of the agencies has reported specifically on results. Breast Cancer Research stamp proceeds have been used to award research grants by the National Institutes of Health and the Department of Defense. No grants have yet been awarded with the proceeds from the two other semipostals. The Federal Emergency Management Agency plans to distribute Heroes of 2001 stamp proceeds through grants to families of emergency personnel killed or permanently disabled from the September 11 attacks, while the Department of Health and Human Services plans to use Stop Family Violence stamp proceeds for grants to organizations for projects aimed at enhancing services to children exposed to domestic violence. Key lessons that have emerged from the three semipostals: (1) the nature of the charitable cause can greatly affect sales patterns and other results. A disaster, for example, is more likely to have a brief but intense response, while an ongoing health issue will have a longer one; (2) early and continued involvement of advocacy groups helps sustain semipostal support; (3) stamp design, promotion, and clear understanding about how proceeds will be used can greatly affect consumers' response; (4) semipostals generate proceeds immediately, but the logistics of using the moneys raised takes much longer, and (5) reporting can enhance accountability. Congress included a reporting requirement in the Semipostal Authorization Act of 2000, but these three semipostals are not subject to that requirement. |
GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the president’s budget, provide a direct linkage between an agency’s longer term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. FEMA is an independent agency whose mission is to reduce the loss of life and property and protect our institutions from natural and technological hazards by leading and supporting the nation in a comprehensive, risk- based emergency management program of mitigation, preparedness, response, and recovery. Traditionally, the role of the federal government has been to supplement the emergency management efforts of state and local governments, voluntary organizations, and private citizens. According to FEMA’s strategic plan, the nation’s emergency management capability is built on a partnership of local, state, and federal governments; voluntary agencies; business and industry; and individual citizens. FEMA’s focus is on building partnerships and mitigating the effects of disaster by assisting state, tribal, and local governments to prepare for, respond to, and recover from natural, manmade, and technological disasters. This section discusses our analysis of FEMA’s performance in achieving its selected key outcomes and the strategies it has in place, particularly strategic human capital management and information technology, for accomplishing these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. According to its fiscal year 2000 annual performance report, FEMA has made some progress in minimizing human suffering and property losses after natural disasters. FEMA has 10 performance goals related to this key outcome. It reported that it met three of this outcome’s goals, including efforts to process disaster declaration requests within an average of 8.3 days and achieved an 85-percent customer satisfaction rating for elements of its Public Assistance Program. We could not determine progress for two other goals because FEMA did not provide data for all measures associated with these goals. For example, FEMA did not provide data on reducing costs for disseminating FEMA documents and public announcements making it difficult to assess FEMA’s progress toward its goal of providing reliable data and communications services to disaster locations. FEMA also reported that it did not fully meet five goals related to this outcome but generally provided explanations for why goals were not achieved. For instance, FEMA reported that its growth rate for National Flood Insurance Program (NFIP) policies fell short of its 5 percent goal but discusses a number of factors that affected overall policy growth in fiscal year 2000. FEMA’s fiscal year 2000 performance report was similar to its fiscal year 1999 performance report in that it did little to identify significant limitations that potentially affect the credibility of data used to measure its performance. For example, FEMA has a goal associated with this outcome to enhance recovery by expediting disaster operations through the National Emergency Management Information System. FEMA does not acknowledge reported limitations associated with this system. In a report to be issued in July 2001, we note that FEMA had identified weaknesses in the system, such as untimely data, as reported in FEMA after-action reports. The fiscal year 2000 performance report presented more descriptive details for each of the annual performance goals than the fiscal year 1999 performance report, including more explanation on the goals’ background and why the goals are important. In some cases, FEMA included information on the benefits derived from achieving goals. For example, one of the Response and Recovery goals is to enhance a community’s disaster recovery process by improving administrative processes and training. FEMA stated in its fiscal year 2000 performance report that achieving this goal means that customers are satisfied with the overall Public Assistance Program and are being served in a timely manner by responsive, competent, and accountable staff. In some cases, FEMA also identified special conditions that affected the agency’s ability to meet the goals. For example, one of the measures used to determine progress toward the goal discussed in the previous example did not have complete data on fiscal year 2000. As a result, FEMA reported on data for the first half of the fiscal year and provided an explanation of why the data were not available for the entire year. FEMA also indicated that incomplete data would be a continuing problem because of the lag time between collecting and analyzing data on this goal. FEMA’s fiscal year 2000 performance report also used more data to illustrate progress toward achieving goals. For example, FEMA has a goal to increase the effective delivery of response services by ensuring immediate response to a governor’s request for a presidential declaration. One measure is that FEMA will process a governor’s request within an average of 8.3 days. Figure 1 illustrates FEMA’s progress toward achieving its processing goal for fiscal years 1999 and 2000. In its fiscal year 2002 performance plan, FEMA outlines several strategies to improve disaster response operations such as enhancing interagency coordination through a number of groups, including the Catastrophic Disaster Response Group, Emergency Support Function Leaders, and the Regional Interagency Committee and establishing improved disaster declaration criteria. FEMA’s plan also discusses specific actions for coordinating with other agencies to accomplish this goal. In the area of information technology, FEMA’s fiscal year 2002 performance plan states that it plans to reduce the resources needed and increase the speed for processing disaster assistance within the National Emergency Management Information System. However, FEMA mentions no specifics on how it plans to achieve this goal. In the area of strategic human capital management, FEMA presents a strategy to increase senior management effectiveness at disaster field offices for three goals, but provides no specifics on how it plans to pursue this strategy. Although FEMA reported accomplishing most performance measures under this outcome, it reported that it did not fully meet any goal under this outcome. This outcome contained three goals with numerous performance measures. For example, FEMA’s goal to increase the level of internal and external customer satisfaction with FEMA services contains nine performance measures. FEMA reported that four of nine measures were accomplished, two were not accomplished, and three were discontinued and not reported. Although FEMA provided a rationale for why some of these goals were not fully achieved, it did not provide a detailed strategy on how it plans to achieve these unmet goals in the future. For example, FEMA explained it did not fully achieve its goal of referring 100 percent of eligible delinquent debts to the Department of the Treasury. However, the only discussion provided on needed changes was that FEMA must develop a policy on the collection of delinquent debts, publish rules and regulations in the Federal Register before collecting such debts, and transfer remaining delinquent debts to the Treasury. FEMA’s fiscal year 2002 performance plan has two performance goals under this outcome that represent goals for several FEMA offices. FEMA acknowledges that these goals are iterations of goals found in the other two outcomes—minimizing human suffering and mitigation efforts. Although the goals themselves appear to be clear and reasonable, they could result in confusion over who is responsible for achieving these goals. For example, the Response and Recovery Directorate has a performance goal in this outcome to determine cost drivers in the response and recovery processes and implement re-engineered processes to support improvements in FEMA cost efficiency. Under the outcome to minimize human suffering and property losses after natural disasters, FEMA has performance measures to improve disaster processing by 5 percent and reduce the total dollar value of assets at closed disaster field offices by 10 percent. In the area of strategic human capital management, FEMA outlines the skills base it needs to achieve goals under this outcome and has one goal for the Human Resources Management Office to provide timely and effective human resource tools, services, information, and assistance to FEMA organizations. In the area of information technology, FEMA’s fiscal year 2002 performance plan has measures to expand public access to information through e-government services and deliver accessible and standardized information technology services at 98 percent availability with no undetected virus attacks. Expanding e-government services is a new administration initiative, which FEMA plans to use to provide information to the public in a more timely and efficient manner. FEMA’s fiscal year 2000 performance report showed that the agency was making progress in preventing or reducing harm and losses from future disasters through mitigation efforts. The agency reported meeting the majority of its goals for this key outcome, which included results such as entering into formal agreements with 11 agencies to support mitigation designating 63 communities as Project Impact communities,implementing building standards that increased the use and effectiveness of mitigation tools, and completing seven hurricane evacuation studies. Most of the performance goals for this key outcome have at least one measurable or quantifiable performance measure that helps demonstrate progress toward reaching the goals. For example, FEMA reported that the Federal Insurance Administration (FIA) successfully refined and remeasured the savings achieved from flood loss reduction. FEMA estimated flood loss reduction amounted to just over $1 billion in fiscal year 2000. It also reported that tests of the National Warning System showed emergency alerts were disseminated within 2 minutes—exceeding FEMA’s goal of 3-minute dissemination. In addition, as we pointed out in our May 2001 testimony, opportunities are emerging to better measure the success of the NFIP in protecting lives and preventing loss of property. FEMA’s FIA has a number of performance goals aimed at improving the results of the NFIP, including increasing the number of insurance policies sold. FEMA did not meet the 5 percent annual increase goal for policies sold in fiscal years 1999 and 2000. However, it decided not to change the goal, according to the acting FIA Administrator, because FIA felt it was an effective workforce driver. Although this goal may serve a workforce purpose and provide insight on program volume, it does not measure the degree of participation by the most vulnerable residents—those living in flood-prone areas. Capturing data on the number of both uninsured and insured structures in flood- prone areas could provide FEMA with another indication of how effectively the program is penetrating into those areas most at risk of flooding, whether the financial consequences of floods in these areas are increasing or decreasing, and where to better target marketing efforts. Our May 2001 testimony also pointed out that opportunities are developing for FEMA to obtain valuable information about the program’s success through analysis of the rate of participation for those communities involved in the program. The participation rate is obtained by dividing the number of properties located in special flood hazard areas (SFHA) with flood insurance by the total number of properties in these SFHAs. FIA maintains a database on the number of flood insurance policies in force, including the number in SFHAs. However, the data FEMA has on the national and local community levels for the number of structures in SFHAs are of varying quality, according to FIA’s Acting Administrator. Even so, several current mapping technologies can be used to facilitate the collection of data on the number of structures in the SFHAs. Local communities, such as Dekalb County, GA and Charlotte, NC, are using mapping technologies to estimate the number of structures in SFHAs. Combining these technologies with the digital flood maps that FEMA is already producing would increase accuracy in the identification of structures within SFHAs and the calculation of participation rates. FIA officials agree that program participation rates are a useful measure that can provide insights for measuring the program’s success, including the effectiveness of marketing. However, it is still difficult to determine the degree of progress FEMA has made in achieving some of it goals. This is because FEMA did not clearly state whether some goals were fully achieved. For example, FEMA cited that it had achieved “substantial advancement” in achieving its efforts to evaluate the effectiveness of the mitigation planning. It would be more helpful if FEMA clearly stated whether or not the goal had been met or not met as required under GPRA, then discuss the degree of achievement FEMA made under this goal. In addition, FEMA did not report the results achieved for some of the performance measures. For example, FEMA’s goal to increase public awareness of fire hazards has two performance measures: (1) increase the usage of public education materials by 4 percent and (2) increase the number of hotels and motels with automatic sprinkler and smoke detection systems by 20 percent. FEMA provided performance data for the first measure but did not provide any performance data or information on the second measure. Also, FEMA still needs to provide better information on significant limitations to the data used to measure performance. Although the Director of FEMA acknowledges there are limitations with some of FEMA’s data in the fiscal year 2000 performance report, the report did not always discuss where data limitations exist and how they affect the accuracy, completeness, and availability of performance measurement data under this outcome. FEMA’s fiscal year 2002 performance plan shows that the agency has made some improvements in its strategies by streamlining a number of its mitigation goals into one outcome-oriented goal that will support the development of disaster resistance in a number of communities. FEMA reports that this consolidation is in recognition that several fiscal year 2000 goals were better identified as means and strategies to the revised goal. FEMA’s strategies for achieving progress towards this key outcome include conducting post-disaster economic impact studies and coordinating with other federal departments and agencies via Memorandums of Understanding to identify ways existing programs and new initiatives can support national mitigation goals. In the area of strategic human capital management, FEMA discusses the skills needed to achieve performance goals under this outcome in its fiscal year 2002 performance plan. In the area of information technology, FEMA plans to evaluate and apply emerging technologies that enable more cost- effective modeling and mapping. For the selected key outcomes, this section describes major improvements or remaining weaknesses in FEMA’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan address concerns and recommendations made by the Congress, GAO, FEMA’s Inspector General, us and others. FEMA made a number of improvements in its fiscal year 2000 performance report, such as using more trend data and providing explanations about variations in its performance goals but omitted a key piece of information that highlighted the degree of progress it made towards achieving its performance goals. However, unlike FEMA’s fiscal year 1999 performance report which clearly stated the extent to which goals were met, FEMA’s fiscal year 2000 performance report did not include a quantitative assessment of the progress the agency made in achieving each goal, which makes it difficult, in some cases, to determine whether the agency achieved its goal. FEMA’s fiscal year 2000 performance report used more data to illustrate progress towards achieving goals. The report made frequent use of graphics to illustrate trends—which is helpful to the reader. For example, FEMA has an annual performance goal to provide a safe and secure environment for FEMA and its emergency management partners at disaster facilities. One measure is to provide trained safety and security staff for 80 percent of major declared disasters. FEMA illustrates its achievement with a graph of security staff deployments to major disasters for fiscal years 1998 through 2000. FEMA’s fiscal year 2000 performance report also showed improvement in providing explanations for its inability to meet some of its performance goals and measures. For example, FEMA reported that it did not meet its goal to increase the number of policies in the NFIP but cited several factors, such as lack of flood activity and drought conditions across many parts of the United States, that affected overall policy growth. In addition, when applicable, FEMA identified whether its goal changed in the next fiscal year. In some cases, it is difficult to determine the degree of progress FEMA made towards achieving goals under its three outcomes because FEMA did not provide a quantitative assessment of progress. For example, the goal on evaluating the effectiveness of mitigation planning processes and related initiatives does not explicitly state whether the goal was met. The narrative under “Achievement” states fiscal year 2000 efforts have resulted in substantial advancement in mitigation planning. The text goes on to discuss a variety of mitigation planning activities but does not clearly state whether the goal has been achieved. Both GPRA and the Office of Management and Budget (OMB) Circular A-11’s guidance for developing performance plans and reports require that agencies provide an indication of whether a goal is or is not met. FEMA made some improvements to its fiscal year 2002 performance plan as compared to its fiscal year 2001 performance plan. FEMA continued to streamline its performance goals and make them more outcome-oriented. FEMA also provided more descriptive details on the background of the goals and means and strategies for achieving them; more graphics and trend data on annual outcomes; and added goals to reflect FEMA’s commitment to the administration’s reform goals. FEMA’s fiscal year 2002 performance plan also shows improvement in providing details about the procedures for verification and validation for most of the performance goals. However, the agency did not generally provide information on significant limitations that may potentially affect the credibility of the data used to measure performance. As mentioned previously, FEMA continued its streamlining by consolidating a number of goals. As a result, FEMA has 19 performance goals in its fiscal year 2002 performance plan compared with 30 in its fiscal year 2001 performance plan. The fiscal year 2002 performance plan’s goals have some measures that were performance goals in the fiscal year 2001 plan. For example, FEMA consolidated a number of mitigation-related goals to form a more outcome-oriented goal to support the development of disaster resistance in communities and states. FEMA’s fiscal year 2002 performance plan also has more descriptive details for each of the outcomes. For example, FEMA outlines a number of mitigation tools, education and outreach activities, and partnership agreements it will pursue to support the development of disaster resistance in communities and states. FEMA plans to coordinate with other federal departments and agencies to identify ways in which their existing programs and new initiatives can support national mitigation goals. FEMA also plans to discuss specific actions for coordinating with other agencies to accomplish these goals. FEMA makes use of trend data, for example, to illustrate the costs FEMA avoids when purchasing new equipment by recycling previously used equipment in support of its goals to operate a logistics program that provides timely and cost effective resources in support of emergency management missions. FEMA added six goals to its fiscal year 2002 performance plan in support of its commitment to the administration’s reform goals issued in February 2001 through OMB. Five of the six reform goals are part of the outcome to provide timely responses to disaster aid requests. Of these five goals, one has elements of strategic human capital management—determine management levels for streamlining purposes. The remaining four goals include reducing erroneous payments, expanding on-line procurement, and making greater use of performance-based contracts. The sixth goal— related to minimizing human suffering and property losses after natural disasters—calls for the development of a disaster declaration process that better defines federal and state responsibilities for providing disaster assistance. Three of the six goals have quantitative measures to measure success, but FEMA does not provide any details on its strategies for achieving the goals. FEMA has addressed weaknesses that we identified in the 1999 plan by providing additional descriptions of the procedures for verification and validation for most performance goals. For example, FEMA plans to use additional verification and validation strategies to measure progress in supporting the reduction of loss of life from fire-related incidents. FEMA’s fiscal year 2002 performance plan states it will use reports from several sources, including the National Fire Data Center, the National Center for Health Statistics, and the Consumer Product Safety Commission to compare data on fire-related deaths, injuries, and losses. However, FEMA still needs to do a better job of identifying limitations that potentially affect the credibility of the data used to measure performance and identifying external factors that may affect performance data. For example, FEMA has a goal to improve response operations for which one measure requires FEMA to act on requests for water, food, and shelter within 12 hours after a presidential disaster declaration. FEMA reports the goal’s intent is to coordinate through partnerships with other federal agencies, states, and local governments and private and voluntary organizations for initial provision of these basic needs. The difficulties inherent in working with so many other agencies and organizations are not acknowledged, although they may have an effect on FEMA’s ability to meet this performance goal. We have identified two governmentwide high-risk areas: strategic human capital management and information security. We found that FEMA’s performance plan had goals and measures related to human capital, but the agency’s performance report did not explain its progress in resolving human capital challenges except that progress had been made in improving Disaster Field Office operations. We also found that FEMA’s fiscal year 2000 performance report discusses information security activities such as the interception of major viruses and strengthening its Internet firewall policies, but the fiscal year 2002 performance plan had no goals and measures directly related to information security. While FEMA’s fiscal year 2002 performance plan has no goals and measures directly related to information security, it does have a performance measure indirectly related to information technology that is associated with its customer satisfaction goal. FEMA has a two-part performance measure that calls for (1) delivering accessible and standardized information technology services at 98-percent availability with no undetected virus attacks and (2) resolving 80 percent of help desk trouble issues on the first call. In its fiscal year 2000 performance report, FEMA reported it had established a Critical Infrastructure Assurance Officer position and an Information Assurance Branch and was taking actions to protect and strengthen its Intranet/Internet assets. FEMA also reported that it had intercepted major viruses, conducted network scan and security audits, and implemented Intranet security measures. However, as part of an audit of FEMA’s fiscal year 2000 financial statements, an independent auditor reported a material weakness in computer-based controls over FEMA’s automated financial information systems. In addition, we identified three other major management challenges facing FEMA. In our January 2001 Presidential and Congressional Transition effort, we identified three management challenges—determining the cost effectiveness of mitigation efforts, reducing the cost of disaster assistance, and improving the financial condition of the NFIP. For these three major management challenges, FEMA’s performance plan had 19 goals or measures that were directly related to these challenges. Appendix I provides detailed information on how FEMA addressed these challenges, high-risk areas that we identified, and the challenges identified by FEMA’s Office of Inspector General. As agreed, our evaluation was generally based on the requirements of GPRA; the Reports Consolidation Act of 2000; guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, part 2); previous reports and evaluations by us and others; our knowledge of FEMA’s operations and programs; our identification of best practices concerning performance planning and reporting; and our observations of FEMA’s other GPRA-related efforts. We also discussed our review with agency officials and with FEMA’s Office of Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Governmental Affairs Committee as important mission areas for the agency and generally reflect the outcomes for all of FEMA’s programs or activities. The major management challenges confronting FEMA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by us in our January 2001 Performance and Accountability Series and High-Risk Update or in our January 2001 Presidential and Congressional Transition effort. The management challenges identified by FEMA’s OIG were included in a December 2000 letter from the OIG to the Director. We did not independently verify the information contained in the performance report and plan, although we did draw from some of our other work in assessing the validity, reliability, and timeliness of FEMA’s performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. We provided a draft of this report to FEMA for its review and comment. FEMA chose to meet with us to provide oral comments on the draft report, and we met with FEMA’s GPRA Manager of the Administration and Resource Planning Directorate on June 28, 2001, to discuss these comments. While the FEMA official agreed with the report, she provided suggested changes that we have included in this final report. The suggested changes that we incorporated in this report include (1) adding clarifying language that FEMA did not “fully meet” five goals related to the outcome to minimize human suffering and property losses to recognize the progress FEMA had made, (2) adding five goals outlined in FEMA’s fiscal year 2002 performance plan related to the major management challenge to support terrorism preparedness coordination, and (3) adding additional information on progress made to resolve the major management challenge to improve the financial condition of the NFIP. FEMA also asked us to identify its key outcomes with FEMA’s own numbering system in its performance plan in addition to the narrative description we provided to increase clarity in the discussion of agency outcomes. We did not include this change because it does not improve the clarity of the report. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Director, Federal Emergency Management Agency; and the Director, Office of Management and Budget. Copies will also be made available to others upon request. If you or your staff have any questions, please call me at (202) 512-8984. Key contributors to this report were Mark Abraham, Julia Duquette, David Gill, Signora May, Robert Procaccini, and Carrie Watkins. The following table identifies the major management challenges confronting the Federal Emergency Management Agency (FEMA), including the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the challenges identified by our office and/or FEMA’s Office of Inspector General (OIG). The second column discusses the progress that has been made in resolving the challenges as discussed in FEMA’s fiscal year 2000 performance report. The third column discusses the extent to which FEMA’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and/or FEMA’s OIG identified. FEMA’s fiscal year 2000 performance report generally discussed the agency’s progress in resolving its challenges. Of the agency’s 9 major management challenges, its performance plan had (1) 38 goals or measures that were directly related to 7 challenges; (2) 3 goals or measures that were indirectly applicable to 2 challenges—one of these challenges also has goals or measures directly related to it; and (3) no goals or measures related to 1 challenge—financial management systems—but discussed strategies to address this challenge. | This report discusses the Federal Emergency Management Agency's (FEMA) fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993. Although FEMA did not attain all of its goals for selected key outcomes in its fiscal year 2000 annual performance report, FEMA did make progress toward achieving the outcomes. FEMA's progress varied for each outcome, and the information presented in the performance report did not always provide enough information to allow an independent assessment of FEMA's progress in achieving the outcome. In general, FEMA's strategies for achieving these key outcomes appeared to be clear and reasonable. Although FEMA has more work to do on the outcomes GAO reviewed, its fiscal year 2000 performance report and fiscal year 2002 performance plan reflect continued improvement compared with the prior year's report and plan. FEMA has refined its performance goals and made them more outcome oriented. FEMA's fiscal year 2000 performance report and fiscal year 2002 performance plan generally addressed the management challenges GAO cited in earlier reports. The report and plan indicate that FEMA has taken some actions to address strategic human capital management and information security management challenges. |
DOD’s efforts to build partner capacity include a broad range of security cooperation activities designed to build the defense capacity of foreign partners and allies. These security cooperation activities include military- to-military training, military exercises in cooperation with partner nations, knowledge sharing from subject matter experts, visits between senior military leaders, providing military equipment and supplies, and counternarcotics activities. Table 1 below describes selected partner capacity activities that DOD implements. The table illustrates the broad range of activities DOD engages in to build partner capacity and is not a comprehensive list. To perform its military missions around the world, DOD operates six unified military geographic combatant commands, which are responsible for a variety of functions including planning for and conducting missions that range from humanitarian assistance to combat operations.their planning responsibilities, geographic combatant commands develop theater campaign plans, which are multiyear plans that reflect the command’s strategy to achieve certain end states within their areas of responsibility. These plans are the primary vehicle for designing, organizing, integrating, and executing security cooperation activities. A hierarchy of national and strategic guidance—including the National Security Strategy, the National Defense Strategy, the National Military Strategy, and the Guidance for Employment of the Force—informs the development of the combatant commands’ theater campaign plans. The U.S. Special Operations Command is responsible for preparing special operations forces to carry out assigned missions and to plan and conduct special operations. Its mission is (1) to provide fully capable special operations forces to defend the United States and its interests and (2) to synchronize global operations against terrorist networks, including receiving, reviewing, coordinating, and prioritizing all DOD plans that support the global campaign against terror. notifies the combatant command and solicits proposals from the adjutants general of the state Guards. These 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. I would like to now discuss the key practices we have identified that can aid DOD in more effectively managing its building partner capacity activities. Setting clear goals and defining terminology can help stakeholders understand what partnership capacity programs seek to accomplish and how they fit in with broad national security interests. In our reviews, we found that DOD’s efforts to align goals with broader strategies and clarify terminology have varied. More specifically, in some reviews, we found that programs have aligned with broader strategies but DOD officials have experienced challenges in agreeing upon key terms. A positive example of strategic alignment involves our work on the Section 1206 program. In 2010, we reported that the Section 1206 activities have generally been in alignment with U.S. counterterrorism priorities while also addressing the partner countries’ security interests. For example, in 2010, we found that DOD and the State Department (State) have used Section 1206 funds in Kazakhstan to address its priority of enhancing the country’s counterterrorism capacity in the Caspian Sea, according to a U.S. embassy official. Additionally, in Pakistan, U.S. officials used Section 1206 funds to increase special operations capacity to support counterterrorism operations on its western border. Overall, from fiscal year 2006 to 2009, DOD and State allotted $932 million, or 95 percent, of all Section 1206 funding for counterterrorism-related equipment and training for partner countries and the remaining $47 million, or 5 percent, to build the capacity of five partner nations to participate in stability operations with the United States, such as providing spare parts for a country’s ground vehicles. We also found that most Section 1206 counterterrorism resources had been directed to countries that the U.S. intelligence community has identified as priority countries for the counterterrorism effort. In another case we found that DOD is taking steps to address challenges faced by department officials in identifying and defining partner country assistance requirements. In a November 2012 report on the Defense Security Cooperation Agency’s oversight of security cooperation and assistance programs, we found that since 2009, DOD has initiated reforms to improve the process of developing assistance requests that are intended to reduce implementation delays and improve the effectiveness of assistance to partner countries. new training courses and provided in-country advisors to help country officials identify short- and long-term requirements and strategies to meet those requirements. Second, DOD is reforming its own processes for defining requirements to improve long-term effectiveness of security cooperation programs and provide short-term solutions for meeting requirements using assistance requests. Third, DOD created a strategic planning support group to assist combatant commands with early identification and resolution of issues related to capability requirements and certain types of assistance requests. Fourth, the Defense Security Cooperation Agency established expeditionary teams whose purpose is to help the combatant commands, partner countries, and security cooperation officers identify and refine a partner country’s requirements. GAO, Security Assistance: DOD’s Ongoing Reforms Address Some Challenges, but Additional Information Is Needed to Further Enhance Program Management, GAO-13-84 (Washington, D.C.: November 16, 2012). the Task Force’s original mission of countering violent extremism and its location at Camp Lemonnier remain important, particularly given terrorist threats in the region, we found some activities that may not be aligned with the command’s mission. For example, at a training exercise for incoming Combined Joint Task Force-Horn of Africa officials, discussion was raised concerning Combined Joint Task Force-Horn of Africa’s discovery of a dilapidated school in Kenya with a placard stating “donated by Combined Joint Task Force-Horn of Africa”; current staff had been unaware of the school’s existence. While the activity may have promoted temporary benefits for the participants at the time it was built, its dilapidated state could have potentially promoted unfavorable views of the U.S. military within the partner nation and heightened concerns about how such activities fit into a framework of sustained security engagement. In another example, other embassy officials stated that the experiences of African navy and coast guard participants of Task Force maritime training sessions were dampened because participants had anticipated a permanent training program; instead, they received sporadic and short- term training, which may not promote U.S. Africa Command’s mission of sustained or long-term security engagement. As a result, we recommended that U.S. Africa Command complete its evaluation of Combined Joint Task Force-Horn of Africa to determine whether the Task Force should be retained, and if so, whether changes are needed to its mission, structure, and resources to best support the command’s mission. In a 2012 follow up on our recommendation, U.S. Africa Command stated that it had issued a plan to alter the Task Force’s mission in accordance with the command’s assessment of the current security environment. However, DOD has not identified how the Task Force is changing its structure and resources to support the new mission. Another review in 2012 found that DOD’s lack of clarity surrounding the term “security force assistance” has created challenges for the combatant commands and military services in their efforts to plan for security force assistance as a distinct activity and enhance force capabilities. DOD intends to focus more on security force assistance activities and has directed the combatant commands to incorporate them into their long range plans and forecast requirements. In its instruction, DOD defined security force assistance as “DOD activities that contribute to unified action by the U.S. government to support the development of the capacity and capability of foreign security forces and their supporting institutions.” Seeking to clarify this definition, DOD has further stated that security force assistance encompasses all DOD activities conducted under various programs to “organize, train, equip, rebuild/build and advise foreign security forces and their supporting institutions from the tactical to ministerial levels.” Notwithstanding DOD’s efforts to clarify its terminology, we found that the commands continue to lack a common understanding of the term and therefore some were unclear as to what additional actions were needed to meet DOD’s intent. Officials we interviewed generally viewed security force assistance as a recharacterization of some of their existing security cooperation activities but had different interpretations of what types of activities should be considered as security force assistance. For example, within one command, officials considered nearly every activity with partner nations to be security force assistance. Another command considered only individual efforts to train partner nations as security force assistance and excluded other activities. Also, some command officials were not clear as to the intent of DOD’s increased focus on security force assistance and whether any related adjustments should be made in their plans and scope or level of activities. As a result, they do not currently distinguish security force assistance from other security cooperation activities in their plans. The services are taking steps and investing resources to organize and train general purpose forces capable of conducting security force assistance based on current requirements. Without greater clarity in regard to future needs, the services are uncertain whether their current efforts are sufficient or whether additional capabilities will be required. Therefore, we recommended that DOD take steps to clarify its intent, including the level of effort that combatant commands should devote to security force assistance, and what additional actions are required by the commands to plan for and conduct security force assistance beyond their existing security cooperation efforts. These steps would also help inform the services’ efforts to ensure that the capabilities that they are developing and thus the resources that they are investing are appropriate and adequate to meet future requirements. DOD generally agreed with our recommendations. In another instance, we found that DOD, State, and the U.S. Agency for International Development used different terminology to describe similar efforts during our review of DOD’s humanitarian assistance efforts. For example, according to DOD officials, DOD uses the term “humanitarian assistance” to describe its strategically planned assistance. In contrast, the U.S. Agency for International Development and State refer to immediate, life-saving relief as “humanitarian assistance” but other capacity-building efforts as “development assistance.” DOD officials explained that the terminology they use is derived from their legislative authority to perform humanitarian assistance, and DOD and U.S. Agency for International Development officials said that DOD uses “humanitarian assistance” rather than “development assistance” to ensure that the department is not perceived as performing development efforts that are outside of its legislatively-prescribed areas of responsibility. Further, DOD officials who are engaged in implementing some of DOD’s humanitarian assistance efforts told us that differences in terminology can create challenges among agencies in understanding the scope and nature of each others’ efforts. State officials said that differing terminology creates challenges to setting goals or objectives when planning with other agencies. As a result, we recommended and they agreed that DOD, State, and the U.S. Agency for International Development collaborate to develop guidance that provides a common understanding of the terminology used for their humanitarian and development assistance efforts. In a 2013 follow-up on our recommendation, DOD officials stated that they have continued to regularly engage officials at State and the U.S. Agency for International Development through working groups and briefings to minimize confusion over terminology, but did not identify any actions taken to develop guidance on the differences in the agencies’ terminology. National strategies have emphasized the importance of building partner capacity using an interagency and whole of government approach, but mechanisms for coordinating activities and sharing information within DOD and across agencies have not been consistently implemented. Our work shows that DOD has taken steps to work with other agencies on activities, such as embedding representatives from their agencies at its combatant commands, but challenges remain. Agencies have different organizational structures, planning processes, and funding sources to plan for and conduct their building partner capacity efforts, which can hinder interagency collaboration. Given these organizational differences, coordination mechanisms that can facilitate interagency collaboration are needed to achieve integrated approaches to building partner capacity efforts. Our work has found that DOD has led or participated in coordinating activities and taken steps to share and integrate information for building partner capacity activities through some of the programs at its geographic combatant commands. For instance, U.S. Southern Command is a geographic combatant command that operates in the Americas and the Caribbean, areas primarily affected by challenges such as corruption, crime, transnational terrorism, natural disasters, and poverty that impact the security and stability of the region. In recent years, in an effort to better support security and stability in the region, U.S. Southern Command has sought to become a more interagency-oriented command, recognizing that many of the challenges it faces cross role and mission lines of various U.S. government agencies. In 2010, our review of U.S. Southern Command found that the command coordinated with interagency partners to develop mutually reinforcing strategies, including its 2009 Theater Campaign Plan and its 2020 Command Strategy. U.S. Southern Command coordinated the development of its 2009 Theater Campaign Plan, which lays out the command’s theater priorities and guides its resource allocations, with over 10 U.S. government departments, agencies, and offices. In addition, for U.S. Southern Command’s 2020 Command Strategy, which was in development in 2010, the command conducted a 3-day conference to gather perspectives from interagency partners on the command’s assessment of challenges in the region and the command’s strategic objectives. However, challenges with coordinating and information sharing with other agencies remain. In 2012, we reported that DOD, State, and the U.S. Agency for International Development recognize the need to improve information sharing for humanitarian assistance efforts and they have begun to take steps to address the challenge.assistance efforts include constructing schools, digging water wells, preparing communities for natural disasters, and helping local populations obtain medical care. Despite DOD’s various collaborative efforts, challenges remain, particularly in project coordination and data management for information sharing. For example, officials said that the frequent rotation of personnel can lead to continuity challenges. Many officials also stated that coordination tends to be personality driven; when staff is replaced, relationships have to be rebuilt and progress can be lost. Further, while officials from DOD, State, and the U.S. Agency for International Development said that interagency personnel at the commands have helped improve coordination with DOD, the roles of these personnel may be limited. Some State and U.S. Agency for International Development officials explained that the role of their advisors assigned to DOD’s combatant commands is limited. Specifically, they are able to report on what is happening in their respective areas of responsibility but cannot make decisions or speak on behalf of their home agencies. Moreover, DOD, State, and U.S. Agency for International Development do not have full visibility over each others’ assistance efforts, which could result in a fragmented approach to U.S. assistance. There are several initiatives under way to improve information sharing; however, no framework, such as a common database, currently exists for the agencies to readily access information on each others’ efforts. Therefore, we recommended that the State Department, U.S. Agency for International Development, and DOD develop a framework for sharing information to be used by all agencies in their assistance efforts, and indicated that this framework could involve selecting an existing initiative, such as the Foreign Assistance Dashboard. They agreed with our recommendation, and in 2012 DOD officials stated they submitted foreign assistance data on their peacetime humanitarian assistance programs and 12 other security programs to State for inclusion into the Foreign Assistance Dashboard. Further, State officials said they expect to have DOD’s foreign assistance data available on the Dashboard by the end of fiscal year 2013. We have found that when agencies share information, managing and integrating information from multiple sources present challenges regarding data comparability. For instance, we found that the multiple data systems used to track National Guard State Partnership Program activities and funding are not interoperable and users apply varying methods and definitions to guide data inputs. In 2012, we reported that we could not provide complete information on the types and frequency of State Partnership Program activities because activity data are incomplete as well as inconsistent. 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. However, the National Guard Bureau and the combatant commands maintain separate databases for tracking events and each entity independently tracks its activities in databases that are not interoperable. Further, the terminology used to identify activity types varied both across the combatant commands and between the combatant commands and the National Guard Bureau. As a result, we found it difficult to identify whether the data in different databases were describing the same activity or two separate activities. Therefore, we recommended and the department agreed that DOD, in coordination with the National Guard Bureau, the combatant commands, and the embassy country teams, develop guidance for all stakeholders that includes agreed-upon definitions for data fields and rules for maintaining data until the program’s global data system is fully implemented. In December 2012, DOD issued an instruction requiring combatant commanders to submit annual records of State Partnership Program activities and defining specific data that must be included in these reports. While this instruction does not directly identify data field definitions, it could provide a basis for improving the department’s efforts to track State Partnership Program activities and funding. In 2012, we found that DOD efforts to provide timely security assistance were affected by communication and coordination issues within DOD that in some cases delayed assistance and increased costs. DOD’s Security Cooperation Organizations in foreign countries reported persistent difficulties obtaining information from the Defense Security Cooperation Agency and the implementing agencies of the military departments—the Army, Navy, and Air Force—on the status of security assistance equipment acquisitions and deliveries because information systems are difficult for them to access and contain limited information. DOD’s existing delivery tracking system provides only limited data on the status of equipment deliveries because partner country agents and DOD agencies are not entering the needed data into the system. Without advance notice of deliveries, Security Cooperation Organization staff have been unable to ensure that addresses were correct and that partner countries were ready to receive and process deliveries, resulting in delays or increased costs. For example, security cooperation officers we met with reported instances where: equipment was held by the partner country’s customs agency because the delivery lacked proper documentation or proper address labels, and additional customs fees were incurred while the security cooperation officers found the missing information; shipments were warehoused in a customs office for 2 years because they had no addresses or were improperly addressed; the Security Cooperation Organization discovered equipment at ports and airports that had arrived without advance notice. To improve the ability of combatant commands and Security Cooperation Organization officials to obtain information on the acquisition and delivery status of assistance agreements, we recommended that DOD establish procedures to help ensure that DOD agencies populate security assistance information systems with complete data. In response, the Defense Security Cooperation Agency stated that it would work with the military departments to ensure that information systems are populated with acquisition and delivery status data. The Defense Security Cooperation Agency is also developing a new electronic system, the Security Cooperation Enterprise Solution, to improve visibility and aggregate data from the separate computer management systems used by DOD’s implementing agencies, but it is not expected to be fully implemented until 2020. Developing plans to sustain DOD’s building partner capacity activities and establishing mechanisms to monitor programs and evaluate results can help ensure that these programs have long-term impact. Our work has shown that some building partner capacity activities may not endure because planning for sustainment has been a systemic challenge. In a 2009 memo to the Assistant to the President for National Security Affairs, the Secretary of Defense stated that sustaining the results of capacity- building has proven difficult because the lack of multi-year planning and funding authorities at the outset of security assistance efforts makes it difficult for the U.S. government and its partners to build or maintain effective collaborative relationships. Further, our work has also shown that DOD had not consistently defined performance measures, and reporting on progress and effectiveness of some building partner capacity activities has been limited to anecdotal information. One example of sustainment planning challenges came from our review of the Section 1206 program. In 2010, we reported that the long-term impact of some Section 1206 projects could be limited because U.S. agencies have not fully addressed how to sustain these projects. For example, we found that most participating countries have relatively low incomes and may be unwilling or unable to provide the necessary resources to sustain projects. According to project proposal instructions applicable at the time of our report, proposals must explain how projects will be sustained in future years. However, we found that only 26 percent of the 135 proposals we reviewed for fiscal years 2007-2009 projects explicitly addressed the recipient country’s ability or willingness to bear sustainment costs. Moreover, only 1 of the 15 Security Assistance Officers we interviewed indicated that he believed his partner nation had the ability to sustain its Section 1206 projects independently. For example, the Security Assistance Officer in Mali noted that sustainment of the Section 1206 project to train and equip that country’s light infantry units would be problematic if the country had to find its own funding. Our 2010 report also showed that DOD and State had conducted little monitoring and evaluation of the Section 1206 security assistance program. Specifically, DOD and State’s reporting has generally consisted of anecdotal information and DOD officials told us that they had not consistently monitored these security assistance projects. Our review of 149 approved proposals for Section 1206 projects for fiscal years 2006 through 2009 showed that only 32 percent (48 proposals) defined measures of effectiveness or anticipated outcomes. In addition, only 25 percent (34) of 135 approved fiscal year 2007 through 2009 proposals we reviewed documented an intention to monitor results. We recommended that DOD and State develop and implement specific plans to monitor, evaluate, and report routinely on the results of such monitoring and evaluation for Section 1206 projects. DOD agreed with our recommendation and, in response, completed its first systematic assessments of Section 1206 projects implemented in 5 countries in 2012. As part of that effort, DOD also created the Section 1206 Assessment Handbook to be used for the future, annual assessment efforts. Officials we spoke to stated that these pilot assessments validated the assessment methodology, which will be used to evaluate all future potential recipients’ capabilities prior to receipt of Section 1206 equipment, as well as to conduct evaluations of selected Section 1206 efforts following the implementation. In a separate review of U.S. Africa Command in 2010, we found that it is unclear whether all of the activities that U.S. Africa Command inherited or is planning fully align with its mission of sustained security engagement in Africa because the command was generally not measuring the long-term effects of its activities. met with while observing a command activity in Uganda told us that the command planned to produce an “after action” report after the activity, but they acknowledged that U.S. Africa Command needs to develop a method to perform longer-term assessments of activities. Command officials also stated they did not know whether projects such as reconstructing a school would have a sustainable effect on the community and State officials added that the command’s efforts to support U.S. GAO, Defense Management: Improved Planning, Training, and Interagency Collaboration Could Strengthen DOD’s Efforts in Africa, GAO-10-794 (Washington, D.C.: July 28, 2010). embassies by augmenting or broadening existing public-diplomacy efforts were not being assessed. While long-term evaluation can be difficult to achieve, particularly the ability to link an action to a desired effect, we noted it nonetheless remains important for the command to have some performance measures. Therefore, we recommended that U.S. Africa Command conduct long-term assessments of the full range of its activities to determine whether the activities are having their intended effects and supporting the Command’s mission. In a 2012 follow up to our recommendation, the command stated that it has conducted nationwide polling and stakeholder interviews across several African countries to develop a baseline against which progress can be measured. For example, the command asked how participants viewed their nation’s military and how they felt toward international cooperation in military training and peacekeeping in Africa. However, U.S. Africa Command still needs to take steps to develop metrics and indicators in order to conduct more thorough assessments. Until the long-term assessments of its activities are completed, U.S. Africa Command may have difficulty making successful future planning decisions and allocating resources to maximize its effect in Africa. More recently, in 2012, we found that because the National Guard’s State Partnership Program did not have agreed-upon goals or metrics, it could not assess progress. National Guard Bureau officials acknowledged that once they update program goals and objectives, they will need to develop metrics to measure results of the program. The officials are working with experts from other organizations and have begun to develop metrics for 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. We recommended that the department complete and implement the program’s comprehensive oversight framework by using the goals, objectives, and metrics currently being developed. In the December 2012 DOD instruction, the department directed the alignment of State Partnership Program activities with combatant commanders’ theater security cooperation program objectives, as well as with the objectives of the U.S. embassies and national security objectives of the partner nations. This is a positive step; however, goals, objectives, or metrics specific to the State Partnership Program still need to be completed. Such goals, objectives, 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. In addition, our work on counternarcotics efforts has found challenges with the reliability of performance data. For example, our 2012 review of the Andean countries found that although DOD is working to improve its counternarcotics performance measurement system, the department’s Inspector General has been unable to attest to the reliability of the performance data from 2007 through 2011, as required by the Office of National Drug Control Policy. We previously reported that DOD had established performance measures for its counternarcotics activities, such as percentage of tasked counternarcotics missions flown, the number of partner nation law enforcement agencies engaged, and the number of military working dog teams trained. However, during our 2012 review, we found that the DOD Inspector General cited a number of reasons for not attesting to the reliability of DOD’s performance data. One example was that DOD’s 2008 performance report did not include 4 consecutive years of data required for tracking improvements. Lacking these attestations from DOD, the Office of National Drug Control Policy has minimal assurance of the reliability of DOD’s reporting on its estimated $956 million in counternarcotics assistance for those years. Without reliable information, the Office of National Drug Control Policy may be limited in its ability to carry out its responsibility for coordinating and overseeing implementation of the policies, goals, objectives, and priorities established by the national drug control program and to report to Congress on counternarcotics assistance provided by agencies under its purview. As a result, we recommended that the department submit its performance summary report along with the Inspector General’s attestations of the reliability of the information reported to the National Drug Control Policy office. DOD agreed with our recommendation but did not detail how it would address this recommendation. In conclusion, DOD’s building partner capacity efforts encompass a broad range of security cooperation activities that focus on emphasizing existing alliances and expanding cooperation with emerging partners to ensure collective capability and capacity for securing common interests, as well as sharing the costs and responsibilities of global leadership. Given the recent emphasis on these efforts, it is vital to manage them effectively and efficiently. By setting clear goals and defining terminology, coordinating activities and sharing information, and sustaining efforts and evaluating progress, DOD can avoid confusion about the activities and help to assess their long-term impact. Effective management of current and future building partner capacity efforts will help DOD steward its resources to achieve its strategic priorities and provide Congress with the information it needs as it evaluates current programs and considers future funding levels. Moreover, effective management of these efforts will likely better position the U.S. government to respond to changing conditions and future uncertainties around the world. Chairman McKeon, Ranking Member Smith, this concludes my prepared remarks. I would be pleased to respond to any questions you may have. For future information regarding this statement, please contact Janet A. St. Laurent at (202) 512-4300 or at stlaurentj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this statement. Key contributors to this statement are listed in appendix II. Security Assistance: DOD’s Ongoing Reforms Address Some Challenges, but Additional Information Is Needed to Further Enhance Program Management. GAO-13-84. Washington, D.C.: November 16, 2012. Counternarcotics Assistance: U.S. Agencies Have Allotted Billions in Andean Countries, but DOD Should Improve Its Reporting of Results. GAO-12-824. Washington, D.C.: July 10, 2012. State Partnership Program: Improved Oversight, Guidance, and Training Needed for National Guard’s Efforts with Foreign Partners. GAO-12-548. Washington, D.C.: May 15, 2012. Security Force Assistance: Additional Actions Needed to Guide Geographic Combatant Command and Service Efforts. GAO-12-556. Washington, D.C.: May 10, 2012. Humanitarian and Development Assistance: Project Evaluations and Better Information Sharing Needed to Manage the Military’s Efforts. GAO-12-359. Washington, D.C.: February 8, 2012. Defense Management: U.S. Southern Command Demonstrates Interagency Collaboration, but Its Haiti Disaster Response Revealed Challenges Conducting a Large Military Operation. GAO-10-801. Washington, D.C.: July 28, 2010. Defense Management: Improved Planning, Training, and Interagency Collaboration Could Strengthen DOD’s Efforts in Africa. GAO-10-794. Washington, D.C.: July 28, 2010. Drug Control: DOD Needs to Improve Its Performance Measurement System to Better Manage and Oversee Its Counternarcotics Activities. GAO-10-835. Washington, D.C.: July 21, 2010. Defense Management: DOD Needs to Determine the Future of Its Horn of Africa Task Force. GAO-10-504. Washington, D.C.: April 15, 2010. International Security: DOD and State Need to Improve Sustainment Planning and Monitoring and Evaluation for Section 1206 and 1207 Assistance Programs. GAO-10-431. Washington, D.C.: April 15, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing. GAO-09-904SP. Washington, D.C.: September 25, 2009. Janet A. St. Laurent, (202) 512-4300 or stlaurentj@gao.gov. In addition to the contact name above, Charles Michael Johnson Jr., Director; John Pendleton, Director; Sharon Pickup, Director; Marie Mak, Assistant Director; James Michels, Assistant Director; Jennifer Andreone, Kathryn Bolduc, Katherine Forsyth, Simon Hirschfeld, Meghan Perez, Erika Prochaska, Steven Putansu, Jodie Sandel, Michael Simon, John Van Schaik, Erik Wilkins-McKee, and Nicole Willems made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | DOD has increasingly focused on security cooperation activities designed to build the defense capacity of foreign partners and allies, furthering the U.S. objective of securing international peace and cooperation. Both the 2011 National Military Strategy of the United States of America and the 2011 National Strategy for Counterterrorism identify building partner capacity as a worldwide priority. As DOD continues to emphasize building partner capacity, the need for efficient and effective coordination with foreign partners and within the U.S. government has become more important, in part due to fiscal challenges, which can be exacerbated by overlapping or ineffective efforts. This testimony highlights opportunities to strengthen DOD's management of its building partner capacity efforts by focusing on three key practices: (1) setting clear goals and defining terminology, (2) coordinating activities and sharing information, and (3) sustaining efforts and evaluating progress. It is based on GAO's body of work on building partner capacity from April 2010 through November 2012. GAO's recent work has identified key practices that would enhance the Department of Defense's (DOD) management of building partner capacity efforts. Such efforts include a range of security cooperation activities such as military exercises with partner nations and counternarcotics activities. In GAO's reviews of these activities, GAO found that DOD has demonstrated some of these key practices, but opportunities for improvement remain. Setting clear goals and defining terminology. Setting clear goals and defining terminology can help stakeholders understand what partnership capacity programs seek to accomplish and how they fit in with broad national security interests. GAO has reported that DOD activities to build the capacity of foreign military forces though the Global Train and Equip program have generally been in alignment with U.S. counterterrorism priorities while also addressing partner countries' security interests. However, in a 2012 review of security force assistance, GAO found that the lack of a common understanding of this term within DOD resulted in different interpretations of what types of activities are included and presented challenges in planning activities and forecasting needs for force capabilities. GAO recommended DOD take steps to clarify its intent and then determine what additional actions are required to plan for and conduct security force assistance. Coordinating activities and sharing information. Coordination mechanisms that facilitate communication within DOD and across agencies are needed to achieve integrated approaches to building partner capacity efforts. In 2012, GAO found that stakeholders had difficulties in obtaining status information on security assistance acquisitions and deliveries because information systems are difficult to access and contain limited information. The department is developing a new information system to address this gap but it will not be fully implemented until 2020. Further, GAO's review of the National Guard State Partnership Program in 2012 found that data systems used by the combatant commands and the National Guard Bureau were not interoperable and users applied varying methods and definitions to track the program's activities and funding. As a result, the data on types and frequency of activities were incomplete and inconsistent. GAO recommended that DOD develop guidance including agreed-upon definitions for data fields. Sustaining efforts and evaluating progress. Developing plans to sustain projects and establishing mechanisms to evaluate them can help ensure that programs have long-term impact. In 2010, GAO reported that the long-term impact of some projects to train and equip foreign militaries could be limited because U.S. agencies have not fully addressed their sustainment. Specifically, only 26 percent of the 135 proposals for fiscal years 2007-2009 projects explicitly addressed the recipient country's ability or willingness to bear sustainment costs. In a review on counternarcotics efforts in 2012, GAO found that DOD is working to improve its counternarcotics performance measurement system, but the department has been unable to attest to the reliability of the performance data for several countries from 2007 through 2011. GAO recommended that DOD submit its performance summary report with the reliability attestation to the National Drug Control Policy office. GAO has made numerous recommendations to align goals with broader strategies and to clarify terminology; develop mechanisms to better coordinate activities and share information; and develop and implement plans and metrics to sustain and evaluate progress. DOD has generally concurred with GAO's recommendations and has taken some actions, but work remains to fully implement GAO's recommendations. |
EPA’s size, geographical dispersion, reliance on its partnership with state and local governments, and broad and complex mission all combine to make management of the agency a formidable challenge. Our recent work has identified several particular management challenges at EPA, including the need to address workload and workforce planning, to ensure consistent environmental enforcement and compliance data, and to better coordinate with other agencies to more effectively leverage limited resources. EPA has struggled for years to identify its human resource needs and to deploy its staff throughout the agency in a manner that would do the most good. In 2008, we reported that rather than establishing a process for budgeting and allocating human resources that fully considers the agency’s current workload, EPA makes requests for funding and staffing by making incremental adjustments, largely based on historical precedent. We noted that the agency has not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. Moreover, EPA’s human capital management systems have not kept pace with changing legis requirements and priorities, changes in environmental conditions in different regions of the country, and the much more active role that states now play in carrying out day-to-day-activities of federal environmental programs. To remedy its piecemeal methods for determining workload and staff allocation, we recommended that EPA improve its workforce planning by identifying the factors driving its workload and developing more accurate allocation systems for deploying staff with the requisite skills and capabilities to areas where they are most needed. The agency has taken some recent steps to improve its workforce planning. For example, in 2009 it hired a contractor to provide information about the agency’s workload in several key areas, such as staffing levels and workload shifts. In addition, the agency asked one of its advisory councils to help in developing its next strategic workforce plan to supersede the last plan established in 2006, which delegated responsibilities to the various offices. We have not evaluated whether EPA has made meaningful progress in these efforts. EPA has authorized states to carry out many of the day-to-day responsibilities for timely and appropriate enforcement of environmental laws and regulations. We have noted instances in the past where EPA has not (1) identified the causes of poorly performing state enforcement programs, (2) informed the public about how well the states are implementing their enforcement responsibilities, or (3) assessed the performance of EPA’s regional offices in carrying out their state oversight responsibilities—performance that has generally proven to be inconsistent over the years. EPA has been slow to improve long-standing problems with often incomplete and unreliable enforcement data. Among other things, enforcement data are needed to accurately identify and characterize regulated entities to improve the transparency and accuracy of the agency’s reports to Congress and the public when reporting on the effectiveness of the enforcement programs. Furthermore, we have reported problems in how EPA calculates and reports on measures of program effectiveness, such as penalties, the value of injunctive relief, and any resulting reduction in pollution. These problems may undermine the transparency and accuracy of EPA’s reported outcomes and cause the agency to either over- or underreport its enforcement achievements. In recent years, we have recommended ways for EPA to enhance its oversight of regional and state enforcement activities so as to implement environmental programs consistent with the requirements of federal statutes and regulations. In particular, we recommended that EPA develop an action plan for addressing enforcement problems identified in state programs; ensure that states have sufficient resources to implement and enforce programs as authorized by EPA; and help the states improve their capacity for enforcement. We also suggested that EPA (1) routinely assess the performance of regional and state enforcement programs and communicate the results of these assessments to the public and the regulated industry and (2) disclose more information when reporting penalties and estimates of the value of injunctive relief and pollution reduction. EPA has generally agreed with our recommendations and is in the process of implementing them. In particular, the agency has developed an initiative known as the State Review Framework that it believes will (1) address many of the long-term problems related to providing fair, consistent, and transparent enforcement throughout the country and (2) obtain accurate data that can be used to determine the extent of state compliance with enforcement standards and the need for corrective actions. Still, implementation of the framework is clearly a work in progress. During its fiscal year 2008 evaluation of the framework, for example, EPA identified significant noncompliance with water permitting requirements and an unacceptably low level of enforcement activity. In response, in 2009 the agency issued its Clean Water Act Enforcement Action Plan, which described efforts to (1) raise the bar for EPA and state enforcement performance; (2) inform the public clearly and fully about serious Clean Water Act violations and actions to address them; and (3) use the latest technology to transform the collection, use, and availability of EPA data. In addition, EPA now publishes its State Review Framework reports and data on enforcement performance on its Web site and has developed new Web-based tools to help the public search and analyze the performance data. EPA also stated that it would take actions to disclose more information when reporting estimates of injunctive relief and pollution reductions and consider our recommendation to report collected penalties. For example, in 2010, EPA began reporting penalties in a manner that clearly indicates that penalties are reported as assessed, rather than as collected, and began properly presenting time-series data that are adjusted for inflation. Overall, the agency’s efforts in this area are still in their early stages, and their success is uncertain. Much will depend on the continued commitment of senior management, along with sufficient priority and resources. EPA relies on other federal and state agencies to help implement its programs. Given the federal deficit and the government’s long-term fiscal challenges, it is imperative that EPA improve coordination with its federal and state partners to reduce administrative burdens, redundant activities, and inefficient uses of federal resources. For example, EPA and other federal agencies may work together to fund water infrastructure projects. In 2009, we reported that EPA and six federal agencies obligated $1.4 billion for drinking water and wastewater projects to assist communities in the U.S.-Mexico border region from fiscal years 2000 through 2008. Nevertheless, we found that the agencies’ efforts to fund these projects were ineffective because the agencies, with the exception of the Indian Health Service, had not comprehensively assessed the region’s needs and lacked coordinated policies and processes for selecting and building projects. As a result, we suggested that Congress may wish to consider establishing an interagency task force to develop a plan for coordinating funding to address the region’s most pressing needs. In addition to funding water infrastructure projects, EPA has coordinated with numerous federal and state agencies as the lead agency in a multi- billion dollar effort to restore the Chesapeake Bay. We found, however, that key commitments and plans were inconsistent with one another, and some were viewed to be unachievable by some partners. In 2008, we reported that the Chesapeake Bay Program (a partnership among EPA, several states, and the Chesapeake Bay Commission) had taken several actions in response to our findings, such as developing a strategic framework to unify planning documents and identify how it will pursue its goals. While these actions are positive steps, we found that additional actions are needed before the program has the comprehensive, coordinated implementation strategy we recommended. As we reported in March 2009, EPA’s ability to effectively implement its mission of protecting public health and the environment depends on credible and timely assessment of the risks posed by toxic chemicals. Such assessments are the cornerstone of scientifically sound environmental decisions, policies, and regulations under a variety of statutes, including TSCA. EPA assesses chemicals under its Integrated Risk Information System (IRIS) program and is authorized under TSCA to obtain information on the risks of chemicals and to control those it determines pose an unreasonable risk. Because EPA had not developed sufficient chemical assessment information under these programs to limit public exposure to many chemicals that may pose substantial health risks, in 2009 we added this issue to our list of areas at high risk for waste, fraud, abuse, and mismanagement or in need of broad-based transformation. In a number of reports, we have also made recommendations to (1) improve the timeliness and credibility of EPA’s IRIS program, which provides EPA’s scientific position on the potential human health effects of more than 540 chemicals, and (2) enhance EPA’s ability under TSCA to, among other things, obtain health and safety information from the chemical industry. We also recently addressed nanotechnology as an emerging area of toxic substance regulation. EPA’s IRIS database provides the basic information the agency needs to determine whether it should establish controls to protect the public from exposure to toxic chemicals in the air, in water, and at hazardous waste sites. In March 2008, we reported that IRIS’ viability was at risk because EPA had been unable to complete timely and credible chemical assessments—including those for chemicals of greatest concern, such as formaldehyde and dioxin. Assessments of these two chemicals have been in progress for 13 and 19 years, respectively. In addition, EPA had been unable to decrease its long-standing backlog of ongoing assessments or to keep its existing assessments current. In May 2009, EPA revised its IRIS assessment process. If implemented effectively, these assessment reforms will be largely responsive to our 2008 recommendations. Among other things, they will restore EPA’s control of the process and increase its transparency. Specifically, under the prior process, interagency reviews were required and managed by the Office of Management and Budget, and EPA was not allowed to proceed with assessments at various stages until the office agreed that EPA had sufficiently responded to interagency comments. In contrast, under the reforms, EPA is to manage the entire assessment process, and all written comments on draft assessments provided during the interagency process are to be part of the public record. It is too soon to determine whether the reforms will be effective, but EPA reports it has made some progress in addressing its assessment backlog. We are currently reviewing EPA’s implementation of the revised process. We have also reported that EPA’s assessments of industrial chemicals under TSCA provide limited information on health and environmental risks. In contrast to the approach taken by the European Union—which generally places the burden on companies to provide data on the chemicals they produce and to address the risks posed by these chemicals to human health and the environment—TSCA generally places the burden on EPA to obtain information about the roughly 80,000 chemicals in the agency’s TSCA inventory. For example, the act requires EPA to demonstrate certain health or environmental risks before it can require companies to further test their chemicals. Consequently, EPA does not routinely assess the risks of the industrial chemicals already in use. For the approximately 700 new chemicals introduced into commerce annually, chemical companies are required to provide EPA with certain information in premanufacture notices, and EPA can ban or limit the chemicals’ use if the information is inadequate. Nevertheless, although 85 percent of the notices lack any health or safety test data, EPA does not often use its authority to obtain more information. After our reports, EPA began taking steps to address some of these issues. For example, under its existing authorities, EPA has initiated actions on such chemicals as mercury and lead to, for example, ban or phase out their use in certain products. Most of these actions are in their early stages of development. As we reported in our February 2011 High-Risk Update, EPA needs to continue to demonstrate a strong commitment to and support of the IRIS program and its TSCA initiatives. Specifically, we stated that EPA needs to ensure that its 2009 IRIS reforms are implemented effectively and that the program can routinely provide timely and credible assessments. Regarding TSCA, we have recommended both statutory and regulatory changes to, among other things, provide EPA with additional authorities to obtain health and safety information from the chemical industry and to shift more of the burden to chemical companies for demonstrating the safety of their chemicals. The EPA Administrator has expressed support for TSCA reforms and in 2010 developed principles for addressing them. Finally, one emerging area of toxic substance regulation on which we recently reported, and for which EPA faces challenges, is the area of nanotechnology. Nanotechnology involves the ability to control matter at the scale of a nanometer—one billionth of a meter. The world market for products containing nanomaterials is expected to reach $2.6 trillion by 2015. EPA has taken some regulatory action under TSCA to address potential risks to human health and the environment related to nanotechnology, but other planned actions have not yet gone into effect. Overall, EPA has issued four regulations characterizing the manufacture of four different nanomaterials as significant new uses of existing chemicals under TSCA. In our May 2010 report, we recommended, among other things, that EPA finalize a number of regulatory actions it had planned to pursue. Specifically, according to EPA, the agency plans to propose a new rule that would regulate, in a single rule, a range of nanoscale versions of existing chemicals as significant new uses of those chemicals. EPA also plans to require companies to provide certain information on nanomaterials—including production volume, methods of manufacture and processing, exposure and release, and available health and safety studies—and plans to require companies to generate test data on the health effects of different nanomaterials. At the time our report was released, EPA reported that it planned to propose these rules by December 2010, but has not yet done so. While EPA continues to work on these rules, however, products may be entering the market without EPA review of available information on their potential risk. In addition, although EPA requires chemical companies to periodically provide certain information on many of the chemicals currently in commerce, it has not extended this requirement to nanomaterials. The Clean Water Act establishes the basic structure for regulating discharges of pollutants into the waters of the United States and regulating the quality of surface waters. Since its enactment, much progress has been achieved under the act to control pollution from wastewater treatment plants and other specific “point sources” of discharge. Since that time, however, other challenges have emerged and continue to confront EPA and other levels of government in their efforts to ensure safe and abundant water supplies for the American people. These challenges include (1) the need to focus more attention on diffuse, or “nonpoint,” sources of pollution to address the most significant of the nation’s remaining water quality problems; (2) the unique challenges posed by deterioration in the nation’s premier watersheds including, among others, the Chesapeake Bay and Great Lakes; and (3) daunting challenges posed by the multibillion dollar liabilities associated with replacing, maintaining, and building new water infrastructure. The Clean Water Act’s effectiveness has become increasingly challenged by a recognition that the largest share of the nation’s remaining water quality problems are more decentralized and diffuse in nature—and therefore more difficult to monitor and regulate. One such nonpoint pollution source, for example, is urban storm water runoff. Pollutants and sediment carried by storm water, as well as the volume and temperature of runoff, can alter aquatic habitats and make it hard for fish and other organisms to survive. Polluted storm water runoff can also make fish and shellfish unsafe to eat and can adversely affect people using fresh- and saltwater areas for recreation. In 2007, we reported that while many communities were still implementing their first permits for controlling storm water runoff, several factors influence the extent to which EPA’s storm water program burdens a community, such as prior storm water management experience. We recommended that EPA evaluate the implementation of its storm water program, issue additional program guidance, and consider regulatory changes to improve the quality and consistency of activity reporting by communities. EPA agreed with our recommendations to develop guidance to help the agency obtain better data to evaluate the program and provided additional program guidance to states and regions on such items as storm water pollution prevention plans. In 2009, the agency issued a guide to assist permit writers in strengthening storm water permits in 2010. The agricultural sector accounts for a large share of water problems stemming from nonpoint sources and therefore much of the effort to control such pollution lies within the jurisdiction of the U.S. Department of Agriculture. Crop production, for example, impairs water quality as pesticides, fertilizer, and sediment run off fields and into nearby water bodies. Of particular note, a 10-year, nationwide study published in 2006 by the U.S. Geological Survey detected pesticides in 97 percent of streams in agricultural and urban watersheds. In 2009, we reported that many experts believe that the increased use of pesticides (insecticides and herbicides) related in particular to increased crop production for biofuels, will likely further degrade surface and ground water quality. Another major source of agriculture-related pollution stems from discharges associated with large-scale animal feeding operations. More than a dozen government-sponsored or peer-reviewed studies since 2002 on water pollutants emitted by concentrated animal-feeding operations found increased levels of phosphorus, nitrogen, or hormones in surface water and groundwater near animal-feeding operations. Excessive amounts of these nutrients can deplete oxygen in water, which could result in fish deaths, reduced aquatic diversity, and illness in infants. Our 2008 report on the subject found that despite its long-term regulation of concentrated animal-feeding operations, EPA still lacks comprehensive and reliable data on the number, location, and size of the operations that have been issued permits and the amounts of discharge they release. As a result, EPA has neither the information it needs to assess the extent to which these concentrated animal-feeding operations may be contributing to water pollution, nor the information it needs to ensure compliance with the Clean Water Act. The question of how well EPA is coordinating its own efforts to control agricultural pollution with Agriculture is an important part of our ongoing review of the agency’s Nonpoint Source Management Program, established under section 319 of the Clean Water Act. This program supports state nonpoint source management programs, providing funds to states to implement projects directed toward resolving nonpoint source pollution problems. Among the key issues being addressed in this broad program review are the extent to which EPA coordinates the implementation of its section 319 program with similar efforts to control agricultural nonpoint sources of pollution undertaken by Agriculture, as well as with other federally funded efforts to control nonpoint sources of pollution (including efforts funded through EPA’s own Clean Water State Revolving Fund). EPA has increasingly emphasized a “watershed-based approach” that attempts to restore and protect the nation’s water resources by taking into account the full range of stresses emanating from all pollution sources. Under this holistic approach, EPA and its partners seek to identify the priority threats to large, often multistate watersheds like the Great Lakes and Chesapeake Bay. EPA partners with federal, state, and local agencies and nongovernmental organizations to develop and implement approaches that reduce pollution in our nation’s significant water bodies. Nonetheless, after decades of effort and expense by EPA and its partners to spearhead restoration efforts for these watersheds, we reported that these efforts have been impeded by a lack of targeted strategies; poor coordination among federal, state, and local stakeholders; and unrealistic goals for ensuring that limited restoration resources are being used for the most effective restoration activities. In 2006, for example, we recommended that EPA ensure that the Chesapeake Bay Program develop a coordinated implementation strategy unifying its various planning documents and establishing a means to better target its limited resources to the most cost-effective restoration activities. Along similar lines, in 2008 we recommended that EPA develop for its Great Lakes Initiative a more consistent permitting strategy for controlling mercury and gather more information to help it develop water quality standards and assess the effect of programs intended to minimize pollutants that are exceeding standards. EPA has taken some actions in response to our recommendations. In addition, in May 2009, the President issued an executive order establishing a Federal Leadership Committee for the Chesapeake Bay to oversee the development and coordination of programs and activities of agencies participating in protection and restoration of the bay. Chaired by EPA, the committee includes six other federal agencies. Part of its responsibilities included developing a strategy for coordinated implementation of existing programs and projects to guide efforts to protect and restore Chesapeake Bay. The resulting strategy was issued in May 2010. We are currently assessing this strategy. Additionally, EPA has indicated that it plans to work with the Great Lakes states in assessing approaches for reducing mercury in lieu of developing a mercury permitting strategy. Some of the most daunting water pollution control problems will be those faced by EPA and the nation’s water utilities in addressing the multibillion- dollar costs of upgrading aging and deteriorating water infrastructure and building new infrastructure to serve a growing population. The investment made throughout the 1970s and 1980s to build and upgrade the nation’s water infrastructure accounted for much of the progress in past years to deal with what were, at that time, the pressing water issues of high bacterial contamination and toxic water pollution. Many of the wastewater treatment plants and other water infrastructure built in those years, however, have since reached, or will soon reach, the end of their design lives. Frequent and highly publicized incidents of combined sewer overflows into rivers and streams, as well as water main breaks in the nation’s largest cities, have been perhaps the most visible manifestations that the problem is growing. EPA provides funding to the states for water infrastructure upgrades and construction through the Clean Water and the Drinking Water state revolving funds, authorized by Congress in 1987 and 1996, respectively. Congress provided $2.1 billion and $1.4 billion, respectively, for each program in fiscal year 2010. These funds supplement other revenue—from water rates or other taxes—raised by local utilities to pay for their infrastructure projects. While EPA also received and distributed about $6 billion in additional water infrastructure funding under the American Recovery and Reinvestment Act, the total cost to meet water infrastructure needs across the country through 2029 has been estimated to be from $485 billion to $1.2 trillion. EPA faces a challenge in working with the states and utilities to address this issue. We have noted in the past that better management techniques can, at least to some extent, help utilities make the best use of available dollars in their struggle to meet their infrastructure needs. We recommended comprehensive asset management—a technique whereby water systems systematically identify their needs, set priorities and better target their investments—as a tool for helping utilities make better use of available funds. However, additional funds—or revenue from rate increases—will still likely be needed to address future needs. To address options for alternative funding sources for these infrastructure needs, we have issued reports providing information on various proposals to develop alternative funding sources and mechanisms to address current and projected water infrastructure needs. In 2009, we reviewed one proposal to establish a Clean Water Trust Fund, which would provide a dedicated source of federal funding for wastewater infrastructure. Stakeholders we interviewed disagreed over whether EPA should administer such a trust fund as part of the Clean Water State Revolving Fund. These stakeholders also disagreed over whether funding should be provided as loans or grants to recipients, although a majority did agree that funds should pay for capital projects. We also discussed potential revenue sources for funding a Clean Water Trust Fund and obstacles to generating revenue from these sources. In 2010, we examined two other proposed alternative funding sources for water infrastructure projects: a national infrastructure bank and public- private partnerships. Concerning an infrastructure bank, stakeholders disagreed over whether an infrastructure bank should be administered by a federal agency or structured as a government corporation or other entity and over which types of projects—such as large infrastructure projects or small ones—should be eligible for bank financing. Stakeholders did agree, however, that federal funds should be used to finance a bank initially but that other mechanisms could be used to generate funds for financing projects over the long term. Regarding public-private partnerships, officials for the 7 municipalities that had experience with such arrangements said that advantages of public-private partnerships include access to nontraditional funding sources, creating potential efficiency through economies of scale, and completing projects more quickly. These officials also identified challenges to public-private partnerships, such as local opposition to potential or perceived rate increases, higher interest rates charged by private entities involved in the partnership, and increased project costs because of complex contracts and arrangements. As a related matter, in 2010, we reviewed 14 states’ spending of Recovery Act funding on water infrastructure projects. The Recovery Act provided $6 billion in additional funding for states, $2 billion for the Drinking Water State Revolving Fund and $4 billion for the Clean Water State Revolving Fund. We found that these states allocated the funding to 504 drinking water projects and 890 clean water projects. We also found that the states met Recovery Act requirements for providing Clean Water revolving fund assistance for “green” projects (projects that included environmentally friendly infrastructure, provided water- or energy-efficiency improvements, or other environmentally innovative activities). We found, however, that attention and monitoring by EPA and the states of Recovery Act projects could be strengthened. As a result, we recommended that EPA work with the states to implement specific oversight procedures to monitor and ensure Recovery Act compliance. EPA issued new guidance in June 2010. We are continuing our review of EPA’s implementation of Recovery Act funds and how the funds will help address states’ water quality problems. As part of this work, we will continue to assess EPA’s and the states’ monitoring of Recovery Act projects. To protect human health and the environment from the effects of hazardous substances, Congress enacted the Comprehensive Environmental Response, Compensation, and Liability Act in 1980, which established the Superfund program. Since 1980, EPA has identified more than 47,000 hazardous waste sites potentially requiring cleanup. As of the beginning of fiscal year 2010, 1,269 of the most seriously contaminated sites were included on EPA’s National Priorities List: 1,111 nonfederal sites and 158 federal facilities. Among the key findings of our recent work are that (1) cleanup costs are likely to be substantial, (2) problems with the accuracy and completeness of data prevent the agency from estimating future cleanup costs, and (3) several key obstacles have delayed cleanup progress at Department of Defense (DOD) installations. Our recent work provides an indication of the challenges that lie ahead for this important program. We and other organizations have cited the growing gap between the costs associated with cleaning up sites remaining on the National Priorities List and funds available to do so. Cleanup efforts at listed sites are typically expensive and can take many years. While responsible parties are liable for conducting or paying for site cleanup of hazardous substances—and EPA can seek reimbursement for its cleanup costs from these parties—the parties in some cases cannot be identified or may be unwilling or financially unable to perform the cleanup. To fund EPA-led cleanups at nonfederal National Priorities sites, EPA uses the Hazardous Substance Superfund (trust fund) from which EPA receives annual appropriations. Historically, the trust fund was financed primarily by taxes on crude oil and certain chemicals, as well as an environmental tax on corporations based on their taxable income. The authority for these taxes expired in 1995, however, and shortly thereafter the balance in the trust fund started to diminish. Since 2001, appropriations from general revenues have been the largest source of funding for the trust fund. At the start of fiscal year 2009, the trust fund had a balance of $137 million. Superfund program appropriations have averaged about $1.2 billion annually since 1981, although the annual level of these appropriated funds has generally declined in recent years when adjusted for inflation. In June 2010 we reported that EPA’s cost to remediate existing and future National Priorities sites will likely exceed current funding levels. Considerable work remains at most nonfederal sites on the list with unknown or unacceptable human exposures, and some site cleanups have not been funded at a level that is sufficient to ensure meaningful results. Moreover, site costs are likely to increase because, according to EPA, in the program’s early years the agency focused resources on sites that needed less construction work and were farther along in the cleanup process. Consequently, the sites that have been on the National Priorities List the longest without completing construction of cleanup remedies are likely to face more complex and costly future cleanup work. While remedial actions have been implemented or are under way at most sites on the National Priorities List, the amount of work remaining is unclear because, as we reported in July 2009, data on whether construction is complete at sites do not provide a clear picture of the amount of work that actually remains at sites, and the progress of cleanup is even less clear for sites where construction is not complete. EPA program status reports do not provide information on the number and cleanup status of megasites—sites with actual or expected total cleanup costs, including removal and remedial action costs, that are expected to amount to $50 million or more (especially mining and sediment sites). This information could help indicate the types of conditions driving EPA’s remedy decisions at sites that were listed more recently, as well as the impediments to cleanup progress at older sites. Additionally, these reports do not provide information on the number of sites where responsible parties are financially unable to help pay for cleanup activities or on the potential impact on EPA’s ability to carry out cleanup activities when it cannot obtain reimbursement from responsible parties for agency cleanup costs. Such information could help indicate the factors that are driving program expenditures and potential future costs. Accordingly, we recommended that EPA assess the comprehensiveness and reliability of the data the agency collects and, where necessary, improve the data to provide aggregated information on (1) the status and cost of cleanups at individual sites, particularly complex and expensive sites; (2) the extent to which there are viable responsible parties at sites on the National Priorities List; and (3) the potential financial impacts from EPA’s inability to obtain reimbursement for agency cleanup costs from nonviable responsible parties. EPA agreed to assess data reported on program status and costs but did not agree to assess and report data on the extent to which there are viable responsible parties, nor on the financial impacts if such parties cannot be identified. We believe these data are essential to assess EPA’s future funding needs. As we reported in May 2010, most EPA regional offices expect an increase in the number of sites added to the National Priorities List over the next 5 years but cannot estimate the associated cleanup costs. One factor that could increase the number of sites eligible for the list is whether EPA begins to assess the risks of subsurface hazardous substances leaking upward into homes and businesses (vapor intrusion). As a result, we recommended that EPA determine the extent to which EPA will consider vapor intrusion as part of the listing process for the National Priorities List and how this phenomenon will affect the number of sites listed in the future. EPA agreed with our recommendation. Our July 2010 report on DOD-related Superfund sites identified several obstacles—including poor coordination, lack of interagency agreements, contract management, and legal limitations—that have delayed cleanups. First, poor coordination with regulators and incomplete record reviews have resulted in poor decision making, such as placing military personnel in housing at risk of contamination, ultimately leading to their evacuation. Second, because DOD had not signed interagency agreements at some of its National Priorities List sites, EPA lacked the mechanisms to ensure that cleanup proceeds expeditiously, is properly done, and has public input as required by law. Third, DOD’s use of performance-based contracts to clean up installations has affected how the cleanup work was scoped and conducted and has created pressure on contractors to operate within price caps and meet deadlines, which may conflict with regulatory review times and encourage the department to take shortcuts. Finally, EPA has virtually no enforcement tools available to compel agency compliance with the law at installations without an interagency agreement, unless EPA has concurrence from the Department of Justice, whose policy generally precludes one agency from bringing suit against another. As one of the most complicated interdisciplinary environmental issues currently facing the federal government, climate change poses particular management challenges for EPA. We have previously reported that, in addition to its environmental implications, climate change has implications for the fiscal health of the federal government, affecting federal crop and flood insurance programs and placing new stresses on infrastructure and natural resources. We have also analyzed and reported on recent legislative and regulatory efforts to reduce greenhouse gas emissions. Recent GAO work has also identified a range of climate change management challenges for the federal government at large, including a broad array of departments with diverse missions. For EPA, particular challenges relate to the agency’s ongoing efforts to reduce carbon emissions; to coordinate activities with other agencies; and to account for and manage data on greenhouse gas emissions. Several bills that would have established comprehensive emissions reduction programs were introduced and debated during the 111th Congress, although none became law. To provide the Congress with relevant information during these deliberations, however, we reported on the economic implications of different policy options and on lessons learned from the European Union’s own efforts to implement mandatory carbon reductions. We found, for example, that the European Union set its overall emissions limit, or “cap,” too high (i.e., at a level that was higher than actual emissions) because of uncertainty surrounding the emissions data used to set the cap. We also reported on carbon offsets—reductions of greenhouse gas emissions from an activity on one place to compensate for emissions elsewhere—noting that the credibility of offsets could compromise the environmental integrity of a system to reduce emissions. In the absence of a law establishing a cap-and-trade program in the United States, EPA is implementing a regulatory program to reduce greenhouse gas emissions that is facing an array of legal challenges. Specifically, in 2009 EPA issued a finding that greenhouse gas emissions from new motor vehicles are contributing to air pollution that is endangering public health and welfare. This finding, known as the Endangerment Finding, is the foundation for all of EPA’s efforts to regulate greenhouse gases under the Clean Air Act. Twenty-six lawsuits have been filed challenging the endangerment finding for greenhouse gases. Nonetheless, the EPA rule establishing emissions standards for light-duty motor vehicles went into effect on January 2, 2011. Additional rules subjecting certain stationary sources to regulation under the Clean Air Act as of January 2, 2011, have also been challenged. All of these lawsuits are to be heard together by the same panel of judges. Moreover, to date, five bills that would preclude EPA from regulating greenhouse gases under the Clean Air Act have been introduced in the 112th Congress. Climate change has the potential to affect every sector and level of government operations. Consequently, there are areas in which EPA will need to work closely with other agencies and to clarify its own role within broader, governmentwide efforts. One example arose during our 2008 work on the federal government’s examination of carbon capture and storage as a means of reducing carbon emissions from the electric utility sector. Carbon capture and storage involves capturing carbon dioxide from a power plant’s emissions, transporting it to an underground storage location, and then injecting it into a geologic formation for long-term storage. In addition to its formidable technological challenges, we noted that carbon capture and storage faces significant legal and regulatory uncertainties. We noted that EPA was addressing some of these uncertainties (specifically by issuing a rule to govern underground injection of carbon dioxide for geologic sequestration), but that “many of them fall within the domain of the Departments of Energy, the Interior, Transportation, the Federal Energy Regulatory Commission, and other agencies in a manner that would require collaboration between agencies and, in many cases, coordination with state governments and other entities.” We recommended that EPA more comprehensively examine barriers to the development of carbon capture and storage by identifying key issues that fall outside the agency’s Safe Drinking Water Act authority. EPA’s Office of Water responded to GAO that it is committed to work both with other offices within the agency as well as other “partner federal agencies” to assess the implications of various statutes on the development of carbon capture and storage. As a related matter, the White House established an Interagency Task Force on Carbon Capture and Storage on February 3, 2010, to develop a comprehensive and coordinated federal strategy to speed the commercial development and deployment of clean coal technologies. Among other things, the Task Force’s August 2010 report recommended that EPA and other relevant agencies work to quickly and collaboratively propose, finalize, and implement a regulatory framework to ensure safe and effective carbon capture and storage deployment. High-quality data on greenhouse gas emissions are critical to the development and implementation of domestic and international efforts to address climate change. As we recently reported, for example, a European Union program designed to control carbon emissions has run into difficulties due to a lack of facility-specific data on baseline emissions. EPA faces particular challenges in accounting for and managing emissions data from facilities. The Consolidated Appropriations Act of 2008 directed EPA to issue a regulation requiring mandatory reporting of greenhouse gas emissions above appropriate thresholds in all sectors of the economy. EPA issued the regulation under its Clean Air Act authority on October 30, 2009. The regulation includes provisions to ensure the accuracy of emissions data through monitoring, record-keeping, and verification requirements. According to EPA, the rule covers approximately 10,000 facilities responsible for an estimated 85 to 90 percent of total U.S. greenhouse gas emissions. Data collection, monitoring, and verification for a universe of facilities this large could be expected to pose a formidable challenge for EPA especially in light of the tight budget environment. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact David Trimble at (202) 512-3841 or trimbled@gao.gov. 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 Steve Elstein, Assistant Director, Nathan Anderson, and Joseph D. Thompson. Also contributing to this testimony were Liz Beardsley; Antoinette Capaccio; Ellen Chu; Emily Eischen; Elizabeth Erdmann; Christine Fishkin; Mike Hix; Richard P. Johnson; James R. Jones, Jr.; Susan Iott; Barbara Patterson; Vincent Price; Diane Raynes; Daniel Semick; John C. Smith; and Jeanette Soares. High Risk Series: An Update, GAO-11-278. Washington, D.C.: February 2011. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation, GAO-10-413. Washington, D.C.: March 31, 2010. Clean Water Act: Longstanding Issues Impact EPA’s and States’ Enforcement Efforts GAO-10-165T. Washington, D.C.: October 15, 2009. EPA’s Execution of Its Fiscal year 2007 New Budget Authority for the Enforcement and Compliance Assurance Program in the Regional Offices. GAO-08-1109R. Washington, D.C.: September 26, 2008. Environmental Enforcement: EPA Needs to Improve the Accuracy and Transparency of Measures Used to Report on Program Effectiveness. GAO-08-1111R. Washington, D.C.: September 18, 2008. Chesapeake Bay Program: Recent Actions Are Positive Steps Toward More Effectively Guiding Restoration Efforts. GAO-08-1033T. Washington, D.C.: July 30, 2008. Environmental Protection: EPA Needs to Follow Best Practices and Procedures When Reorganizing Its Library Network. GAO-08-579T. Washington, D.C.: March 13, 2008. Environmental Protection: EPA Needs to Ensure That Best Practices and Procedures Are Followed When Making Further Changes to Its Library Network. GAO-08-304. Washington, D.C.: February 29, 2008. Toxic Chemical Releases: EPA Actions Could Reduce Environmental Information Available to Many Communities. GAO-08-128. Washington, D.C.: November 30, 2007. Measuring Our Nation’s Natural Resources and Environmental Sustainability: Highlights of a Forum Jointly Convened by the Comptroller General of the United States and the National Academy of Science. GAO-08-127SP. Washington, D.C.: October 2007. Environmental Right-To-Know: EPA’s Recent Rule Could Reduce Availability of Toxic Chemical Information Used to Assess Environmental Justice. GAO-08-115T. Washington, D.C.: October 4, 2007. Environmental Protection: EPA-State Enforcement Partnership Has Improved, but EPA’s Oversight Needs Further Enhancement. GAO-07-883. Washington, D.C.: July 31, 2007. Environmental Justice: Measurable Benchmarks Needed to Gauge EPA Progress in Correcting Past Problems. GAO-07-1140T. Washington, D.C.: July 25, 2007. Environmental Information: EPA Actions Could Reduce the Availability of Environmental Information to the Public. GAO-07-464T. Washington, D.C.: February 6, 2007. Environmental Compliance and Enforcement: EPA’s Effort to Improve and Make More Consistent Its Compliance and Enforcement Activities. GAO-06-840T. Washington, D.C.: June 28, 2006. Clean Water Act: Improved Resource Planning Would Help EPA Better Respond to Changing Needs and Fiscal Constraints. GAO-05-721. Washington, D.C.: July 22, 2005. Environmental Indicators: Better Coordination Is Needed to Develop Environmental Indicator Sets That Inform Decisions. GAO-05-52. Washington, D.C.: November 17, 2004. Human Capital: Implementing an Effective Workforce Strategy Would Help EPA to Achieve Its Strategic Goals. GAO-01-812. Washington, D.C.: July 31, 2001. Nanotechnology: Nanomaterials Are Widely Used in Commerce, but EPA Faces Challenges in Regulating Risk. GAO-10-549. Washington, D. C: May 25, 2010. Chemical Regulation: Observations on Improving the Toxic Substances Control Act. GAO-10-292T. Washington, D.C.: December 2, 2009. EPA Chemical Assessments: Process Reforms Offer the Potential to Address Key Problems. GAO-09-774T. Washington, D.C.: June 11, 2009. Scientific Integrity: EPA’s Efforts to Enhance the Credibility and Transparency of Its Scientific Processes. GAO-09-773T. Washington, D.C.: June 9, 2009. Chemical Regulation: Options for Enhancing the Effectiveness of the Toxic Substances Control Act. GAO-09-428T. Washington, D.C.: February 26, 2009. High Risk Series: An Update. GAO-09-271. Washington, D.C.: January, 2009. Environmental Health: EPA Efforts to Address Children’s Health Issues Need Greater Focus, Direction, and Top-Level Commitment. GAO-08-1155T. Washington, D.C.: September 16, 2008. Chemical Assessments: EPA’s New Assessment Process Will Further Limit the Productivity and Credibility of Its Integrated Risk Information System. GAO-08-810T. Washington, D.C.: May 21, 2008. Toxic Chemicals: EPA’s New Assessment Process Will Increase Challenges EPA Faces in Evaluating and Regulating Chemicals. GAO-08-743T. Washington, D.C.: April 29, 2008. Chemical Assessments: Low Productivity and New Interagency Review Process Limit the Usefulness and Credibility of EPA’s Integrated Risk Information System. GAO-08-440. Washington, D.C.: March 7, 2008. Chemical Regulation: Comparison of U.S. and Recently Enacted European Union Approaches to Protect against the Risks of Toxic Chemicals. GAO-07-825. Washington, D.C.: August 17, 2007. Environmental Contamination: Department of Defense Activities Related to Trichloroethylene, Perchlorate, and Other Emerging Contaminants. GAO-07-1042T. Washington, D.C.: July 12, 2007. Perchlorate: EPA Does Not Systematically Track Incidents of Contamination. GAO-07-797T. Washington, D.C.: April 25, 2007. Chemical Regulation: Actions Are Needed to Improve the Effectiveness of EPA’s Chemical Review Program. GAO-06-1032T. Washington, D.C.: August 2, 2006. Chemical Regulation: Approaches in the United States, Canada, and the European Union. Washington, D.C.: GAO-06-217R. November 4, 2005. Chemical Regulation: Options Exist to Improve EPA’s Ability to Assess Health Risks and Manage Its Chemical Review Program. GAO-05-458. Washington, D.C.: June 13, 2005. Wastewater Infrastructure Financing: Stakeholder Views on a National Infrastructure Bank and Public-Private Partnerships. GAO-10-728. Washington, D.C.: June 30, 2010. Recovery Act: Status of States’ and Localities’ Use of Funds and Efforts to Ensure Accountability. GAO-10-604. Washington, D.C.: May 26, 2010. Biofuels: Potential Effects and Challenges of Required Increases in Production and Use. GAO-09-446. Washington, D.C.: August 25, 2009. Clean Water Infrastructure: A Variety of Issues Need to Be Considered When Designing a Clean Water Trust Fund. GAO-09-657. Washington, D.C.: May 29, 2009. Environmental Health: EPA Efforts to Address Children’s Health Issues Need Greater Focus, Direction, and Top-Level Commitment. GAO-08-1155T. Washington, D.C.: September 16, 2008. Concentrated Animal Feeding Operations: EPA Needs More Information and a Clearly Defined Strategy to Protect Air and Water Quality from Pollutants of Concern, GAO-08-944. Washington, D.C.: September 4, 2008. Recent Actions by the Chesapeake Bay Program Are Positive Steps Toward More Effectively Guiding the Restoration Effort, but Additional Steps Are Needed. GAO-08-1131R. Washington, D.C.: August 28, 2008. Chesapeake Bay Program: Recent Actions Are Positive Steps Toward More Effectively Guiding the Restoration Effort. GAO-08-1033T. Washington, D.C.: July 30, 2008. Physical Infrastructure: Challenges and Investment Options for the Nation’s Infrastructure, GAO-08-763T. Washington, D.C.: May 8, 2008. International Boundary and Water Commission: Two Alternatives for Improving Wastewater Treatment at the United States-Mexico Border. GAO-08-595R. Washington, D.C.: April 24, 2008. Great Lakes Initiative: EPA and States Have Made Progress, but Much Remains to Be Done If Water Quality Goals Are to Be Achieved. GAO-08-312T. Washington, D.C.: January 23, 2008. Coastal Wetlands: Lessons Learned from Past Efforts in Louisiana Could Help Guide Future Restoration and Protection. GAO-08-130. Washington, D.C.: December 14, 2007. South Florida Ecosystem: Some Restoration Progress Has Been Made, but the Effort Faces Significant Delays, Implementation Challenges, and Rising Costs. GAO-07-1250T. Washington, D.C.: September 19, 2007. Maritime Transportation: Major Oil Spills Occur Infrequently, but Risks to the Federal Oil Spill Fund Remain. GAO-07-1085. Washington, D.C.: September 7, 2007. The BEACH Act of 2000: EPA and States Have Made Progress Implementing the Act, but Further Actions Could Increase Public Health Protection. GAO-07-1073T. Washington, D.C.: July 12, 2007. South Florida Ecosystem: Restoration Is Moving Forward but Is Facing Significant Delays, Implementation Challenges, and Rising Costs. GAO-07-520. Washington, D.C.: May 31, 2007. Clean Water: Further Implementation and Better Cost Data Needed to Determine Impact of EPA’s Storm Water Program on Communities. GAO-07-479. Washington, D.C.: May 31, 2007. Great Lakes: EPA and States Have Made Progress in Implementing the BEACH Act, but Additional Actions Could Improve Public Health Protection. GAO-07-591. Washington, D.C: May 1, 2007. Chesapeake Bay Program: Improved Strategies Needed to Better Guide Restoration Efforts. GAO-06-614T. Washington, D.C.: July 13, 2006. Chesapeake Bay Program: Improved Strategies Are Needed to Better Assess, Report, and Manage Restoration Progress, GAO-06-96. Washington, D.C.: October 28, 2005. Great Lakes Initiative: EPA Needs to Better Ensure the Complete and Consistent Implementation of Water Quality Standards. GAO-05-829. Washington, D.C.: July 27, 2005. Water Infrastructure: Comprehensive Asset Management Has Potential to Help Utilities Better Identify Needs and Plan Future Investments, GAO-04-461. Washington, D.C.: March 19, 2004. Superfund: Interagency Agreements and Improved Project Management Needed to Achieve Cleanup Progress at Key Defense Installations. GAO-10-348. Washington, D.C.: July 15, 2010. Superfund: Costs to Remediate Existing and Future Sites Will Likely Exceed Current Funding Levels. GAO-10-857T. Washington, D.C.: June 22, 2010. Superfund: EPA’s Estimated Costs to Remediate Existing Sites Exceed Current Funding Levels, and More Sites Are Expected to Be Added to the National Priorities List. GAO-10-380. Washington, D.C.: May 6, 2010. Superfund: Litigation Has Decreased and EPA Needs Better Information on Site Cleanup and Cost Issues to Estimate Future Program Funding Requirements. GAO-09-656. Washington, D.C.: July 15, 2009. Superfund: Greater EPA Enforcement and Reporting Are Needed to Enhance Cleanup at DOD Sites. GAO-09-278. Washington, D.C.: March 13, 2009. Electronic Waste: Harmful U.S. Exports Flow Virtually Unrestricted Because of Minimal EPA Enforcement and Narrow Regulation. GAO-08-1166T. Washington, D.C.: September 17, 2008. Hurricane Katrina: Continuing Debris Removal and Disposal Issues. GAO-08-985R. Washington, D.C.: August 25, 2008. Superfund: Funding and Reported Costs of Enforcement and Administration Activities. GAO-08-841R. Washington, D.C.: July 18, 2008. Aboveground Oil Storage Tanks: More Complete Facility Data Could Improve Implementation of EPA’s Spill Prevention Program. GAO-08-482. Washington, D.C.: April 30, 2008. Hazardous Waste: Information on How DOD and Federal and State Regulators Oversee the Off-Site Disposal of Waste from DOD Installations. GAO-08-74. Washington, D.C.: November 13, 2007. Hazardous Materials: EPA May Need to Reassess Sites Receiving Asbestos-Contaminated Ore from Libby, Montana, and Should Improve Its Public Notification Process. GAO-08-71. Washington, D.C.: October 12, 2007. Aboveground Oil Storage Tanks: Observations on EPA’s Economic Analyses of Amendments to the Spill Prevention, Control, and Countermeasure Rule. GAO-07-763. Washington, D.C.: July 27, 2007. Hurricane Katrina: EPA’s Current and Future Environmental Protection Efforts Could Be Enhanced by Addressing Issues and Challenges Faced on the Gulf Coast. GAO-07-651. Washington, D.C.: June 25, 2007. Leaking Underground Storage Tanks: EPA Should Take Steps to Better Ensure the Effective Use of Public Funding for Cleanups. GAO-07-152. Washington, D.C.: February 8, 2007. Recycling: Additional Efforts Could Increase Municipal Recycling. GAO-07-37. Washington, D.C.: December 29, 2006. Environmental Liabilities: EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations, GAO-05-658. Washington, D.C.: August 17, 2005. Perchlorate: A System to Track Sampling and Cleanup Results Is Needed, GAO-05-462. Washington, D.C.: May 20, 2005. Hazardous Waste Sites: Improved Effectiveness of Controls at Sites Could Better Protect the Public, GAO-05-163. Washington, D.C.: January 28, 2005. Climate Change: A Coordinated Strategy Could Focus Federal Geoengineering Research and Inform Governance Efforts. GAO-10-903. September 23, 2010. Carbon Trading: Current Situation and Oversight Considerations for Policymakers. GAO-10-851R. Washington, D.C.: August 19, 2010. Climate Change: The Quality, Comparability, and Review of Emissions Inventories Vary Between Developed and Developing Nations. GAO-10-818. July 30, 2010. Climate Change: Observations on Options for Selling Emissions Allowances in a Cap-and-Trade Program. GAO-10-377. Washington, D.C.: February 24, 2010. Climate Change Adaptation: Strategic Federal Planning Could Help Government Officials Make More Informed Decisions. GAO-10-113. Washington, D.C.: October 7, 2009. Climate Change Adaptation: Information on Selected Federal Efforts To Adapt To a Changing Climate (GAO-10-114SP, October 7, 2009), an E-supplement to GAO-10-113. GAO-10-114SP. Washington, D.C.: October 7, 2009. Aviation and Climate Change: Aircraft Emissions Expected to Grow, but Technological and Operational Improvements and Government Policies Can Help Control Emissions.GAO-09-554. Washington, D.C.: June 8, 2009. Climate Change Science: High Quality Greenhouse Gas Emissions Data are a Cornerstone of Programs to Address Climate Change. GAO-09-423T. Washington, D.C.: February 24, 2009. International Climate Change Programs: Lessons Learned from the European Union’s Emissions Trading Scheme and the Kyoto Protocol’s Clean Development Mechanism. GAO-09-151. Washington, D.C.: November 18, 2008. Climate Change: Federal Actions Will Greatly Affect the Viability of Carbon Capture and Storage As a Key Mitigation Option. GAO-08-1080. Washington, D.C.: September 30, 2008. Carbon Offsets: The U.S. Voluntary Market Is Growing, but Quality Assurance Poses Challenges for Market Participants. GAO-08-1048. Washington, D.C.: August 29, 2008. Climate Change: Expert Opinion on the Economics of Policy Options to Address Climate Change. GAO-08-605. Washington, D.C.: May 9, 2008. Climate Change Research: Agencies Have Data-Sharing Policies but Could Do More to Enhance the Availability of Data from Federally Funded Research. GAO-07-1172. Washington, D.C.: September 28, 2007. 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. Biofuels: DOE Lacks a Strategic Approach to Coordinate Increasing Production with Infrastructure Development and Vehicle Needs. GAO-07-713. Washington, D.C.: June 8, 2007. Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant. GAO-07-285. Washington, D.C.: March 16, 2007. Climate Change: Federal Reports on Climate Change Funding Should Be Clearer and More Complete. GAO-05-461. Washington, D.C.: August 25, 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 Environmental Protection Agency's (EPA) overarching mission is to protect human health and the environment by implementing and enforcing the laws intended to improve the quality of the nation's air, water, and lands. EPA's policies and programs affect virtually all segments of the economy, society, and government. As such, it operates in a highly complex and controversial regulatory arena. In recent years, GAO's work has identified several significant and persistent challenges across a range of EPA programs and activities and has proposed corrective actions to enable the agency to more effectively accomplish its mission. Based on this work, this testimony highlights some of the major management challenges facing EPA today, the agency's efforts to address them, and the work GAO believes remains to be done. On the basis of recent GAO work, key management challenges facing EPA include the following: (1) Improving agencywide management. EPA has struggled for years to deploy its staff efficiently and in a manner that would do the most good. It has also sought to improve the reliability of its environmental enforcement and other program data, as well as its coordination among EPA offices and with other agencies to improve efficiency and leverage limited resources. Generally, the agency's initiatives in these areas have yet to achieve their intended goals. In this connection, GAO is currently examining the extent to which EPA is taking a coordinated approach in managing its laboratories. (2) Transforming EPA's processes for assessing and controlling toxic chemicals. EPA has yet to develop sufficient chemical assessment information for limiting public exposure to many chemicals that may pose substantial health risks. As a consequence, GAO in February 2011 reaffirmed the need to transform EPA's process for assessing and controlling toxic chemicals by continuing it as one if GAO's "high-risk" areas warranting increased attention by Congress and the executive branch. (3) Reducing pollution in the nation's waters. Among the nation's most pressing water quality problems with which EPA and other stakeholders struggle are the contributions of diffuse, or "nonpoint," sources of pollution and the challenges posed by deterioration in the nation's premier watersheds, such as the Chesapeake Bay and Great Lakes. Multibillion-dollar liabilities associated with replacing and upgrading the nation's aging water infrastructure are a looming issue that, if not sufficiently addressed, will impact water quality. (4) Addressing the cost and pace of cleanup at Superfund and other hazardous waste sites. EPA's Superfund program is intended to ensure the cleanup of hazardous waste sites on both private and public lands. Nonetheless, 30 years after the program began, GAO found that cleanup costs for remaining hazardous waste sites will not only be substantial, but that problems with the accuracy and completeness of data on the amount of remaining cleanup work prevent EPA from reliably estimating these costs. (5) Addressing the agency's emerging role in climate change issues. As a highly interdisciplinary issue, climate change poses management challenges for the federal government at large. For EPA, particular climate change-related challenges pertain to the legal and administrative barriers facing the agency in its ongoing efforts to reduce carbon emissions, its difficulties in coordinating activities involving numerous other agencies and other levels of government, and its efforts to account for and manage data on greenhouse gas emissions. GAO has made a number of recommendations intended to improve EPA's programs by, for example, improving the information upon which key regulatory decisions are based; improving oversight over enforcement and other key program activities; and improving EPA's coordination with other agencies in program delivery. EPA has concurred with most of the recommendations and has taken steps to implement some of them. |
Under the Housing Act of 1937, as amended, HUD contracts with housing authorities to provide subsidies and grants for operating expenses and modernizing deteriorated housing. In return, housing authorities agree to provide residents with decent, safe, and sanitary housing. These agreements are formalized in a contract between HUD and the housing authority stipulating that housing authorities will operate in a manner that promotes serviceability, efficiency, economy, and stability. In New Orleans, as in many other cities, the mayor appoints a governing body or board of commissioners which, in turn, hires the local housing authority’s executive director and may approve other top management positions. The board provides for policy guidance, while the executive director is responsible for the day-to-day operations. Both are responsible for complying with the terms of the contract with HUD. In 1979, HUD began tracking housing authorities’ performance and providing corrective action for those that performed poorly. HUD’s current monitoring system—the Public Housing Management Assessment Program (PHMAP)—evaluates 12 performance indicators, calculates a numerical score for each, and relates the total score to a 100-point scale. Poor performers under PHMAP are classified as troubled, and under current law, HUD must negotiate with them a Memorandum of Agreement that includes performance targets for improving the poor performers’ operations. This process establishes a joint responsibility between HUD and the housing authority for improving the performance. However, if HUD determines that a troubled authority cannot, within a reasonable time and with reasonable resources, improve its operations, make effective use of federal funds, and adequately house its residents, HUD can declare the authority in breach of its contract. This legal step allows HUD either to take direct control of the housing authority’s operations and assets or to appoint (or petition a court to appoint) a receiver to control and manage the housing authority. HUD’s field offices and Office of Distressed and Troubled Housing Recovery (ODTHR) use the results from PHMAP to oversee and assist housing authorities. HUD’s field offices oversee troubled housing authorities’ performance, ensure that these authorities comply with such agreements as the Memorandum of Agreement (MOA), and provide them with technical assistance. ODTHR, which was formed in 1994 to focus resources on assisting large troubled housing authorities and to administer a special grant program aimed at rehabilitating distressed properties, can marshal resources from city governments, HUD, and housing authorities to improve the troubled authorities’ operations. During 1995, ODTHR provided for the funding to support and temporarily place experienced public housing officials and independent consultants in the Atlanta, Chicago, Detroit, New Orleans, and Puerto Rico housing authorities. On the basis of its size and need, HANO received over $245 million in federal modernization grants and other subsidies during 1992 through 1994. HANO has been designated as troubled since 1979 and is currently ranked by HUD as the worst performing large housing authority. As a result, HANO operated under an MOA which HUD first signed in 1988; a special partnership agreement with the Secretary since September 1994; and, as of February 8, 1996, a new cooperative agreement with the Secretary to help it improve its housing conditions. (See app. I for an abbreviated time line for significant events at HANO over the past 17 years.) In the future, troubled housing authorities may not have as many years as HANO has had to improve their performance before the Secretary of HUD is legally compelled to declare the housing authority in breach of its contract. HUD and both houses of the Congress have proposed reform legislation for public housing that includes the stringent treatment of long-troubled housing authorities. In legislation proposed by HUD and in a bill passed by the Senate, a 1-year period is proposed as the grace period within which a housing authority would be allowed to demonstrate improvement or suffer the mandatory declaration of a breach of contract. A pending House bill contains similar language but limits the grace period to 180 days. All three of these proposals are consistent with a September 1993 report of the National Performance Review that recommended that “HUD should make a hard-hitting, targeted effort to resolve the severe difficulties of those few public housing agencies identified as problem.” Over the past 12 years, the problems at HANO have been well documented in numerous audit reports by HUD’s Office of the Inspector General (OIG), HUD’s Office of Public and Indian Housing, and private consultants. The audit reports show a continuous decline in HANO’s management performance and the condition of HANO’s housing stock. Among the many significant problems at HANO, the reports consistently cite the lack of an effective maintenance program and HANO’s inability to operate a program to carry out major modernization and rehabilitation projects. The OIG’s first review of HANO, released in December 1983, detailed four operational and managerial deficiencies related to poor maintenance of the housing stock. These problems included the deteriorating condition of two housing developments, an ineffective maintenance operation, excessive utility costs, and poor tenant selection and eviction procedures. Five years later, a management review of HANO—initiated at HUD’s headquarters and implemented by an interdisciplinary team of 31 people from HUD’s headquarters and field offices—reported 241 findings of deficiencies that reiterated many of the same problems noted in the OIG’s 1983 report. When the OIG auditors from HUD returned to HANO in 1994, they found that the housing authority and its management contractor were still not effectively administering the maintenance program and that, as a result, HANO had breached its contract with HUD. For example, the OIG’s June 1994 audit report stated that all 150 housing units randomly selected for inspection failed to meet HUD’s housing quality standards in one or more areas. Under these areas were structural problems such as missing ceilings and holes in walls, loose and peeling paint, steady leaks from faucets, and roach infestations. In addition, the report determined that HANO still had not established a preventive maintenance program and that no maintenance improvements had been realized at HANO in the past 10 years. The report concluded that a lack of preventive maintenance resulted in the continued deterioration of the buildings and HANO’s inability to “turn around” vacant units in fewer than 140 calendar days. In addition, the OIG estimated that HANO had lost over $3 million in potential rental income because vacant units were not occupied in a timely manner. In addition to day-to-day maintenance deficiencies, the OIG’s 1994 audit found that HANO and the private firm that was hired in accordance with the MOA to manage HANO did not follow certain federal regulations and standards in contracting for modernization work on HANO’s properties. For example, the private manager approved the construction of private balconies, which are prohibited in public housing, and the disposal of valuable steel railings without recouping the salvage value of at least $50,000. In its report, the OIG recommended that HUD recover nearly $5 million in federal payments. In addition, the OIG discovered HANO modernization projects whose costs exceeded the upper limits established by HUD. Moreover, HANO had failed to follow proper procurement procedures, such as obtaining competitive bids for major expenditures and price quotes for small purchases. HANO also did not expend its modernization funding—between $20 million and $30 million per year—in a timely manner or within about 3 years after HUD obligated the funds to the housing authority. On the basis of these findings, the OIG concluded that HANO was incapable of carrying out an effective modernization program. Since the OIG’s report, HANO’s ability to use its modernization funding efficiently has not improved. HANO currently has nearly $200 million in unexpended funds. Furthermore, an independent consultant hired by HUD to review HANO’s performance cited ineffective maintenance and modernization programs as serious problems. The consultant’s review shows that HANO’s PHMAP score dropped from 47 in 1993 to 26 in 1994, despite the presence of a property management contractor hired to operate HANO as specified in the housing authority’s MOA with HUD. According to the Director of HUD’s Office of Troubled Housing, the 1994 score rose marginally in 1995 to 29. As highlighted earlier, HANO’s board had a long history of problems in governing HANO. Also, the continued decline in HANO’s overall performance suggests that HUD’s New Orleans Field Office has not fulfilled its responsibility to provide for the effective oversight of HANO. Although the field office, together with headquarters staff, has tried various options available under the 1937 act to intervene in HANO’s management, little has improved. Over the years, HANO’s board of commissioners has tended to interfere with HANO’s day-to-day operations. In response, HUD exercised sanctions against the board, often to no avail. Thus, when the Mayor appointed HANO’s most recent seven-member board—four of whom were HANO residents—in May 1994, HUD staff conducted a 1.5-day briefing session for the board at the Mayor’s request. The topics covered during the training included a review of the 1937 Housing Act, HANO’s contract with HUD, HANO’s by-laws, the provisions of the MOA, and the state’s enabling legislation. In addition, the briefing session detailed the board’s responsibility to develop policies and procedures to ensure that HANO operates efficiently and economically and provides for housing in accordance with the existing laws and regulations. Despite the emphasis on the board’s expected role, HUD’s headquarters and field office staff began in June 1994 to document inappropriate actions by the board. For example, the board overstepped its bounds by directing HANO’s private manager to hire and fire staff, stop payment on contracts, and disregard proper procurement procedures. In addition, the minutes of board meetings documented that board members, contrary to their governance role, directed HANO staff to move tenants from one housing unit to another as well as into larger units without regard to HANO’s waiting list for potential tenants. HUD’s OIG recently documented additional inappropriate involvement by the current board in HANO’s contracting activities. The OIG concluded that because of the board’s inappropriate involvement in modernization activities, including canceling several contracts, HANO is susceptible to multimillion-dollar lawsuits, and partially completed units have remained unoccupied and exposed to the weather for an extended period. The OIG also concluded that current board members (1) directed the preferential placement of individuals into subsidized units ahead of hundreds of people on the waiting lists or (2) were involved in this activity. During the confirmatory review of HANO’s 1994 PHMAP score, an independent consultant who specializes in public housing management and assessment and was hired by HUD also cited the board’s intrusion into HANO’s day-to-day operations, hiring, and contracting. The review concluded that this behavior impeded HANO’s recovery and that the board was preventing effective performance by HANO staff. In August 1995, HUD sent an official to HANO to help revise the housing authority’s by-laws to (1) better define the board’s policy and monitoring role and (2) include a clause describing the ethical conduct expected of the board. According to the OIG, the board had not adopted the revisions as of December 8, 1995. Finally, the board had not ensured that HANO has sound policies and procedures for improving its management operations and housing stock, as illustrated by the following example. One of the board’s first actions was to commission, with HUD approval, a strategic plan for HANO that (1) would address its operational deficiencies and (2) develop a plan for improving physical and other living conditions in the housing developments. HUD’s field office believed that this strategic plan also could provide the information needed to resolve many of the recommendations in the OIG’s June 1994 audit report on HANO. The final plan, as accepted by the board from the contractor, was a large document costing approximately $490,000. But our review showed that the plan did not contain the necessary policies and procedures contracted for and that we believe would help improve HANO’s day-to-day maintenance operations and the long-term condition of the housing units. Similarly, the independent consultant’s confirmatory review stated that although the plan was a good guide for HANO’s future, it did not address HANO’s operational deficiencies. HUD’s field offices are responsible for enforcing compliance with the federal housing regulations, monitoring the performance of all housing authorities, and providing housing authorities with technical assistance. For troubled authorities, the field offices’ additional responsibilities include administering the MOA and conducting on-site reviews of the housing units. However, on the basis of HANO’s long-standing problems—as documented in the OIG’s audit reports, random inspections of housing units, and the consultant’s confirmatory review of HANO’s performance assessment—we believe that HUD’s oversight of HANO has contributed little to improving HANO’s performance. In addition, even as the OIG’s 1994 report called for specific corrective actions by HANO and close monitoring of HANO by HUD, the OIG concluded that this “course of action had failed in the past.” This judgment suggests to us that HUD’s field office in New Orleans has not provided for the necessary and effective oversight of HANO. To deal with the problems identified by the numerous audit reports and the poor performance results as measured by HUD’s Public Housing Management Assessment Program, HUD has unsuccessfully attempted on several occasions to improve HANO’s management, including a September 1994 partnership between the Secretary of HUD and the then-Mayor of New Orleans. The partnership’s purposes were to avoid a federal takeover of HANO, hold the Mayor and the New Orleans City Council accountable for progress, and ultimately solve New Orleans’ public housing crisis and improve the residents’ housing conditions. However, a consultant’s estimate of HANO’s 1995 PHMAP score and a recent housing quality inspection by HUD show that HANO has not fulfilled its obligations under the 1994 partnership nor made significant management and operational improvements. For these reasons, HUD declared HANO to be in breach of its contract and entered into a second agreement with the Mayor on February 8, 1996. Over the last decade, HUD has tried many approaches to find a satisfactory means of improving HANO’s performance, including the following: In 1984, HUD withheld HANO’s annual share (approximately $10 million) of HUD’s appropriation for modernization grants because no improvement had occurred in HANO’s performance. HUD believed that withholding funding would motivate HANO’s management to improve its performance. Although HANO remained on HUD’s troubled list, HUD reinstated modernization funding the next year. After the 1988 management review revealed 241 findings of deficiencies, HUD required HANO’s board of commissioners to enter into an MOA that placed HANO under a private manager until HUD determined that HANO was no longer troubled. As discussed earlier, the private management of HANO did not prove effective and resulted in few lasting improvements over its 5-year duration. In 1991, HUD attempted to prevent HANO’s board of commissioners from interfering with the private manager’s activities by issuing a “limited denial of participation” against HANO’s board of commissioners. HUD rescinded the denial a year later when the board agreed to resign and the Mayor appointed a new board. In March 1993, however, under pressure from HUD, HANO’s board chairman resigned because of allegations that he interfered with and impeded the private manager’s effort to improve HANO. The 1994 OIG report stated that under the private manager’s tenure, little improvement had occurred in the condition of HANO’s properties or its management capacity. The OIG concluded that HANO had breached its contract with HUD and that HUD should declare the breach and take control of the housing authority’s properties and assets. In response to the report and to avoid declaring a breach, the Secretary of HUD entered into a partnership agreement with the Mayor and the city, which the Secretary confirmed in a letter of August 1, 1994, to the Mayor. As part of the partnership, the Secretary and the Mayor of New Orleans agreed to form an executive council that would provide policy guidance for HANO’s board, maintain the private manager on a month-to-month basis for continuity in critical operations until a permanent executive director could be hired, and develop a 6-month strategic plan. However, because the board allowed the private management contract to expire and had not hired necessary top managers at HANO, HUD subsequently revised the partnership agreement with the Mayor to include a transitional management structure. The following are highlights of the events that occurred under the partnership and transitional management: The transitional management team, formed by ODTHR and staff from the city, remained at HANO from October 1, 1994, through April 4, 1995. The team comprised more than 15 individuals—both full- and part-time—from a variety of sources, including well-performing housing authorities, HUD offices, and city offices. HUD provided over $220,000 to pay for the salaries and living expenses of the transitional staff loaned from other housing authorities and to cover the expenses of HUD staff. In addition, HANO provided over $260,000 to compensate nine city employees. The transitional management team stabilized, to some extent, HANO’s critical operations by addressing two-thirds of the authority’s 21,000 outstanding work orders for routine repairs and implementing standard contracting procedures for HANO. The team did not, however, address HANO’s vacancy rate in this effort. The partnership agreement also required HANO to develop the 6-month strategic plan within 45 days. However, the board did not approve the strategic plan—which would become the foundation of a new MOA—for submittal to HUD until November 1995, about 10 months later. The partnership agreement also provided for HANO to hire a permanent executive director within 90 days. HUD helped HANO to obtain waivers from Louisiana’s Civil Service System to hire the executive director and upper-level managers at salaries higher than the system allowed. However, the new executive director, who was formerly a member of HANO’s transitional management team and has significant experience in managing public housing, was not hired until April 1995, about 4 months later than agreed. As part of a routine confirmation of HANO’s 1994 PHMAP score, an independent private consultant estimated that HANO’s performance scores for 1995 would be low. HUD officials also estimated that the score would be low—about 29—and now note that their estimate is being confirmed. Thus, according to these estimates, HANO made little improvement on PHMAP indicators from September 1994—when the partnership was first initiated—to the time of the consultant’s June 1995 confirmatory review. The confirmatory review found modernization to be one of HANO’s most troubled areas and cited HANO’s inability to spend backlogged funds and obtain quality work. Our review of HUD’s records found that since the new board took control of HANO in May 1994, HUD’s New Orleans field office has ordered HANO twice to take corrective actions for failing to submit contracts and a 5-year modernization plan for HUD’s approval. A November 1995 inspection of housing quality by HUD’s field office further substantiates the lack of improvement at HANO over the last year. The inspection found that 93 percent (70 out of 75) of the occupied units that were randomly selected from HANO’s 10 developments failed HUD’s quality standards for housing. The inspectors described the conditions as “deplorable, unsafe, and in many instances unfit for human habitation.” The results of the inspection mirrored the earlier findings in the OIG’s 1994 inspections of housing quality. Furthermore, the inspectors said that they found no visible indication that maintenance staff were deployed on-site, that they were responding to scheduled maintenance, or that recent maintenance work had been done in any of the units, even though many of the tenants reported broken space heaters and other problems that should have been addressed. In a December 4, 1995 memorandum, HUD’s then-Deputy Assistant Secretary for Distressed and Troubled Housing Recovery advised the Secretary that HUD should take control of HANO and declared HANO to be in breach of its contract, if necessary. The memorandum stated that the actions by HANO’s current board and the Mayor had been “too little, too late and fall far short of reversing HANO’s decline in performance.” In documenting his decision to declare HANO in breach of its contract, the Secretary said that multiple disputes, conflicts of interests, confrontations, and standoffs between the board and HANO staff had hindered critical decision-making for operations and improvements. The Secretary also noted that as of June 1995, unspent balances for operating subsidies and grants at HANO reached almost $200 million, or 82 percent of all funding provided for HANO under its public housing programs. On February 8, 1996, the Secretary of HUD declared HANO to be in breach of its contract and entered into a cooperative endeavor agreement with the Mayor of New Orleans for improving HANO’s performance. The highlights of the agreement include the following: HANO’s board of commissioners has been dissolved, and HUD’s Acting Assistant Secretary of Public and Indian Housing will fulfill the duties of the board. HUD and the City of New Orleans will provide joint administrative oversight of HANO. HUD reserves its right under law to seek the appointment of a receiver for HANO if the requirements of the agreement are not accomplished. The general counsel of Tulane and Xavier Universities will act for HUD as an “executive monitor” of the agreement, subject to the Acting Assistant Secretary’s oversight. HUD and the City of New Orleans agreed to a series of specific actions, which include developing and beginning to implement by May 1, 1996, a 24-month action plan to complete the tasks and strategies needed to (1) establish adequate maintenance of HANO’s properties, (2) address quantifiable short- and long-term targets for PHMAP, (3) accomplish other necessary management improvements, and (4) specify reporting milestones. According to the Director of HUD’s Office of Troubled Housing, the relationship between HUD’s field office in New Orleans and HANO has changed to reflect the declaration of the breach. She said that as of the end of March 1996, an 11-member HUD team has been on-site at HANO to guide the housing authority as it tries to correct the deficiencies that led to the breach. She also said that HUD has approved a plan to guide HANO’s operations over the next 120 days and that the 24-month plan should be ready for approval by May 1996. On the basis of the current experiences of other large housing authorities taken over by HUD or in receivership, we believe that it could take 6 months to 1 year to determine whether this agreement will have a lasting, positive impact on HUD. The Secretary has reserved his right to appoint a receiver if the agreement does not work out, and he could exercise this right if the quantifiable performance targets that are to be set as part of the 24-month plan are not achieved within the time frames established. We believe that this would be consistent with earlier proposals by HUD and pending legislation in the Congress to resolve the severe difficulties of long-troubled housing authorities. On February 15, 1996, we provided the Secretary of HUD with a copy of a draft of this report for his review and comment. Within several days thereafter, we provided the Mayor of New Orleans and the acting executive director of HANO with copies of a draft of this report. We met with the Mayor and the acting executive director in New Orleans to discuss their comments. The acting executive director provided us with comments that both clarified and updated certain portions of the draft, which we have incorporated into the report. In providing informal comments to us, the Director of HUD’s Office of Troubled Housing said she believes that our report incorrectly describes the 1994 partnership agreement between the Mayor of New Orleans and the Secretary of HUD. She said that rather than providing a significant level of technical assistance, the 1994 partnership was an effort to hold things together at HANO until permanent management staff could be hired. However, we believe that the effort was significant because of the resources applied to carry out the partnership. During the 6-month period from October 1994 through April 1995, an executive council was formed to provide policy guidance for HANO, a 15-member transitional team of consultants and other staff was formed and put in place to manage HANO, and nearly $1 million dollars was spent for the transition team’s salaries and for a contractor to prepare a strategic plan. The Troubled Housing Office’s Director provided other clarifying comments, which we have incorporated into the report. Subsequent to these comments, we received written comments from HUD on April 16, 1996, and they are included as appendix II. The Mayor of New Orleans raised two concerns about our report. First, he was concerned about our conclusion that the contractor-prepared strategic plan should have contained policies and procedures with which to manage HANO. The Mayor stated that the board of commissioners did not intend for the plan to include such material. This statement is not supported, however, by the contract and the statement of work for preparing the strategic plan. According to the contract’s statement of work, the strategic plan should have contained policies and procedures for operating HANO. Second, the Mayor believed that our report—and those of HUD’s OIG—are too limited because they do not contain information obtained from stakeholders other than the staff of HUD and HANO. He stated that residents, for example, should have been interviewed because they are the consumers and have definite opinions on the services that they should be receiving. To address our objectives, we relied on our analysis of the documented historical record of housing conditions and management problems at HANO. Included in that record are minutes of scheduled meetings held by HANO’s board of commissioners at which residents and other interested parties were given the opportunity to participate and share their views and concerns. We also relied on the record of numerous and varied actions taken to resolve and remedy those problems. We supplemented our analysis with discussions with HUD, OIG, and HANO officials. The Mayor made a number of other comments that were not directly related to the accuracy of our report but which were germane to HUD’s oversight of public housing and the measurement of HANO’s performance. For example, he believes that HUD has too many approval layers and that this review process caused significant delays to HANO’s modernization program. The Mayor, however, was pleased with the approach that the Secretary is taking toward public housing and his willingness to try innovative funding methods in areas such as modernization. In connection with performance measurement, the Mayor does not believe that the PHMAP system measures critical actions taken by housing authorities to improve the quality of residents’ lives. To illustrate, he said that by using police substations located within public housing, HANO has reduced the murder rate by 80 percent in its Desire Development. He noted, however, that HANO has received no recognition for improving this important facet of HANO’s mission. Nevertheless, on the basis of this success, the Mayor said that HANO is planning to implement the police substation concept in HANO’s other housing developments. To identify HANO’s major operational problems, HUD’s actions to address these problems, and the problems’ underlying causes, we collected data from many sources. We reviewed pertinent legislation, documentation on the housing program, minutes of HANO’s board meetings, and HUD’s regulations on the operation of public housing authorities. We discussed management and oversight issues with HUD officials in Washington, D.C., including officials at the Office of Public and Indian Housing, the Office of Distressed and Troubled Housing Recovery, the Office of the Inspector General, and the Office of General Counsel. We also spoke with HUD officials in HUD’s Office of the Inspector General, Southwest District. We interviewed officials and reviewed documentation from HUD’s New Orleans Office, Region VI, and Office of Public Housing, and from consultants and contractors. Our discussions and data-gathering activities focused on HUD’s oversight of HANO’s management. We also visited New Orleans to discuss HANO’s operational problems with members of the transitional management team, the executive director, and other key management officials. To observe conditions and gain perspective on HANO’s problems, we visually observed the HANO developments. This report is based on work we conducted from March 1995 through March 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days after the date of this letter. At that time, we will send copies of this report to the appropriate Senate and House committees; the Secretary of HUD; and the Director, Office of Management and Budget. We will make copies available to others on request. Please call me at (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix III. HUD designates HANO as troubled for the first time. From 1979 to the present, HANO remains on HUD’s troubled list, where it is currently ranked as the lowest performing large housing authority. HUD releases a Comprehensive Management Review of HANO containing 241 findings; many are similar to the issues raised in a 1983 OIG report. HUD and HANO enter into a memorandum of understanding requiring HANO to contract with a private firm to manage the housing authority’s day-to-day operations. HUD issues a Limited Denial of Participation to every member of HANO’s board of commissioners for inappropriately interfering with HANO’s day-to-day operations. New Orleans’ Mayor and HUD agree that the Mayor should appoint a new board. HUD pressures HANO’s board chairman into resigning because he interfered with and impeded the private manager’s efforts to manage the housing authority. HUD’s OIG releases an audit report of HANO stating that HANO is in breach of its contract with HUD to provide decent, safe, and sanitary housing because all 150 housing units chosen at random failed to meet housing quality standards. HUD’s Secretary enters into a partnership with New Orleans’ Mayor to avoid declaring HANO in breach of its contract. The partnership states that HANO will hire an executive director and develop a strategic plan with performance targets detailing management improvements. HUD’s Secretary agrees to declare HANO in breach of its contract and take control of the housing authority and its properties. HUD’s Secretary declares HANO in breach of its contract and enters into a cooperative endeavor agreement with the Mayor. Eric A. Marts, Assistant Director Carol Anderson-Guthrie, Evaluator-in-Charge Kirk Menard, Senior Evaluator Terri Russell, 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 the Housing Authority of New Orleans (HANO), focusing on: (1) its major operational difficulties; (2) the causes of those problems; and (3) the Department of Housing and Urban Development's (HUD) corrective actions and the effects of those actions. GAO found that: (1) HANO has been unable to implement and maintain effective maintenance, modernization, and rehabilitation programs; (2) in 1994, none of the 150 HANO housing units that HUD sampled met HUD housing quality standards; (3) although HANO has over $200 million in unspent modernization grants that have accumulated over the past decade, its housing units continue to deteriorate and unit vacancies remain at over 25 percent; (4) the HANO board of commissioners has not effectively governed HANO and has interfered with its day-to-day operations, hiring, and contracting; (5) this interference has slowed HANO management improvements, prevented its staff from performing effectively, and resulted in the cancellation of modernization contracts; (6) HUD and its New Orleans Field Office have not helped to improve HANO operations; (7) unsuccessful HUD attempts to correct HANO mismanagement have included punitive actions, imposing private management, and limiting the board of commissioners' authority; (8) in 1994, HUD entered into a partnership with New Orleans to avoid a federal takeover of HANO, hold local officials responsible for HANO performance, and improve management and housing conditions; and (9) in February 1996, HUD declared HANO in breach of its contract and entered into a new partnership with New Orleans. |
Millions of individuals arrive in the United States every year and undergo an inspection to ensure they are entering the country lawfully and not transporting any illegal goods or harmful pests and prohibited agricultural products. Prior to the creation of DHS in 2003, passengers were required to undergo separate customs, immigration, and agriculture quarantine inspections (AQI), which were performed by the United States Customs Service, the United States Immigration and Naturalization Service (INS), and APHIS. Under the Homeland Security Act of 2002, however, these passenger inspection functions were transferred to DHS. As part of this realignment, CBP was charged with leading the customs, immigration, and agriculture quarantine inspection functions, and all immigration and agriculture quarantine inspectors were transferred to CBP. The newly created CBP officers were cross-trained on customs, immigration, and agricultural quarantine inspections in what is now referred to as “SABPOE.” As a result, all international passengers are now subject to a single primary inspection—looking for customs, immigration, and agriculture quarantine violations—conducted by a CBP officer. If, as a result of the primary inspection, a passenger requires further scrutiny, that passenger is referred to another CBP officer who conducts a more in-depth secondary inspection. Secondary inspection can involve additional interviews, document reviews, database queries, communication with other law enforcement agencies, observational techniques, and heightened physical inspections. Although CBP absorbed and leads the inspection program for customs, immigration, and agriculture quarantine, other immigration and agriculture responsibilities were not merged into CBP. (See text box for more information on CBP, ICE, and APHIS and their missions.) CBP, ICE, and APHIS The Homeland Security Act established DHS by merging 22 disparate agencies and organizations with multiple missions, values, and cultures. As part of this transition, both CBP and ICE were newly created from parts of legacy agencies. CBP was assigned the border inspection functions of the former Immigration and Naturalization Service (INS) and former U.S. Customs Service and the Department of Agriculture’s APHIS program. The new agency’s mission is the following: interdicting illegal drugs and other contraband; apprehending individuals who are attempting to enter the United States illegally; inspecting inbound and outbound people, vehicles, and cargo; enforcing all laws of the United States at the border; protecting U.S. agricultural and economic interests from harmful pests and diseases; regulating and facilitating international trade; collecting import duties; and enforcing U.S. trade laws. ICE was created by combining the law enforcement arms of the former INS and the former U.S. Customs Service. Its mission is the following: to enforce immigration and customs laws, and to protect the United States against terrorist attacks by targeting illegal immigrants— including the people, money, and materials that support terrorism and other criminal activities. The APHIS Program remains part of the Department of Agriculture, though the agriculture quarantine inspection functions have now been transferred to CBP. The program’s mission is to protect and promote U.S. agricultural health, and administer certain domestic and wild animal management programs. Although the inspections were unified in 2002, the Homeland Security Act did not consolidate the corresponding air passenger inspection fees. Thus the previous separate processes for setting, collecting, and distributing the fees remain in place. So, whereas most passengers likely notice only that they pay “fees” when they purchase a ticket, they actually pay—among other charges—three separate inspection user fees: one for the legacy customs inspection, one for the legacy immigration inspection, and one for the legacy agriculture quarantine inspection. What Is a User Fee? A user fee is a fee assessed to consumers of goods or services provided by the federal government. User fees generally apply to federal programs or activities that provide special benefits to identifiable recipients above and beyond what is normally available to the public. User fees are normally related to the cost of the goods or services provided. An example of a user fee is a fee for entering a national park. In the narrow budgetary sense, a toll for the use of a highway is considered a user fee because it is related to the specific use of a particular section of highway. Alternatively, highway excise taxes on gasoline are considered a form of user charge in the economic sense, but since the tax must be paid regardless of how the gasoline is used and since it is not directly linked with the provision of the specific service, it is considered a tax. The customs air passenger inspection is designed to prevent passengers from bringing illegal goods—such as narcotics—into the United States. Passengers pay a customs air passenger inspection fee, currently set in statute at $5.50 per passenger, when they purchase their tickets. The fees are remitted to the government quarterly, after which they reimburse CBP appropriations for a specific set of reimbursable expenses. The air passenger inspection fee is only one of several types of customs inspection fees also known as COBRA fees—named for its authorizing legislation, the Consolidated Omnibus Reconciliation Act of 1985. For example, commercial vessel passengers also pay a customs inspection fee. The immigration air passenger inspection is designed to prevent passengers from entering the United States without legal entry and immigration documents. Passengers pay an inspection fee (set in statute at $7 per passenger) when they purchase their tickets. The fees are remitted to the government quarterly, except for the last quarter of the year, when the immigration fees collected to-date are remitted 10 days before the end of the fiscal year, with the remaining fees collected in the fourth quarter remitted along with the first quarter payment of the next fiscal year. The fees are then divided between CBP and ICE according to the costs of the immigration inspection activities for which each agency is responsible. The immigration air passenger fee is one of two immigration inspection fees, the other being the international passenger commercial vessel fee. The agriculture air passenger inspection is in place to seize prohibited materials and intercept foreign agricultural pests. Passengers pay an inspection fee, set by the agency in regulation at $5.00 per passenger, when they purchase their tickets. The fees are remitted to the government quarterly and are made available to APHIS. The fees are then divided between APHIS and CBP based on the proportion of costs associated with each agency’s agriculture quarantine inspection activities. The air passenger inspection fee is only one of several types of APHIS inspection fees, known as AQI fees. For example, commercial aircraft and vessels also pay AQI fees. By statute, the authority to collect the three passenger inspection user fees varies from a legislative grant of broad agency discretion to set and collect a full-cost recovery fee, to more restrictive authority to collect a sum- certain amount available for a limited number of purposes. For example, the agriculture inspection statute grants the Secretary of Agriculture broad discretion to prescribe and collect fees sufficient to cover the cost of providing agricultural quarantine and inspection services. APHIS adjusts fees under this authority through the federal regulatory process by public notice and comment on proposed rates and implementing regulations in the federal register. In contrast, the customs passenger inspection fee statute is the most restrictive of these three fee statutes. It limits both the fee that may be charged and the set of activities for which collections may reimburse appropriations. Somewhere between these two margins is the immigration fee statute. It is available to refund any appropriation for expenses incurred in providing immigration inspection and preinspection services, but it limits the fee that may be charged. While both the immigration and customs statutes contain language that fees equal or be reasonably related to the cost of services, the two statutes actually prescribe an exact amount in law to be charged for their respective inspection services. That is, the immigration and customs user fees actually limit cost recovery to a sum certain. During our audit work, CBP informed us that they are developing a broad legislative proposal that would, among other things, partially consolidate the three passenger inspection user fees and make other changes to address certain administrative challenges. As of August 2007, the legislative proposal had been reviewed by CBP chief counsel but officials were still working on estimates of the cost of ICE’s inspection activities. We have not received, reviewed, or evaluated this proposal, although we have been briefed on elements of it. Because CBP has widely circulated elements of the proposal among key stakeholders, we refer to relevant elements of this proposal throughout this report. Any proposal to consolidate these fees, however, will be considered in an environment of considerable flux and controversy. For example, there are proposals before lawmakers to transfer the agriculture quarantine inspection function back out of DHS and under the Department of Agriculture’s authority. The complex process for setting, collecting, and distributing the passenger inspection fees is different for each fee, creating administrative, operational, and oversight challenges for agencies and stakeholders, and oversight challenges for Congress. The fees are still governed by separate, dissimilar authorizing legislation and are administered by multiple executive branch agencies and overseen by multiple congressional committees. Agencies involved face difficulties reimbursing the collections among their various appropriations because there is disagreement on how to divide the receipts among them and because the process of transferring the funds from one agency to another complicates agency budget execution. Finally, airports and airlines play an important role in both facilitating inspections and in fee collection and remittance, but they have limited substantive interaction with the three agencies. This contributes to misunderstandings, skepticism, and confusion about how the fees work and what activities they may fund. Although the passenger inspections themselves have largely been consolidated, administrative authority remains divided. The Treasury Department, from which the legacy U.S. Customs Service was transferred, retained administrative authority over the customs fee, although most of these duties have been delegated to DHS. The Department of Agriculture’s APHIS retained administrative authority over the agriculture inspection fee, although a majority of the fee collections is transferred to CBP to cover the cost of agriculture quarantine inspections. The administrative authority for the immigration passenger inspection fee was transferred to CBP, but CBP and ICE divide the immigration fee collections. Table 1 shows the differences in authorizing statute, rate, congressional committees of jurisdiction, and administrative authority. Although the agencies are required to report to Congress on their respective fees, Congress lacks a comprehensive picture of all three fees because the agencies report separately. Both the Office of Management and Budget (OMB) Circular A-25 and the Chief Financial Officers Act of 1990 (CFO Act) require an agency to review its user fees biennially and make recommendations on topics such as revising the fees to reflect costs incurred. We have previously reported that agencies with shared responsibilities for common outcomes or related functions should reinforce agency accountability for collaborative efforts through common agency planning and reporting. However, when CBP issued its user fee review it only reported on the customs fee, the portion of the agriculture fee it received, and the immigration fee. Further, the information provided about the immigration fee did not include any input from ICE, which did not have cost information about its portion of the immigration fee at that time. APHIS’s review included the entire agriculture fee. As a result, the eight congressional committees that oversee the inspection fees do not have a complete picture as to whether the fees work in concert or conflict with each other. Although the immigration fee may be used for any immigration inspection activity, ICE officials said that they do not receive sufficient immigration fee collections to cover their reimbursable activities. Principles of effective user fee design suggest that user fees should be set at a rate to cover allowable costs as a way of ensuring the fee is as efficient as possible. Instead, however, ICE officials said they rely on appropriated funds to cover the gap between fee collections and costs. By law, ICE uses appropriated money for fee-reimbursable expenses and then refunds the appropriations when user fees are received. They are also permitted to use appropriations if fees are insufficient to cover inspection costs. ICE officials said that although they have not finalized their activity cost analysis, the preliminary data shows that ICE’s current portion of the fee collections is not sufficient to fully refund the appropriations used and demonstrates that ICE should receive a greater proportion of the immigration user fee funds. CBP officials do not agree with the preliminary assessment. CBP officials told us that the immigration fee collections CBP receives are sufficient to cover the cost of CBP’s immigration-related reimbursable activities. In fact, CBP’s data show that its portion of the immigration fee collections were 1 percent more than CBP’s immigration inspection costs for fiscal year 2006. Until ICE completes its cost analysis, it will not be known whether the immigration fee is set at a rate that covers the total cost of both CBP and ICE’s immigration activities. CBP and APHIS disagree on how future collections should be estimated and how the fees are subsequently distributed. CBP and APHIS use different rates of passenger volume increases to calculate the costs of covered activities. APHIS—the agency responsible for setting the agriculture fee—estimates future international air passenger volumes by extrapolating historical growth, whereas CBP primarily uses Federal Aviation Administration’s (FAA) passenger volume forecast and collection trends. In the December 2004 interim rule for the January 2005 fee adjustment, for example, APHIS forecast passenger volume to increase by 1.18 percent per year for fiscal years 2005 through 2010, which was the average volume increase for fiscal years 1999 through 2003. In contrast, CBP projected a 4.7 to 4.8 percent annual growth. The resulting higher passenger volume estimate leads to higher total collections estimates by CBP than the one APHIS uses. CBP officials said that in 2004, 2005, and 2006 actual collections were higher than APHIS’s forecast by $17 million, $11 million, and $12 million, respectively. CBP officials said 2007 collections to-date are also $13 million higher than forecasted, and APHIS officials told us they would make additional transfers to CBP to distribute the extra collections. CBP officials said that if the agriculture fee estimates tracked actual collections better, CBP would receive more money earlier in the year rather than toward the end of the fiscal year, which would allow CBP to better plan for its use. However, APHIS officials said the more conservative forecasting approach was appropriate since they do not receive appropriations for these activities and must be able to provide the services even if fee collections should decline. Table 2 shows the bimonthly transfers for November 2005 through August 2006, and the additional year-end transfer of additional fees. Agencies divide and distribute the fees as specified in memoranda. CBP and APHIS, and CBP and ICE signed a memorandum of agreement (MOA) / memorandum of understanding (MOU) establishing a process for fee distribution. The Homeland Security Act of 2002 requires an agreement between the Secretaries governing the transfer of agriculture user fee funds from the Department of Agriculture to DHS for DHS’s agriculture quarantine inspection activities. The most recent MOA, dated 2007, documents the fee distribution: 60.64 percent of total agriculture passenger inspection fees were allotted to CBP and 39.36 percent to APHIS. Per the MOA, APHIS transfers CBP’s portion via a bimonthly transfer. Although we reported in May 2006 that APHIS did not always make regular transfers to CBP, we found that these issues have generally been resolved. The CBP/ICE memo allotted 82.63 percent of total immigration fee collections to CBP and 17.37 percent to ICE, and required CBP to submit monthly warrants to the Treasury to initiate the distribution of the immigration fees between ICE and CBP. However, the extent, quality, and results of agency coordination differ. The CBP/APHIS MOA requires the agencies to periodically exchange cost information. Specifically, CBP is required to submit to APHIS at the end of each quarter an accounting of the costs of its agriculture quarantine inspection activities. APHIS is also required to submit to CBP a quarterly and annual report on both agriculture user fee collections by activity and associated costs of the agriculture quarantine inspection fees. Officials told us that these requirements are important to help them address issues such as changing workloads and costs, and the MOA has been updated accordingly. CBP and APHIS’s experience is consistent with our past work on agency coordination, which states that optimal coordination requires agencies to establish compatible policies and procedures and communicate frequently. Such communication is critical, as evidenced by our recent report on APHIS and CBP management coordination issues, which found that the agencies’ coordination problems sometimes result in operational weaknesses that increase the vulnerability of United States agriculture to foreign pests and disease. In contrast, the CBP/ICE MOU is much less specific and lacks important elements present in the CBP/APHIS MOA. For example, the CBP/ICE MOU only states that, “ICE and CBP agree to provide each other reports on the total amounts of immigration user fees received to ensure that such receipts are equitably split.” ICE officials said the MOU was primarily intended to set up the initial transfer of immigration fee collections from the newly formed ICE to CBP and was not designed to address how CBP and ICE would regularly coordinate on the immigration fee. Even if agencies generate complete cost data and agree on how to divide collections between them, the precise activities associated with inspections—and the costs of those activities—can change over time. Legislation, regulations, or agency agreements governing a fee should ideally contain a mechanism for adjusting user fee rates that is flexible and timely enough to allow for periodic review and, as appropriate, adjustment. The CBP/APHIS MOA requires both agencies to appoint Chief Budget Liaisons who must hold “quarterly and annual face-to-face meetings where both parties would share and analyze their respective program costs … ” so that the proportions can be reviewed and adjusted as appropriate. Through this coordination, CBP received an additional 1.31 percent in agricultural passenger inspection fees, pursuant to approval by both agencies, after actual fee collections exceeded projections. ICE officials told us that, at the time of the transition to DHS, ICE requested that the MOU be renegotiated every 2 years; however, the CBP/ICE MOU does not include any provision to renegotiate, and CBP and ICE officials have not regularly met to discuss potential adjustments to each agency’s portion of the fee. Airlines remit collections of the customs and immigration user fees to CBP and the agriculture fees to APHIS. The three fees are remitted to the government quarterly, except for the last quarter, when the immigration fees collected to-date are remitted 10 days before the end of the fiscal year, with the remaining fees collected in the fourth quarter remitted along with the first quarter payment of the next fiscal year. By law, each of the three passenger inspection fees is deposited into a separate account. Therefore CBP must transfer ICE’s portion of the immigration fees to reimburse ICE’s appropriations, and APHIS must transfer CBP’s portion of the agriculture passenger inspection fee to reimburse CBP’s appropriations. CBP officials told us that CBP has more flexibility in spending customs fees than immigration and agriculture fees, partly because of the fees’ budgetary treatment and partly because of the interagency transfer process for the APHIS fee. The customs fee is subject to an automatic warrant process, wherein within 5 business days Treasury confirms the total amount remitted and then the fees are directly reimbursed to CBP appropriations to spend from right away. In contrast, CBP’s immigration and agriculture activities are funded on a reimbursable basis by CBP’s portion of the respective fees. Therefore, CBP initially uses appropriations to cover the cost of the agriculture quarantine and immigration inspections and then reimburses the appropriations accounts from the immigration and agriculture user fee accounts. To ensure that they reimburse from the correct fee account, CBP officers track time spent on customs, agriculture quarantine, and immigration activities, respectively. CBP officials said that the quarterly remittance schedule—which is exacerbated by the fourth quarter remittance schedule for the immigration fee—contributes to a several-month delay between use of the appropriated funds and receipt of the reimbursement from the immigration and agriculture user fee accounts, which has delayed CBP’s ability to spend funds on critical mission areas such as hiring personnel, purchasing equipment, or travel. For example, CBP officials told us of instances where they had to delay entering into a contract because of cash-flow issues resulting from the delay in fee reimbursement. They also said transferring funds between budget accounts creates administrative rework. To address these challenges, CBP told us it is requesting in its draft legislative proposal direct reimbursement authority for the immigration and agriculture quarantine activities it conducts. Inconsistencies in passenger exemptions and definitions across the three fees make administering the fees difficult. Each statute specifies the same standard passenger exemptions for each fee, but there are additional exemptions for the customs fee. Passengers from Canada, Mexico, and U.S. territories and adjacent islands are exempt from the customs fee but not from the immigration or agriculture fees. (See table 3). For instance, a passenger arriving from the Bahamas must pay the immigration and agriculture fee, but not the customs fee. Aspects of a fee, such as country of origin exemptions, may promote certain policy goals. However, complex fee structures—like the variations in passenger exemptions—can increase administrative costs and potential for error and complicate the audit process since CBP must reconcile the remittance for a single passenger with different exemptions rules. It is important to understand the likely administrative and operational consequences of a fee’s design in order to address and mitigate challenges. CBP officials said its draft legislative proposal recommends eliminating the customs-specific country of origin exemptions. The airline industry officials we spoke with generally support this change and said the administrative transition costs would be minimal, since calculations are automated and could be easily adjusted to accommodate this type of change. In response to Treasury Inspector General recommendations, the audit function was consolidated before the inspection functions themselves were consolidated, creating efficiencies and simplifying the process for government and industry alike by having only one agency audit all three fees concurrently. However, the improvement was limited because the regulations for each of the fees still specify different airline record-keeping requirements for audit purposes. Airlines must retain customs documentation for 5 years and immigration documentation for 2 years. There is no time period specified for airline documentation for the agriculture fees. Both CBP and airline officials said inconsistent record- keeping requirements impose an unnecessary administrative burden on both parties. Airline officials told us that the custom fee’s 5-year document retention requirement is especially burdensome. The administering agencies use separate, different processes for communicating with stakeholders, including soliciting stakeholder feedback on proposed adjustments to the fees, an area of great interest to stakeholders. However, stakeholders report that these disjointed mechanisms for two-way communication are insufficient. CBP uses the Airport and Seaport Inspections User Fee Advisory Committee (Advisory Committee) to solicit stakeholder perspectives, but limits the breadth of the Advisory Committee by discussing only the customs fee and CBP’s portion of the immigration and agriculture fees. ICE is not included in planning these Advisory Committee meetings even though the legacy Department of Justice immigration fee advisory committee was combined with the customs advisory committee when immigration functions were transferred to DHS. ICE officials said they were not aware that a meeting had been scheduled and were not consulted on the agenda, even though their user fee statute specifies that they meet regularly with stakeholders. ICE officials attended the June 2007 Advisory Committee meeting but did not participate in the presentations and had not been involved in the planning or agenda-setting for the meeting. APHIS is also not included in planning Advisory Committee meetings. APHIS officials said issues pertaining to the agricultural inspection fee are handled by CBP’s liaison to APHIS, but no one from this office attended the June 2007 meeting. CBP officials said CBP met the notification requirements of the Federal Advisory Committee Act by publishing notice of the meeting date and the agenda in the Federal Register. APHIS provides information about inspection costs and receives stakeholder input on proposed changes to the agriculture fee through public notice and comment under the federal rule-making process. APHIS officials also told us that they meet informally with stakeholders when issues arise, particularly in the field, and that this informal consultation is sufficient for their purposes, but our audit work indicates otherwise. For the past two adjustments, however APHIS has adjusted the fees through interim final rules, an option within the regulatory process that allows an agency, for “good cause” to make a rule change effective before receiving public comment. That is, the increase took effect before stakeholders had an opportunity to comment. For example, on December 9, 2004, APHIS published an interim final rule in the Federal Register proposing to increase the agriculture passenger inspection fee from $3.10 in 2004 to $4.95 in 2005 and to $5.00 per passenger for 2006 to 2010. The change was effective January 1, 2005, although comments received by February 7, 2005, would be considered before the final rule was issued. In another instance, APHIS eliminated the fee exemption for passengers originating in Canada by means of an interim final rule published in the Federal Register in August 2006, which stated that it was effective November 24, 2006, and comments received by November 24, 2006, would be considered. APHIS’s use of the “good cause” exemptions to issue interim final rules limits stakeholder input. Stakeholders said they do not feel their comments are taken into account since the Department of Agriculture adjusts the fee before even soliciting feedback and the final rule matches the interim one regardless of stakeholder feedback. Furthermore, we have previously reported that nonfederal stakeholders believe relying solely on notice and comment through the Federal Register is insufficient for obtaining stakeholder input. When agencies do not effectively communicate their analysis and results, they miss the opportunity to obtain meaningful comments that could affect the outcome of their regulatory changes. Without showing the underlying analysis, the agencies’ conclusions may lack credibility. ICE and APHIS officials told us that air travel stakeholders have little information on their respective activities and fees and generally do not understand how these fees work or what they are intended to fund. As we will discuss in the next section, CBP stakeholders also do not have a clear understanding of how the customs fee works and what activities it may fund. For example, officials said the agriculture quarantine inspection function has become less transparent to air passengers and stakeholders since CBP officers all wear the same uniform and conduct the primary customs, immigration, and agriculture quarantine inspections—and not all passengers are identified for an agriculture-related secondary inspection. Similarly, many of the inspection activities retained by APHIS and ICE are not visible to most passengers or stakeholders during the actual inspection process. Stakeholders said the Advisory Committee meetings had declined in value since INS ran them because cost and full time equivalent (FTE) information is no longer provided. CBP officials said that in the post- September 11 environment, airport inspector staffing information is “law- enforcement sensitive” and therefore not shared with airports and airlines. Airport, airline, and industry officials said they have requested information about passenger inspection activities or the cost of these activities. As a result, they feel they lack data necessary to know whether the passenger inspection fees are set fairly or accurately, or are being spent on the appropriate activities. Some difficulties with these fees arise not because the fees are separate but because of factors that are specific to the individual passenger inspection fees. First of all, by statute, the customs fees are available for limited purposes. Not all of these purposes are associated with conducting inspections, and not all inspection activities are reimbursable. Even if all the costs were reimburseable, according to CBP, the fees collected still would not cover the full inspection costs. This misalignment, coupled with the problems in stakeholder communication described in the previous section, have created confusion and misunderstandings, and in some cases the misimpression among stakeholders that CBP in particular is using the air passenger fee collections inappropriately. Furthermore, the collection process itself is complex and presents challenges for CBP and the airlines. Finally, the tools provided to the agencies to ensure the airlines’ compliance are not applied consistently and, contrary to strategies associated with effective incentives and penalties, do not provide progressively stronger disincentives for noncompliance (i.e., a graduated penalty system). The activities that can be funded by passenger inspection collections vary among the fees and are specified in statute. Principles of effective user fee design suggest that fees should be aligned with the costs of the activities for which the fee is collected. The agriculture and immigration statutes generally permit the Secretaries of Agriculture and Homeland Security to cover costs associated with agricultural and immigration inspection activities. In contrast, the customs user fee collections are available for limited purposes. Under the customs authorizing statute, passenger inspection fee collections are only available to reimburse appropriations for a limited, prioritized set of activities, including general deficit reduction, overtime and premium pay, retirement and disability contributions, preclearance services, and foreign language proficiency awards. Customs inspection-related activities that occur while a CBP officer is earning overtime, premium pay, or during preclearance can be funded by the user fees, but the customs fee is not authorized to fund customs-inspection activities that occur beyond these times. Moreover, the customs air passenger fee can be used for overtime and premium pay as well as retirement and disability contributions for CBP officers for time spent conducting inspections regardless of whether the CBP officers are inspecting passengers at air, sea, or land ports of entry. Therefore, under current law not all activities that may be funded from the customs fee (see table 4) are necessarily associated with conducting air passenger inspections (see table 5), and not all inspection activities are reimbursable, that is, can be covered by funds from the user fee account. 50 full-time equivalent inspectional positions to provide preclearance services. Despite a unified collection process for the three fees, CBP faces challenges in verifying individual passenger payment and accurately determining each airline’s liability. By law, the ticket seller (i.e., the airline or ticket agent) must collect the applicable passenger inspection fees from the passenger at the time the ticket is sold. Tickets can be sold up to a year in advance, and CBP has no independent documentation on which to calculate liability. Therefore, CBP cannot match the fees paid to individual passengers. The only way CBP can independently confirm that passengers traveling to the United States have paid the requisite inspection fees is through postremittance audits. To remedy this, CBP would like to move to a system wherein airlines remit fees based on the passengers transported into the United States. CBP could then track the remittances to the number of passengers per flight by comparing them to the airplane manifest data and “onboard” counts that airlines already provide to CBP. According to CBP officials, if the fees were remitted based on passengers transported, there would be little need for auditing carrier remittance since CBP would be able to automatically calculate and verify airline liability. Airline and Air Transport Association (ATA) officials with whom we spoke said that changing from a ticket-based collection system to a passenger- transported collection system poses challenges to airlines. First, the airline that transports the passenger is not always the airline that sold the ticket. This means that in a manifest-based system the airline responsible for remitting a fee might not be the airline that collected it from the passenger. Nearly all United States airlines use the “interlining” system, in which one airline can contract with another to provide transportation for one or more segments of a passenger’s journey. Under the current ticket-based collection system, on an interlined ticket the airline that sells the ticket remits the fee, regardless of which airline transports the passenger into the United States. For example, a passenger who purchases a Madrid-Paris- New York ticket from ABC airline pays the fee to ABC airline even if he flies ABC from Madrid to Paris and XYZ from Paris to New York. Airline ABC is liable for the fee and remits it to the U.S. government. However, under CBP’s original proposed passenger-transported system, the liability for remitting the fee would fall on airline XYZ—the airline that brought the passenger into the country—even though ABC airline sold the ticket and collected the fee. As a result, airline XYZ—the airline that transported the passenger into the United States—would have to ensure not only that ABC paid airline XYZ for the ticket but also that it collected and transferred the correct fees. According to CBP officials many foreign-owned airlines already remit the fees based on passengers transported, though these payments are in violation of the statute, and the International Air Transport Association (IATA) reports that the manifest-based remittance system is common in other countries that collect similar fees. Nevertheless, airlines and ATA officials said that transition costs would be significant—though limited to the first year—because airlines begin selling tickets for a flight 1 year in advance, and as a result they would have to maintain two separate remittance systems—ticket-based and passenger-transported-based—for a full year. Airlines question the need for such a change. Officials from two major airlines noted that CBP’s audits put their remittance error rate at less than 1 percent. CBP officials concur that for the six to seven major domestic airlines the remittance error rate is extremely low, but as we will discuss, error and timely remittance rates for small and medium-sized airlines are more problematic. A shift to a passenger-transported system would, they argue, increase the ability of CBP’s finance office to determine the compliance of smaller airlines and potentially reduce CBP’s audit costs. In addition, the airlines also see fee collection as a cost they incur over and above the cost of the audits. To help offset collection costs, airlines are permitted to keep the “interest float”—that is, the interest income that accrues between the quarterly remittances. Airline representatives view this as minimal for two reasons. First, in the recent era of low interest rates, the interest float is small; airline officials told us that it covered as little as 38 percent of collection costs. This would decline even further if CBP moves to monthly remittance as it suggests it will in its legislative proposal. Second, airline and airline industry officials said credit card transaction fees averaging 2.15 percent on the total transaction—including taxes and fees as well as the ticket price—further reduce the benefit. Another user fee collected by airlines on behalf of the government—the passenger facility charges (PFC)—has a provision that is designed to compensate for the actual cost of collections, in addition to the interest float. The airlines told us they would prefer this type of direct compensation for their collection role, similar to the PFC. The tools used to ensure airline compliance do not provide optimal incentives for airlines to make accurate and timely payments. We have previously reported that rewards and penalties should correspond to performance. Although each fee contains enforcement mechanisms meant to encourage airlines to remit the correct fee amount on time— namely the carrier bond associated with the customs fee, the denial of landing rights for the customs and immigration fees, and the penalties and interest associated with the agriculture and immigration fees—none are designed in this manner. For the customs fee, CBP is authorized to require airlines to maintain a carrier bond, which is used both to enforce payment of inspection fees and to encourage airlines to comply with inspection- related requirements, such as submitting complete Advance Passenger Information System (APIS) data prior to takeoff. In addition, airlines that do not remit the customs fee timely—or not at all—are charged liquidated damages for breach of bond conditions that are equal to twice the fee amount owed for each violation, whether it is the first violation or a repeat violation. CBP officials said they have issued liquidated damages against 20–25 airlines on average per quarter since 2003 for late payment or nonpayment. For the immigration and agriculture fees, the agencies may require airlines to pay interest and penalties because of late payment or nonpayment. CBP officials said the interest and penalty rates charged for late payments are set by the Treasury Department and do not provide for increasing interest or penalty rates, or both, for repeated instances of late or nonpayment. Thus an airline that repeatedly pays late—or not at all—is charged the same interest and penalty amount each time, which may just offset the interest the airline earned by not remitting user fee collections in the first place. Therefore, CBP officials said the penalty is not high enough to discourage violations. CBP is also authorized to deny landing rights if the airline does not remit customs and immigration fees. However, this tool suffers from the very opposite design flaw: it is perceived to be too severe to invoke. CBP officials said that denying landing rights is such a severe penalty that its very existence—infrequent application notwithstanding—is effective enough to discourage late payment or nonpayment of passenger inspection fees by the airlines. However, even in cases of carrier nonremittance or chronic late remittance, CBP officials said CBP has threatened to use this authority to deny landing rights on four occasions— twice against the same airline—in nearly 20 years. Three of these instances occurred in 2007. We have previously reported that penalties may lose their effectiveness and credibility over time if they are not executed consistently. Officials said there is no standard set of criteria used to guide the selection of airlines for audit. The audit function for all three inspection fees is consolidated within CBP’s Office of Regulatory Audit, and all audits cover all three fees. Approximately 385 airlines remit immigration and agriculture fees, and 290 airlines remit the customs fee. CBP audits about 50 carriers annually to test for compliance. CBP’s Office of Finance recommends airlines for audit based on a number of factors, including whether a carrier’s remittance dropped substantially from one quarter to the next, news articles about changes in flights or airline financial issues, and prior audit findings. Experience and judgment also come into play. Officials are responsible for processing the same airlines’ payments every quarter and become “experts” on those airlines and the normal trends in their remittances. Although this flexibility and individualized understanding of the airlines is important, we have previously reported that developing internal controls is key to minimizing the risks that may prevent an agency from meeting its objective. Documenting selection criteria could also protect the agency when experienced officials leave the agency. CBP officials told us that although the larger airlines generally present a much lower risk of noncompliance or incomplete remittance, they are audited every couple of years because the record-keeping requirements are so burdensome. In addition, if CBP audited a large airline only once every 5 years, the audit would be very resource-intensive. Nevertheless, the fact that there is significantly more volatility in compliance by small and mid-sized airlines and those offering seasonal flights means they require more audit attention. For context, in a 5-year sample of 16 airlines, the 11 airlines with the smallest passenger volume rate remitted the passenger inspection fees late 35 times. These 11 airlines represented 14.6 percent of total international passenger volume—slightly larger than that of the single largest airline in the sample. As we have discussed, the challenges related to the passenger inspection user fees result both from inconsistencies among the fees—making them difficult to administer—and from specific design elements within the individual fees. For example, agencies face difficulties distributing the fee collections, both because they disagree on how to allocate the receipts among them, and because the process of transferring the funds from one agency or appropriation to another complicates agency budget execution. Moreover, the statutory structure does not permit the administering agencies to easily verify collection and payment, and the customs fee does not permit reimbursement for many activities directly associated with air passenger inspections. These issues should be considered regardless of whether the fees are consolidated. As discussed earlier, we have previously reported on a number of principles that could inform efforts such as these to redesign or consolidate these fees. Understanding the trade-offs inherent in various fee design elements and the likely consequences of various design choices with respect to efficiency, equity, revenue adequacy and administrative burden can help policy makers carefully weigh the likely effects of various policy decisions and move discussion and debate to a more informed plane. Although the need to address some of the user fee challenges presented in this report may appear obvious, how to accomplish this is less clear. Any changes made to one fee should be designed to complement rather than conflict with the other two fees. Moreover, although whether and how to consolidate the international passenger inspection fees is ultimately a policy decision Congress must make, it is important to note that consolidating the passenger inspection fees absent other changes will not eliminate some of the administrative and operational challenges agencies and stakeholders currently encounter. In some cases the origins of these challenges lie in the statutory structure of the fees themselves, and not their lack of consolidation. Any consolidation effort that neglects to consider these issues is unlikely to have the desired effect: Unless agencies present a comprehensive picture of the three fees, including the full scope of inspection activities and their costs, Congress will lack a complete picture of whether the fees work in concert or conflict with each other, which could hamper oversight. Furthermore, agencies will be less able to develop and maintain the partnerships necessary to collect and distribute the fees as efficiently and effectively as possible. The lack of complete cost data and regular, formal opportunities to share such information can prevent the agencies from addressing existing issues, including differences in forecasting assumptions and lack of agreement on activity costs, standardized audit selection criteria, and the design and implementation of a graduated penalty system to encourage and enforce airline compliance. More broadly, if agencies cannot determine whether these fees are recovering costs, Congress cannot be sure that resources are allocated to the activities it most values. Likewise, without substantive, transparent coordination between agencies and stakeholders, agencies will not be able to effectively address administrative burdens such as disparate airline record-keeping requirements among the fees. The principles of effective user fee design discussed earlier in this report can both offer a framework for considering the implications of various statutory structures and help clarify and illuminate the trade-offs associated with various policy choices available to Congress associated with amending the individual statutes related to passenger inspection fees or consolidating all or part of them into a single passenger inspection fee. Such a framework could also provide the basis for future reviews of federal user fees as Congress works to ensure that user fee financing mechanisms remain relevant and up-to-date. We recommend that the Secretaries of Agriculture and Homeland Security take the following seven actions: direct CBP, ICE, and APHIS to make information on the estimated cost of inspections as well as the basis for these cost estimates readily available to affected parties to improve the transparency and credibility—and hence the acceptance by stakeholders and payers—of the processes for setting, collecting, and distributing the fees; direct CBP, ICE, and APHIS to collaborate on agendas, presentations, and discussions with stakeholders for the CBP Airport and Seaport Inspections User Fee Advisory Committee (Advisory Committee) meetings in order to improve the usefulness of these meetings for both agencies and fee stakeholders; consolidate reporting of the passenger inspection fees, to include the activities and proportion of fees for which CBP, ICE, and APHIS are each responsible to provide a comprehensive picture of the user fees supporting the passenger inspection process; develop a legislative proposal in consultation with Congress on a consolidated, graduated penalty system that reflects airline payment history and includes specific administrative procedures regarding when penalties should be invoked in order to improve the effectiveness of the tools for enforcing payment of passenger inspection fees; develop a legislative proposal in consultation with Congress on a single, common set of airline record-keeping requirements for all three passenger inspection fees that reflects the consolidated audit function for these fees and reduces the administrative burden on airlines; develop a legislative proposal in consultation with Congress to eliminate key differences among the fourth quarter remittance requirement for the immigration fee; and develop and implement common assumptions used to forecast the collections of agriculture quarantine inspection activities in order to more closely tie the fee rate to CBP’s and APHIS’s agriculture fee distribution to actual collections. Further, we make the following three recommendations to the Secretary of Homeland Security: develop and implement formal written guidance on factors to be considered in selecting airlines for audit, including factors intended to reflect the risk of non- or incomplete payment; complete development of and report on ICE’s activity costs to ensure the immigration fee is divided between ICE and CBP according to their respective proportion of immigration inspection activity costs. Further, if the study shows that immigration activity costs exceed collections, develop a legislative proposal in consultation with Congress to adjust the immigration fee to recover costs as closely as possible, per statute; and direct CBP and ICE to develop and implement a fee-sharing memorandum of understanding (MOU) to include time frames for when funds would be transferred and to provide for periodic review and update. harmonizing the passenger exemption and statutory definitions across the eliminating the differences among the three fees in the authority to set fee whether it wishes the customs fee to be a full cost recovery fee, and reviewing the activities that may be reimbursed by the customs fee collections. We provided a draft of this report to the Secretaries of the Departments of Homeland Security (DHS) and Agriculture for review and received comments from both agencies that are reprinted in appendixes II and III. In addition, DHS provided technical corrections, which were incorporated as appropriate. DHS and USDA concurred with our recommendations, and provided additional comments for our consideration. We also provided portions of the report for non-federal stakeholder review and made technical corrections where appropriate. While DHS concurred with our recommendations to work with Congress to (1) develop a graduated penalty system, (2) develop a common set of airline record-keeping requirements, (3) eliminate the differences in the fourth quarter remittance requirements for airlines, and, if needed, (4) increase the immigration passenger inspection fee, by developing legislative proposals to address these issues, DHS officials said implementing these individually could take several years and only address the challenges in the air passenger environment. In recommending these separately we did not intend to imply that they should be addressed separately and recognize that the agencies could address these issues in a single legislative proposal. Further, since this engagement only reviewed air passenger inspection fees we limited our recommendations to those fees. We are sending copies of this report to the Secretaries of Homeland Security and Agriculture and interested congressional committees. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9142 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making major contributions to this report are listed in appendix IV. The objectives of this report were to identify how the three separate passenger inspection user fees are set, collected, and distributed and the benefits and challenges of this process for agencies and stakeholders, and implications of consolidating these fees under the Department of Homeland Security (DHS). To meet these objectives, we reviewed the passenger inspection user fee legislation and guidance, agency documents, and literature on user fee design and implementation characteristics, and interviewed officials responsible for managing user fees at the Customs and Border Protection (CBP) offices in Washington, D.C., and from the New York/New Jersey, Miami and Seattle Regional Offices, Immigration and Customs Enforcement (ICE), and Animal and Plant Health Inspection Service (APHIS). We observed the inspections process and interviewed CBP officials responsible for port management and certain airport and airline officials involved with international passenger processing or the three passenger inspection fees. We did not assess the effectiveness of these inspections. We reviewed audit and cost data related to air passenger inspection activities. We also asked questions about CBP’s and APHIS’s internal controls for the data we used and determined that the data are sufficiently reliable for the purposes of this report. However, it was beyond the scope of this report to evaluate the reliability of the cost data for purposes beyond this report. We also interviewed APHIS, CBP, and ICE officials responsible for managing the user fees and auditing the user fee collections at DHS and the Department of Agriculture. We also met with officials from Continental Airlines, American Airlines, Air Transport Association, International Air Transport Association, Airports Council International-North America, Miami-Dade County International Airport, New York/New Jersey Port Authority, Bush Houston-Intercontinental International Airport, Dallas-Fort Worth International Airport, San Francisco International Airport, and Seattle- Tacoma International Airport. We also met with and reviewed documents from the travel industry organization, the Discover America Partnership. To select the airlines and airports to meet with, we reviewed Bureau of Transportation Statistics data on the volume of international air passengers and number of international flights and consulted with officials from government and industry associations. To select industry stakeholders to meet with, we consulted government agency officials and reviewed CBP’s Airport and Seaport User Fee Advisory Committee membership. We performed our work from October 2006 through August 2007 in accordance with generally accepted government auditing standards. Jacqueline M. Nowicki (Assistant Director) and Chelsa Gurkin managed this assignment. Robin Freshwater and Amy Rosewarne made key contributions to all aspects of the report. Susan Etzel, Terrance N. Horner Jr., Jessica Nierenberg, Kathleen Padulchick, and Jack Warner also provided assistance. In addition, Carlos Diz and Pedro Briones provided legal support and Donna Miller developed the report’s graphics. | International air passengers arriving in the United States are subject to an inspection to ensure they possess legal entry and immigration documents and do not bring in contraband, such as illegal drugs, counterfeit goods, or harmful pests and prohibited agriculture products. With the creation of the Department of Homeland Security (DHS) in 2003, the customs, immigration, and agriculture inspections activities were integrated into one program led by DHS's office of Customs and Border Protection (CBP). However, the three fees--whose collections totaled about $1 billion in fiscal year 2006--linked to these inspections remain statutorily distinct and are coadministered by CBP, Immigration and Customs Enforcement (ICE), both within DHS, and the Department of Agriculture's Animal Plant Health Inspection Service (APHIS). GAO was asked to examine how the fees are set, collected, and distributed, and the benefits and challenges of this process to agencies and stakeholders, including implications of consolidating these fees under the authority of DHS. The process of setting, collecting, and distributing separate, dissimilar fees creates challenges for agencies and stakeholders. Although air passenger inspections were integrated within CBP, the fees supporting these inspections were created and are still governed by separate, dissimilar authorizing legislation. Two fee amounts are set in statute and one is set by regulation; all are collected by the airlines, deposited into three separate accounts and distributed among the agencies. As a result, the fees are administered and overseen by a complicated network of executive branch agencies and congressional committees, creating a series of challenges. For example, neither CBP nor ICE know whether the fees collected are recovering the full cost of the immigration inspection activities or whether the fees are properly divided between them, because ICE does not have finalized cost calculations for its inspection-related activities. In addition, certain passengers are exempt from some fees but not others, making it difficult for agencies to administer the fees. Further, although airports and airlines play an important role in facilitating inspections and the process of collecting and remitting the fees, opportunities for two-way communication are fragmented and limited, reducing stakeholder buy-in and acceptance of the fees and contributing to confusion about how the three fees work and what activities they may fund. Other challenges are due to the statutory structure of the individual passenger inspection fees. For example, the customs inspection fees are available for limited purposes: not all reimbursable activities may be associated with inspections, and not all inspection activities are reimbursable. However, CBP officials said even if the customs fees were spent on inspection-related activities, they still would only recover about 72 percent of costs in fiscal year 2006. Therefore, customs inspection-related activities are mainly funded by appropriations from general revenues. Further, without auditing each airline, CBP cannot independently verify the amount owed by airlines, partly because airlines are required to remit the fees based on ticket sales rather than passengers transported. CBP said it is developing a legislative proposal that would address these and other challenges by requiring airlines to remit based on passengers transported, but airline industry stakeholders said this change would complicate their collection process and create substantial transition costs. Although a number of options for addressing these fees have been raised, regardless of whether these fees are consolidated in whole, in part, or not at all, certain problems specific to the individual fees can and should be resolved first, and in a manner consistent with principles of effective user fee design, on which GAO has previously reported. Moreover, although partly or fully consolidating the fees under DHS's authority could provide opportunities to address some of the many challenges identified in this report, consolidation in-and-of-itself will not solve all of the problems we have identified. |
To describe the evolution of PBGC’s current statutory limitation on administrative expenses, we reviewed PBGC’s enabling and appropriations legislation from 1974 to 2002. We reviewed Titles I and IV of ERISA (29 U.S.C. Chapter 18); Chapter 91 of Title 31, United States Code (commonly referred to as the Government Corporation Control Act); the Treasury- General Government Appropriations acts for various fiscal years; and pertinent legislative histories of those acts. In order to review PBGC’s application of the statutory limitations in developing its budget estimates for amounts falling under the limitation, we reviewed the 1985-2003 Budget of the United States Government; PBGC’s 2002 annual report and financial statements; related audit reports, budget submissions, and proposals; and other publications and official correspondence dealing specifically with PBGC’s budget limitations. To review PBGC’s methodology for allocating and reporting its operational and administrative expenses for activities falling within the administrative expense limitation, we reviewed key documents from PBGC’s budget formulation and execution process and interviewed PBGC officials knowledgeable about the process. We analyzed PBGC’s budget policy manual, mission and function descriptions for each PBGC department, and PBGC’s budget justification documents. We obtained and reviewed the 2001 budget execution reports submitted by PBGC to the Office of Management and Budget (OMB), including the Apportionment and Reapportionment Schedules (SF 132) and Reports on Budget Execution and Budgetary Resources (SF 133). We reviewed PBGC’s budgetary accounting code structure and obtained copies of budgeting and accounting documents applying those codes. We also interviewed PBGC’s Budget Director, Controller, Chief Management Officer, and other appropriate PBGC officials. As agreed with your staff, we did not review the relationship of PBGC’s revolving funds to the trust funds it administers as trustee of defined benefit pension plans because this matter is subject to ongoing litigation. Accordingly, we did not review individual expense transactions for the purpose of determining whether they should be properly charged to the revolving or trust funds. We conducted our review from March 2002 through December 2002 in accordance with generally accepted government auditing standards. We obtained written comments on a draft of this report from PBGC’s Chief Management Officer. These are included in appendix IV. Congress enacted ERISA in 1974 to protect the anticipated retirement benefits of employees when defined benefit pension plans they participate in are terminated and do not have sufficient assets to pay the estimated future benefits promised to employees (underfunded plans). Defined benefit pension plans are established or maintained by employers or employee organizations, or both, and provide for a specific amount of retirement income with the payment amounts typically based on years of service and earnings. PBGC insures participants for single-employer and multiemployer defined benefit pension plans. Single-employer plans generally consist of plans that provide benefits to employees of one employer. Multiemployer plans are those established through collective bargaining agreements that require contributions by and provide benefits to workers from more than one employer. PBGC charges a flat-rate premium or a variable-rate premium to finance its coverage of amounts needed to guarantee benefit payments of plans that terminate with insufficient assets to pay promised benefits. PBGC initiates involuntary terminations for underfunded plans. Once those plans are terminated, PBGC routinely is appointed as the permanent trustee. (App. I summarizes the plan termination processes in more detail.) As shown in figure 1, PBGC’s major expenditures include benefit payments, financial assistance payments, and “operational and administrative” expenses. Under the single-employer program, PBGC makes guaranteed benefit payments to retirees or their dependents for underfunded terminated plans. Under the multiemployer program, PBGC provides financial assistance payments to pension plans that become insolvent. This allows the plans to continue paying participants their guaranteed benefits. PBGC’s operational and administrative expenses include expenses incurred in carrying out its responsibilities as trustee of plans and its administrative expenses. PBGC’s expenses as a trustee include the costs of collecting plan assets; processing, accounting, valuing, and managing assets; determining eligibility and benefit levels; and paying benefits. PBGC divides its operational and administrative expenses into two subcategories: “services related to terminations” and “administrative.” PBGC treats all expenses of “services related to terminations,” including an allocation of indirect expenses, as expenses related to its role as trustee of plans. PBGC charges those expenses to its trust funds. (App. II discusses PBGC’s revolving and trust funds.) Over the years, PBGC operations have grown significantly as pension plan terminations have increased. PBGC’s reported net position increased from a negative $1.3 billion in fiscal year 1985 (total assets of $1.2 billion against $2.5 billion in recorded liabilities) to $7.8 billion in fiscal year 2001 (total assets of $22.5 billion against $14.7 billion in recorded liabilities). In fiscal year 2002, PBGC’s net position decreased to a deficit of $3.5 billion (total assets of $26.4 billion against $29.9 billion in recorded liabilities). The large decrease in PBGC’s net position in fiscal year 2002 was due largely to losses associated with completed and probable pension plan terminations. The number of pension plan participants that PBGC is responsible for increased from 170,000 in fiscal year 1985 to 783,000 in fiscal year 2002, an increase of 361 percent. PBGC’s net position from fiscal year 1985 through 2002 is reflected in figure 2. In annual appropriations acts since fiscal year 1985, Congress has limited the amount of PBGC’s permanent indefinite revolving fund appropriations that may be used for administrative expenses. The annual appropriations acts have not defined the types of costs to be included as “administrative expenses.” In fiscal years 1989 and 1991, however, the appropriations acts identified certain PBGC contractual and other expenses to be excluded from the administrative expense limitation, thus narrowing the activities and expenses subject to the administrative expense limitation. Over time, the percentage of PBGC’s administrative expense limitation compared to the total operational and administrative budget has decreased dramatically, from 100 percent in fiscal year 1985 to 5.2 percent in fiscal year 2002. (See fig. 3 and app. III for more details.) This decrease resulted in part from the 1989 and 1991 statutory provisions that narrowed the activities under the administrative expense limitation. The decrease is also a result of PBGC’s application of the statutory limitation in its budget process, which is described in a later section of this report. The first limitation on PBGC’s administrative expenses appeared in the Department of Labor Appropriations Act for fiscal year 1985. Expressing concern that PBGC had not informed Congress of prior-year commitments for computer acquisitions, the Senate Committee on Appropriations recommended to Congress that it cap PBGC’s budget authority for its fiscal year 1985 “administrative expenses” at $33.1 million. This limitation applied to all of PBGC’s operational and administrative expenses for fiscal year 1985, which covered PBGC’s entire operational and administrative budget. Congress has included a limitation on administrative expenses in each annual appropriations act since fiscal year 1985. However, in subsequent years, Congress excluded expenses from the “administrative expenses” that had been included under the original limitation in fiscal year 1985. For fiscal year 1989, PBGC requested that Congress exclude certain contractual expenses from the administrative expense limitation. PBGC’s Budget Director stated that the request was in response to several major plan terminations. He stated that PBGC needed flexibility to react quickly to the sizable cost and the unpredictable nature of pension plan terminations. The statutory administrative expense limitation in fiscal year 1989 limited PBGC’s appropriations for “administrative expenses” to $44.2 million and allowed PBGC to exclude from the limitation its “contractual expenses” for legal and financial service contracts in connection with the termination benefits administration services. In late fiscal year 1991, PBGC requested that Congress further expand its operational and administrative budget flexibility because of its rising workloads. PBGC requested that, for the last 2 months of fiscal year 1991 and thereafter, the exclusions from the expense limitation be expanded to include all expenses related to termination of pension plans, asset management, and benefits administration. Congress modified the administrative expense limitation as requested and has excluded these expenses from the limitation in subsequent appropriations acts. Subsequent to fiscal year 1991, PBGC made changes in its approach to applying the statutory limitations, which resulted in a further reduction in the proportion of expenses falling under the limitation. After we provided a draft of our report to PBGC, the President’s proposed Budget of the United States Government, Fiscal Year 2004 was released on February 3, 2003. The fiscal year 2004 budget includes a proposal to eliminate the limit on PBGC’s administrative expenditures. During our review, we found significant problems with the way PBGC developed its budget estimates for its administrative expense limitation. As a result, PBGC’s estimate for activities covered by the budget limitation is not meaningful or reliable. PBGC’s Budget Director could not demonstrate that PBGC had conducted any analysis of expense classifications for PBGC’s operational and administrative budget since PBGC last reviewed its activities in 1993. We identified flaws in the concepts supporting PBGC’s budget estimates for expenses subject to the limitation. For example, PBGC did not identify any direct costs of activities falling under the expense limitation, and based its estimated budget only on the amount of indirect expenses not allocated to activities PBGC attributes to plan terminations. Based on this flawed concept, PBGC determined that its estimated budget for administrative expense limitation was $11.5 million for fiscal year 1995. PBGC has used that amount, with some minor adjustments, as a basis for all subsequent annual budget proposals, without subsequent validation. To calculate the estimated cost of activities subject to the statutory limitation based on the new exclusions that PBGC received beginning with the last 2 months of fiscal year 1991, PBGC’s Budget Director told us that PBGC conducted reviews in 1991 and 1993 of activities at different organizational levels. The official told us that based on a 1993 review, PBGC identified and estimated direct and indirect expenses associated with PBGC’s different activities, including premium collections and revolving fund investment services—the major expense activities deemed by PBGC to remain subject to the administrative expenses limitation. The PBGC Budget Director was unable to provide us with documentation supporting the review or the resulting expense allocations among PBGC’s activities. The PBGC official also did not provide supporting documentation for the reasons why certain other regulatory and overhead activities were excluded from the budget estimates for the administrative expense limitation. Identifying and documenting its activities, along with a basis for including or excluding those activities from the administrative expense limitation, would have been PBGC’s logical first step in developing a cost allocation methodology for identifying total expenses under the administrative expense limitation. However, in its budget proposals for fiscal year 1995, PBGC used a flawed methodology for estimating costs that was inconsistent with the concept of assigning direct and indirect costs based on activities performed. Under its proposed operational and administrative budget, PBGC identified estimated direct expenses for “services related to terminations” that it considered trustee activities. PBGC then placed all other expenses in a pool it characterized as “indirect,” even though these “indirect” expenses included direct expenses for premium collection and revolving fund investment services, the two major activities it deemed to be subject to the administrative expenses limitation. Further, PBGC estimated its budgeted amount for the expense limitation based on an allocation of the expenses in its pool of “indirect” expenses only. PBGC first allocated estimated “indirect” expenses to its “services related to terminations” based on the ratio of estimated direct expenses for trustee activities to PBGC’s total estimated operational and administrative expenses. PBGC then assigned the remaining “indirect” expenses to the estimated budget for the limited administrative expenses, even though no direct expenses had been assigned to those activities, and even though, by definition, indirect expenses are generally not allocated to functions that do not have direct expenses. (See fig. 4.) The effect of not considering the direct expenses associated with the activities falling under the limitation when budgeting for these activities is to arrive at a total budget estimate for limitation activities that may not be reasonable. The budget estimate could be overstated or understated depending on the actual level of direct expenses associated with limitation activities. Based on this flawed approach, PBGC determined its proposed budget for the expense limitation to be $11.5 million in fiscal year 1995 and has used this amount as a basis for all subsequent years’ budget proposals. According to PBGC’s Budget Director, all of PBGC’s subsequent budget proposals for the statutory limitation on administrative expenses have been based on the fiscal year 1995 budgeted amount of $11.5 million, with minor cost adjustments and inflation adjustments. Therefore, from fiscal year 1995 through 2002, the amount of budgeted expenses falling under the limited administrative expense category has generally remained constant, while PBGC’s total budget for operational and administrative expenses has grown substantially. (See fig. 5.) PBGC has attributed all growth in expenses to trust fund activities and pays the increased expenses from the trust funds, without any verification of the validity of this approach. We found that PBGC does not account for the actual expenses within its administrative expense limitation. Instead, PBGC uses its budgeted amount as a basis for allocating and reporting actual costs for those activities. PBGC accounts for operational and administrative expenses for activities other than “services related to plan terminations” under the category, “administrative expenses.” This amount includes indirect expenses for the statutory limitation category and indirect expenses for “services related to terminations.” However, the amount prorated to the limitation is based on the initial amount of administrative expenses budgeted for activities PBGC subjects to the limitation and is designed to allocate to the limitation an amount equal or close to the originally estimated amount. This amounts to force fitting reported actual expenses so that they equal or come close to the statutory limitation amount. This method does not provide meaningful funds control over these activities. As a result, PBGC does not have a meaningful basis for reporting and tracking its compliance with the limitation. The reporting of actual expenses should be from detailed, transaction-based support for the direct and indirect expenses related to the activities subject to the limitation. According to PBGC’s Budget Director, PBGC developed its current method for reporting the costs associated with premium collection and revolving fund investment services to simplify the process and to avoid unduly complex and excessive accounting practices. He explained that the methodology was created to eliminate judgment calls and any “gray” distinctions between assigning costs for administrative activities subject to budget limitations and those not subject to budget limitations. This methodology, however, does not provide any reliable or meaningful cost data related to actual activities. Proper budgetary accounting provides a means to track the status of budget authority to help avoid overexpending or overobligating appropriations. A methodology for budgeting, allocating, and reporting costs should be clearly defined, well reasoned, consistently applied, and properly documented. However, PBGC’s process for determining annual proposed and reported actual costs of activities subject to the statutory limitation on administrative expenses is neither reasonable nor reliable. As discussed in our executive guide on best practices in financial management, to effectively evaluate and improve the value derived from government programs and spending, Congress and other decision makers need accurate and reliable financial information on program cost and performance. We also note that financial information is meaningful when it is useful, relevant, timely, and reliable. Cost accounting principles call for direct costs to be assigned to an activity wherever feasible and economically practical, and indirect costs to be allocated on a reasonable and consistent basis. Such practices would require that PBGC periodically evaluate its methodology for assigning the direct costs of activities and the allocation of related indirect costs. Further, agencies administering appropriation and fund accounts are responsible for ensuring that the amounts obligated and expended do not exceed the legally imposed limitations. Thus, when obligating or expending amounts for its expenses under the administrative limitations, PBGC is required to separately track those amounts, including whether they were actually disbursed, so that it can determine by expense category whether its obligations and expenditures are proper in amount and purpose. PBGC’s budget proposals for its administrative expense limitation, along with its reporting of the amounts spent under the expense limitation, are not based on actual data and thus are not meaningful or effective in controlling administrative costs. PBGC does not have a reliable basis for estimating its budget for activities subject to the legislative limitation. Even if PBGC had such a basis, it still would have no basis for reporting on adherence to the limitation, since it does not accumulate and allocate actual expenses for activities subject to the limitation. Its practice of reporting on limitation expenses so that the reported amounts are designed to equal or come close to the budgeted numbers further undermines the credibility of this process. Furthermore, the percentage of PBGC’s operational and administrative budget subject to the limitation has fallen significantly while its total operations budget has increased significantly. Accordingly, the limitation as now structured and implemented does not represent a meaningful control over administrative expenses. With only about 5 percent of total operating and administrative costs falling under the limitation in fiscal year 2002, the statutory limitation on administrative expenses offers little opportunity for controlling operational and administrative expenses. Because the limitation no longer serves as a meaningful control over PBGC’s administrative activities and expenses, Congress may wish to consider whether or to what extent to continue to use the administrative expense limitation as a tool for overseeing PBGC’s activities. Congress could choose to more clearly define PBGC’s administrative expense limitation, which would improve the limitation’s use as an oversight tool during the normal congressional appropriations process. A more clearly defined expense limitation could result in a larger share of PBGC’s expenses falling under the limitation. On the other hand, Congress may decide to eliminate the administrative expense limitation for PBGC altogether. In order to provide cost information to assist Congress in its oversight of PBGC’s expenses and for congressional decision making about whether or to what extent it should continue to use an expense limitation in its oversight of PBGC, we recommend that PBGC’s Executive Director employ a systematic review, including both quantitative and qualitative measures, to develop a methodology for assigning the direct expenses related to its major categories of activities; develop a method of allocating indirect costs to each activity using a logical, reasonable, and consistent basis; and develop a method for accounting for actual direct and indirect expenses for its major activities. In commenting on a draft of this report, the Chief Management Officer (CMO) of PBGC noted that the Corporation had reached a conclusion similar to ours about the clarity of PBGC’s current budget structure and stated that the budget structure must change. In this regard, PBGC’s CMO stated that PBGC proposed a new budget structure for its fiscal year 2004 congressional budget submission that would restructure PBGC’s budget program and financing activity line items so that they match up with PBGC’s lines of business. PBGC’s CMO further stated that PBGC will consider establishing an internal review process in which budget, finance, auditing, and legal staff will examine all budget lines midyear to ensure their correct classification to the new activities. PBGC’s CMO expressed concern that our report appears to be stating that PBGC’s budget structure does not provide Congress with meaningful control. However, our report addresses the administrative expense limitation and not PBGC’s overall budget. As we stated in our report, we found significant problems with the way PBGC developed its budget estimates for activities covered by the administrative expense limitation as well as with PBGC’s reporting of actual expenses covered by the limitation. The percentage of PBGC’s administrative expenses subject to the limitation has fallen significantly while its total operational and administrative expenses have increased significantly, resulting in only 5 percent falling under the administrative expense limitation. Accordingly, if Congress wishes to maintain some sort of limitation for some or all of PBGC’s administrative expenses, the limitation as now structured and implemented does not represent a meaningful control. PBGC’s CMO disagreed with our conclusion that PBGC’s reporting processes are not based on actual data. As we stated in our report, for reporting on administrative expenses that fall under the administrative expense limitation, PBGC uses its budgeted amount for the administrative expense limitation as a basis for allocating and reporting actual costs for those activities. As discussed in the body of our report, this PBGC process merely results in force fitting reported expenses so that they equal or come close to the budgeted amount for the statutory limitation, and accordingly, does not provide reliable cost data related to actual activities or a meaningful basis for reporting and tracking compliance with the limitation. PBGC’s CMO stated that the current budget proposal addresses the three recommendations in our report. However, as described in the CMO’s response, PBGC’s proposed budget restructuring does not specifically address our recommendations. As described in the CMO’s response, PBGC’s proposal does not address our recommendations calling for a systematic review to develop a methodology for assigning direct expenses to PBGC’s major categories of activities, developing a method of allocating indirect costs to those activities, and developing a methodology for accounting for those expenses for its major lines of activities. Finally, PBGC notes that it is facing historic challenges to the pension insurance system given the significant number of large plan terminations and other potential liabilities. We agree that this is an opportune time for Congress to decide whether or to what extent it will use the administrative expense limitation as an oversight tool. As we state in our report, Congress may wish to review whether to continue including such a limitation in appropriations acts as an oversight tool. If a statutory limitation for controlling costs continues to be desirable, Congress may wish to reexamine the scope of the limitation and require PBGC to apply and report on the limitation in a more meaningful manner. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the Chairman of the Senate Special Committee on Aging and to other interested congressional committees. We are also sending copies to the Executive Director of the Pension Benefit Guaranty Corporation. Copies of this report will also be made 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 at (202) 512-9406 or by e-mail at franzelj@gao.gov if you or your staff has any questions concerning this report. Key contributors to this report were Darryl Chang, F. Abe Dymond, Meg Mills, and Estelle Tsay. The Employee Retirement Income Security Act of 1974 (ERISA) directs PBGC to oversee the termination of single-employer defined benefit pension plans under three different sets of circumstances. Each type of termination involves different procedures. PBGC may be appointed as pension plan trustee under two of these procedures. ERISA authorizes plan sponsors or plan administrators to initiate the termination of ongoing plans under three general circumstances and through three corresponding procedures set out in federal regulations. First, a plan administrator may initiate a “standard termination” of a single- employer plan if the liabilities of the plan are sufficiently funded. “Standard termination” is the name given by ERISA to the termination procedure that consists primarily of a series of notices and valuations. Second, a plan administrator of a single-employer plan may initiate a “distress termination” when the plan sponsor and each member of the plan sponsor’s controlled group meet financial distress criteria. “Distress termination” is the name given by ERISA to the termination procedure that authorizes plan administrators to notify PBGC that they intend to terminate a plan because (1) the employer is in liquidation proceedings, (2) the employer is in reorganization proceedings and the bankruptcy court determines that the employer is unable to continue in business if it must fund the plan, (3) PBGC agrees that the employer cannot pay all debts and cannot continue in business, or (4) PBGC agrees that the costs of continuing plan coverage are “unreasonably burdensome” solely because of a decline in the employer’s workforce. If, during a “distress termination,” PBGC determines that the plan is not sufficiently funded to cover the amounts it would guarantee, it must petition a federal district court or reach agreement with a plan administrator to terminate the plan. A third termination procedure—“PBGC-initiated termination” (sometimes called “involuntary termination”)—is available only to PBGC. PBGC must initiate the “involuntary termination” of a single-employer plan when it determines that there are insufficient plan assets to pay benefit liabilities currently due, and it may initiate a plan termination when, among similar reasons, PBGC’s “long-run loss with respect to the plan may reasonably be expected to increase unreasonably.” “Involuntary termination” remains available during “standard” and “distress terminations.” Once the decision to terminate an underfunded plan has been made, either in a distress termination or in a PBGC-initiated termination, the applicable procedures vary: PBGC and the plan administrator may agree to the appointment of an interim trustee to administer the plan while they or a federal district court consider whether the plan should be terminated. If they do not agree to an appointment, either may petition a federal district court to appoint an interim trustee for that duration. PBGC and the plan administrator may agree that the plan should be terminated, and if they also agree to the appointment of a permanent trustee, that trustee may terminate the plan. PBGC may apply to a federal district court for a decree adjudicating that the plan should be terminated, or if an interim trustee has been appointed, the trustee may also apply for that decree. The court must stay any proceedings against the plan in any court until it adjudicates the matter. If the court grants the decree, it authorizes the interim trustee to terminate the plan or appoints a new permanent trustee to do so. If an interim trustee is appointed upon initiation of the “involuntary termination,” but the court dismisses an application for termination or PBGC fails to file an application within sufficient time, that trustee’s duties end. A plan’s termination date triggers various powers and duties of PBGC, employers, trustees, plan administrators and sponsors, participants, and the federal courts. The plan termination date generally is reached when agreed to by PBGC or when ordered by a federal court pursuant to the applicable termination procedure. On the plan termination date, benefits cease to accrue to plan participants, the plan is generally removed from coverage under Title I of ERISA, and the plan can be processed for liquidation. The termination date is used by PBGC to make and issue determinations on the value of (1) vested benefits, (2) unfunded vested benefits, (3) employer liability for unfunded amounts, and (4) PBGC’s liability for its insured amounts. Terminated plans under “PBGC-initiated terminations” are “closed-out” when PBGC issues final determinations of benefits payable to plan participants, resolves participants’ appeals from the determinations, and places the plans in administrative status. Under the administrative status, PBGC contracts with plan administrators and other service contractors for subsequent investment of plan assets, payment of benefits due, and maintenance of participant data. The average age of benefit determinations issued in fiscal year 2002 was 3.3 years after the date PBGC was appointed as trustee. The average age of unissued benefit determinations at fiscal year end was 0.9 years. Under “standard” and “distress terminations,” plans are liquidated when PBGC receives a certificate of distribution of plan assets from a plan administrator (certifying that the administrator purchased annuities or paid participants a lump sum). Plan administrators do not manage benefit payments, participant data, or plan investments after they are distributed under “standard” or “distress terminations.” PBGC estimates that it will approve 1,200 “standard terminations” and conduct 110 “involuntary terminations” by the end of fiscal year 2003 and anticipates the same workload in fiscal year 2004. ERISA also authorizes PBGC to restore any terminating or terminated plan to Title I “active” status, and it has done so with major plan failures, such as LTV Corporation’s $1.8 billion underfunded plans in 1986. Prior to 1981, PBGC was treated as an off-budget federal entity, and its transactions were excluded from the budget totals. Beginning in 1981, Public Law 96-364 required that PBGC’s receipts and disbursements be included in the budget. These are accounted for in a single U.S. Treasury account and reported in a single budget account—the PBGC Fund, a public enterprise fund. PBGC also maintains separate trust fund accounts in a custodian bank for plan assets it holds as trustee and to account for terminating or terminated plans. These accounts are not included in the total of the federal budget. The trust funds, referred to by PBGC collectively as the “trust fund,” reflect accounting activity associated with trusteed plans—plans for which PBGC has legal responsibility, plans pending trusteeship—terminated plans for which PBGC has not yet become legal trustee, and probable terminations—plans that PBGC determines are likely to terminate and be trusteed by PBGC. To provide financing for PBGC, ERISA established revolving funds for PBGC that constitute permanent indefinite appropriations. Out of these revolving funds, PBGC may pay its expenses, such as “operational and administrative expenses,” guaranteed benefits, and financial assistance. Accordingly, PBGC categorizes its expenditures into three groups. (See fig. 6.) First are PBGC’s “operational and administrative” expenses, which PBGC further divides into two subcategories: “administrative expenses” and “services related to terminations.” Both of these expense subcategories are paid from the revolving funds, but the trust fund periodically reimburses PBGC for the “services related to terminations” expenses and portions of the “administrative expenses” that are allocated to “services related to terminations.” Reimbursement of a percentage of benefit funding) PBGC’s two other expense categories are benefit payments that PBGC makes to retirees or their dependents (benefit payments) and financial assistance loans that provide PBGC assistance to underfunded multiemployer pension plans (financial assistance). PBGC expends its revolving funds for both categories, but the trust fund reimburses the revolving funds for a percentage of the amount of benefit payments. PBGC calculates the reimbursement percentage using what it calls its “proportional funding” method. The “proportional funding” percentage represents aggregate calculations of the amount of benefits that can be paid by the trust fund without its being depleted. No financial assistance payments are reimbursed by the trust fund. Title IV of ERISA establishes seven revolving funds on the books of the U.S. Treasury and provided PBGC with permanent indefinite spending authority to carry out its duties. ERISA lists the programs, activities, and costs that each of the seven revolving funds may be used to support. Of the seven revolving funds, however, PBGC currently uses only three because it does not conduct the programs or activities supported by the other four. Of the three revolving funds that PBGC currently uses, funds 1 and 7 support the basic benefit guarantee program for single-employer pension plans and fund 2 supports the basic benefit guarantee program for multiemployer pension plans. All of these are combined into the PBGC fund for budget reporting purposes. Title IV of ERISA lists the specific types of resources to be credited to each fund. For example, PBGC’s revolving funds 1 and 2 may receive premiums charged to employers, attorney’s fees awarded to PBGC, earnings on investments of amounts in the funds, and amounts that PBGC may borrow from the U.S. Treasury (up to $100 million). Revolving fund 1 may also receive amounts transferred to it from revolving fund 7. Revolving fund 7, however, may only receive certain premiums for single-employer plans, and also the related penalties, interest charges, and earnings on investment of those amounts. Title IV of ERISA also specifies the types of expenses that each fund may pay and certain types of expenses each may not pay. For example, PBGC may use the two benefit guarantee revolving funds to pay such costs as PBGC’s guaranteed pension plan benefits, to purchase assets of terminated plans, and to pay for certain of PBGC’s “operational and administrative expenses” not included in the statutory “administrative expense” limitation. However, PBGC may use amounts in each of its revolving funds only for the purposes specified by ERISA for each, and they may not be used to finance any other activity. Congress reviews PBGC’s budget each year, as required by the Government Corporation Control Act. However, with the exception of amounts limited under the statutory limitation on administrative expenses, the revolving funds are available to PBGC without annual appropriations, so long as expenditures do not exceed available resources. Title IV of ERISA also authorizes PBGC to be appointed as interim trustee of pension plans to control them after it has initiated an involuntary termination (in its corporate capacity) or to serve as permanent trustee after the plan terminates. According to the PBGC General Counsel, “PBGC routinely requests that it be appointed trustee of terminated, under-funded pension plans, and courts routinely grant such requests.” PBGC administers such plans in the trust fund by depositing their assets into accounts held at a custodian bank. The trust fund identifies trusteed plan assets according to plan type (e.g., single employer) and year of termination. Once plan assets are deposited into the trust fund, PBGC combines them with the assets of similar plan types, so that the assets lose their individual plan accounting identity. Within the trust fund, however, PBGC currently accounts for more than trusteed plan assets, including (1) plans pending trusteeship—terminated plans for which PBGC has not become legal trustee by fiscal year-end—and (2) probable terminations— plans that PBGC determines are likely to terminate and be trusteed by PBGC. PBGC expends amounts from these combined accounts for plan benefit payments and expenses arising from all the plans. PBGC distinguishes the legal status of its revolving funds from its trust fund, concluding that the “private” trust fund assets are not subject to government restrictions on their use, except to the extent that PBGC voluntarily abides by any restrictions. In 1985 and 1986, we concluded that the funds held by PBGC as permanent trustee of terminated plans under ERISA were not subject to the laws applicable to expenditures of appropriated funds by wholly owned government corporations. Specifically, we concluded that they were not subject to laws related to procurement of investment manager services, laws requiring the deposit of collections into the General Fund of the U.S. Treasury, and laws requiring the use of government printing plants. We found that when PBGC assumed the fiduciary duties of permanent trustee as prescribed by ERISA, the specific activities considered in those cases were “fundamentally different” than those arising from its governmental duties because the outcome would inure to “the benefit of the trust funds and not to the direct benefit of the United States.” Because these fiduciary duties were the same as those of a “private fiduciary” appointed to the same position, we concluded that the funds should be treated as “non-public” in nature for the purposes of the specific activities then under review. Since then, a 1987 amendment to ERISA expanded PBGC’s authority to pool the assets of any terminated plan for administration, investment, payment of the liabilities of those pooled plans, and for other purposes that PBGC deems appropriate. PBGC now administers the trust fund together with the revolving funds under a “proportional funding” method whereby it pays benefits from each of these funds using financial calculations designed to maximize the longevity of their combined assets. PBGC uses the trust fund for all of its corporate expenses except those subject to the statutory limitation on administrative expenses, the benefit payment amounts “proportionately” attributed to the revolving funds, and the amounts for multiemployer plan financial assistance. According to PBGC budget and accounting officials, the assets and liabilities of trusteed terminated plans, terminated plans pending trusteeship, and “probable terminations” are accounted for by program and year within the trust fund. PBGC uses the value of its accounts in its allocation of investment gains and losses and in its expenses. It allocates earnings and expenses to individual trust funds in proportion to their value relative to the total amount of the trust funds, unless such activities are directly attributable to a specific fund. PBGC’s trust funds are not included in the federal budget. In the fiscal years from 1985 through 1988, expenses for the administration of terminated plans entrusted to PBGC were accounted for under the separate trust fund, which is not subject to the appropriations act limitation on administrative expenses. Consequently, amounts budgeted for these trust fund expenditures were not included in PBGC’s revolving fund budget submitted to Congress. For example, in fiscal years 1987 and 1988, the trust fund directly paid $7.3 million for administrative expenses for trust fund operations that were not included in the revolving fund operating budgets. During fiscal year 1989, as PBGC needed additional amounts in the revolving funds for additional unbudgeted contractual expenses, it used additional funds from its trust fund without a need for further congressional approval. For its fiscal year 1989 budget, PBGC included in its budget submission to Congress a request for authority to initially use the revolving funds for all revolving fund and trust fund expenses, with the trust fund later reimbursing the revolving funds for trustee-related expenses associated with plan terminations. In the committee reports accompanying their respective appropriations bills, the House and Senate Appropriations committees approved the PBGC proposal to pay expenses from the revolving funds, without limitation, that were previously paid from the trust fund. PBGC now routinely makes payments from the revolving funds first, with reimbursements from the trust fund. For example, in fiscal year 2001, PBGC’s total reported operational and administrative expenses of $187.9 million included amounts chargeable to both the revolving funds and the trust fund. Of this, PBGC charged $176.3 million to the trust fund. Because not all of these were actually paid out during fiscal year 2001, PBGC carried forward to fiscal year 2002 those amounts due to the revolving funds, totaling about $173.3 million. The remaining amount of about $11.6 million was not reimbursed, and was therefore paid by the revolving funds, and it reflects slightly less than the estimated $11.7 million for administrative expenses limited by Congress for fiscal year 2001. PBGC has stated that only the amounts submitted to Congress in its administrative expense budget are subject to the annual appropriations review process because the remaining amounts are reimbursed from the trust fund and constitute “non-public” funds. The following are GAO’s comments on the Pension Benefit Guaranty Corporation’s (PBGC) letter dated February 6, 2003. 1. The term “administrative expenses” in appropriations acts, legislative history, and PBGC’s practices differ from how the term is typically used. Therefore, we used terminology in our report that we believe is understandable to third parties not involved in PBGC’s annual appropriations process. Throughout the report, we are specific when we discuss the expenses that fall under PBGC’s limitation, and use the term “administrative expenses that fall under the limitation” or the “administrative expense limitation.” 2. As we state in our report, the reviews conducted by PBGC in 1991 and 1993 to identify and document its activities would have been PBGC’s logical first step in developing a cost allocation methodology for identifying total expenses under the administrative expense limitation. However, in its budget proposal for fiscal year 1995, PBGC used a flawed methodology for estimating costs that was inconsistent with the concept of assigning direct and indirect costs based on activities performed. Furthermore, PBGC has not reviewed this methodology since then. 3. We do not disagree with PBGC’s overall assumptions about the relationship of its costs to its overall workload trends. However, PBGC has not reviewed its activities—looking at approach and amounts—to determine whether the large changes in the scope of its workload call for changes in the way it budgets and reports the amounts subject to the administrative expense limitation. 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. | Concerned about the increasing proportion of the Pension Benefit Guaranty Corporation's (PBGC) operational and administrative budget that is outside the annual administrative expense limitation, the Ranking Minority Member of the Senate Special Committee on Aging asked GAO to review PBGC's (1) application of the limitations set forth in its appropriations in developing its budget estimates and (2) methodology for allocating and reporting its operational and administrative expenses falling under the statutory limitation. As part of PBGC's fiscal year 1985 appropriation, Congress limited the amount of PBGC's appropriated revolving funds available for "administrative expenses." In later years, PBGC requested and Congress approved certain types of expenses to be excluded from the administrative expense limitation. PBGC requested the exclusions in order to gain flexibility in dealing with several major pension plan terminations. The exclusions, combined with PBGC's application of the limitation, have resulted in only 5 percent of PBGC's administrative and operational expenses being included in the limitation for fiscal year 2002. GAO found significant problems with the way PBGC develops its proposed budget estimates for activities covered by its administrative expense limitation. PBGC does not have a reliable basis for estimating its administrative expenses subject to the legislative limitation. As a result, PBGC's estimates for its activities covered by the limitation are not meaningful and thus are ineffective in controlling administrative costs. In addition, PBGC does not have a meaningful basis for reporting adherence to the limitation, since it does not accumulate and allocate actual expenses for activities subject to the limitation. PBGC uses its budgeted amount for the administrative expenses limitation as a basis for allocating and reporting actual costs for those activities. This amounts to force fitting reported expenses so that they equal or come close to the budgeted amount for the limitation, and accordingly, does not provide reliable cost data related to actual activities or a meaningful basis for reporting and tracking compliance with the limitation. |
Under the current LCS program, two shipyards are building an equal number of two different versions of the LCS seaframe: Lockheed Martin builds the Freedom variant at Fincantieri Marinette Marine in Marinette, Wisconsin, and Austal USA builds the Independence variant in Mobile, Alabama. Table 1 shows the status of LCS seaframe acquisition, including the LCS with minor modifications, referred to as a frigate. When the Navy first conceived of the LCS in the early 2000s, the concept was that two shipbuilders would build prototypes based on commercial designs. The Navy planned to experiment with these ships to determine its preferred design variant. This experimentation strategy was subsequently abandoned. The Navy determined that, based on cost considerations, it would be impractical to have the two competing shipyards build only one or two ships and then wait for the Navy to complete the period of experimentation before awarding additional contracts. Instead, the Navy opted to continue funding additional seaframes without having completed the planned period of discovery and learning. The Navy has made several other revisions to the LCS acquisition strategy over time, some in response to direction from the Office of the Secretary of Defense. These have included changes over time regarding whether the Navy would downselect to one seaframe design. Although it might be expected that a new acquisition concept would require some adjustments over time, the LCS program has evolved significantly since it began, as shown in figure 1. As figure 1 indicates, the Navy now plans to buy LCS with minor modifications, which it refers to as frigates. This change to the acquisition strategy followed an analysis in 2014 by a Navy task force (known as the Small Surface Combatant Task Force) that was completed in response to direction from the then Secretary of Defense to identify options for a more capable small surface combatant. In seeking a frigate concept that would improve upon the capabilities provided by LCS, the Navy selected an LCS concept—referred to as a minor modified LCS. This concept, which Navy leadership believed would offer cost, schedule, and shipbuilding advantages, also was assessed as the least capable option considered for the LCS successor. The Navy has noted that the selected design provides some improvements, such as multi-mission and over-the-horizon missile capabilities, at a relatively lower cost than other options by leveraging the existing LCS shipyards and vendors. However, the Navy’s chosen frigate design will presumably carry forward some limitations inherent to its LCS origins, such as space limitations and equipment that has posed maintenance and logistics challenges. The Navy’s Small Surface Combatant Task Force charged with exploring alternatives to the LCS presented Navy leadership with a number of options, from which the Navy chose the option of a minor modified LCS based on cost, schedule, and industrial base stability factors. As we found in June 2016, 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. In response to this direction, the task force created two additional LCS options with minor modifications. These options provided a multi-mission capability instead of the single-mission capability of LCS and retained the modular mission package characteristic of the LCS program (i.e., ability to more readily swap mission systems in and out). In developing these alternatives, the task force also found that it was feasible to permanently install an over-the-horizon missile to offer longer range surface warfare capability, plus a lightweight towed torpedo countermeasure and multi- function towed array sonar to offer some anti-submarine warfare capability. However, these improvements would still need to be augmented by an LCS surface warfare or anti-submarine warfare mission package to provide the full suite of LCS capability. The task force found that it was not technically feasible to include additional vulnerability capabilities (i.e., capabilities to improve the ship’s ability to sustain battle damage and still perform its mission) beyond adding armor protection to some vital spaces. Task force documentation also stated that in developing these alternative LCS options with minor modifications, some capabilities, like speed, had to be traded. Ultimately, the Navy chose—and the Office of the Secretary of Defense approved—a frigate concept based on a minor modified LCS, despite the task force’s findings that it was the least capable small surface combatant option considered. Navy leadership indicated this decision was based on LCS’s relatively lower cost and quicker ability to field, as well as the ability to upgrade remaining LCS and maintain stability in the LCS industrial base and vendor supply chain. In selecting the minor modified LCS concept, the Navy has made trade- offs in refining the capabilities of the frigate, prioritizing lethality and survivability improvements. The Navy noted that as part of the refinement process, the frigate program office identified additional capacity in the LCS designs that has enabled improvements to the ship’s planned capabilities. In particular, the Navy stated that the program office determined that full surface warfare and anti-submarine warfare capabilities could be included in baseline frigate plans, as opposed to the partial capabilities that were found to be possible by the Small Surface Combatant Task Force analysis. Table 2 presents an overview of capability changes the Navy has planned for the frigate, as compared to LCS, and the expected effect of those changes. However, we found in June 2016 that the Navy’s planned frigate upgrades will not include significant improvements in certain survivability areas. Further, the Navy sacrificed capabilities that were prioritized by fleet operators. For example, when asked in engagement sessions by the Small Surface Combatant Task Force, fleet operators consistently prioritized a range of 4,000 nautical miles, but the selected LCS concept with minor modifications was noted to have a minimum range requirement of 3,000 nautical miles. The Navy asserted that it is working with the prospective frigate shipbuilders to achieve a range more consistent with the priorities of fleet operators. The Director, Operational Test and Evaluation (DOT&E) 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. Additionally, the Navy plans to make some similar capability improvements to existing and future LCS, narrowing the difference between LCS and the frigate. As we found in June 2016, the proposed frigate will utilize the offensive anti- submarine or surface warfare capabilities that are already part of the LCS mission packages, so while the frigate will have multi-mission capability that LCS lacks, the capabilities of the individual mission packages will be consistent with what is available for LCS. Though specific details are classified, there are only a few areas where there are differences in frigate warfighting capability compared to the LCS. Since the frigate will be based on an LCS design, it will likely carry forward some LCS design limitations. For example, LCS is configured to support up to 98 personnel, including core and mission package crew and an aviation detachment. Navy officials have stated that the frigate is being designed for a crew of 130. However, given the space limitations on LCS and the fact that the frigate will be based on one of the two LCS designs, achieving this significant increase in crew size could prove challenging. 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 LCS- unique equipment that has challenged the Navy’s support and logistics chain. Current acquisition plans for the frigate require Congress and the Navy to make significant decisions and potential future commitments of about $9 billion—based on early budget estimates—without key program knowledge. The Navy plans to request authority from Congress in 2017 to use what the Navy refers to as a block buy approach for all 12 planned frigates and request funding for the lead frigate as part of the fiscal year 2018 budget request. Because of recent changes to the acquisition approach that hastened the frigate award, the decisions that Congress will be asked to make in 2017 will not be informed by realistic cost estimates or frigate-specific detail design knowledge that helps solidify cost and construction expectations. Further, Congress will not possess critical information on LCS performance in testing that would increase understanding of the operational capability of LCS, which provides the design foundation for the frigate. The Navy’s award decision planned for 2018 will be informed by formal cost estimate information, but like Congress, the Navy will lack detail design knowledge and have more limited information on LCS’s operational capability than would have been available for the previously planned fiscal year 2019 frigate award. And finally, the current and planned LCS construction demands at both LCS shipyards that extend into 2021 suggest no schedule imperative exists that would require the Navy to request or to receive authority in 2017 for the frigate or to award the lead ship in 2018 as currently planned. The frigate acquisition plan has undergone notable changes since late 2015, for various reasons. As it now stands, an accelerated schedule effectively prevents the Navy from being able to provide Congress with a current, formal cost estimate for the frigate—independently completed or otherwise—before Congress is asked to make significant commitments to the program. Navy officials previously stated that the frigate is expected to cost no more than 20 percent—approximately $100 million—more per ship than the average LCS seaframes, though this was an initial estimate. However, our recent work has shown that LCS under construction have exceeded contract cost targets, with the government responsible for paying for a portion of the cost growth. Regarding expected costs for the frigate, prior LCS context is important to consider. When faced with the prospect of a downselect to one LCS variant in 2010, the two shipbuilders provided competitive pricing that propelled the Navy to continue production at both shipyards. Those prices have not yet been achievable. 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 for frigate-specific design changes and modifications from both LCS contractors in late 2017 that will be used to upgrade the LCS options to frigates. The Navy intends to evaluate pricing and technical factors for the proposed frigate upgrade packages and award frigate construction to one contractor based on a best value determination. This frigate downselect to one of the LCS shipyards is planned to occur in summer 2018. Figure 2 illustrates how the Navy plans to modify the fiscal year 2017 LCS contract to convert the ships in the block buy options to frigates. Navy officials explained that the frigate acquisition plan changed substantially in response to a Secretary of Defense memorandum issued in December 2015 that directed the Navy to revise its LCS and frigate acquisition plans. This included direction to reduce the total number of LCS and frigates from 52 to 40, downselect to one ship design, and award the frigate in fiscal year 2019. The Navy subsequently revised its plans to include a downselect decision, but also decided to accelerate the award of the lead frigate from fiscal year 2019 to 2018 as a replacement for awarding a single LCS in 2018. Table 3 shows the changes that have occurred since that memorandum. A consequence of the Navy’s accelerated frigate schedule is increased risk to the government because it refigures a commitment to buy ships in advance of adequate knowledge—a continuation of premature commitments by the LCS program. The Navy plans to award frigate construction to one shipyard before detail design activities specific to the frigate begin, which—as we previously have found—can result in increased ship prices and reduced understanding of how design changes will affect ship construction costs. Detail design enables the shipbuilders to visualize spaces and test the design as the granularity of the design for individual units, or zones, of the ship comes into focus. The Navy had plans in 2015 to have each LCS shipyard conduct frigate detail design activities in fiscal year 2018. This improved understanding of the frigate design was then going to be available to support the Navy’s construction contracts to both shipyards for frigates in fiscal year 2019. However, as we noted above, the Navy changed course in response to direction from the Secretary of Defense and currently plans for a downselect award in 2018. The reduced contract award timeline led the Navy to abandon its plans to conduct detail design activities before contract award; the current plan is to begin detail design after the frigate downselect award and complete design activities before beginning construction. The Navy has noted that LCS’s design is already complete and many areas of the frigate will be common to LCS—greater than 60 percent according to the frigate program office. However, with no detail design activities specific to the frigate upgrades planned until after the frigate shipbuilder is chosen by the Navy, the procurement activities—including shipbuilder proposal development, the Navy’s completion of a construction cost estimate, and finalization of the target cost for constructing the lead frigate—will not be informed by a more complete understanding of the frigate-specific design. Our work on best practices for program cost estimates has found that over time, cost estimates become more certain as a program progresses—as costs are better understood and program risks identified. Further, we found in August 2016 that even Navy shipbuilders acknowledged the benefits of having detail design knowledge available to inform decisions. Specifically, the two shipbuilders for the Navy’s newest configuration of the Arleigh Burke class destroyers—DDG 51 Flight III—agreed that allowing more time for the design to mature, via detail design, would provide greater confidence in their understanding of the Flight III-specific design changes and how the changes will affect ship construction costs. By completing more detail design activities prior to procuring a ship, the Navy—and shipbuilders— are better positioned for procurement and construction. We also found in June 2016 and February 2005 that awarding a contract before detail design is completed—though common in Navy ship acquisitions—has resulted in increased ship prices. For example, the Navy negotiated target prices for construction of the lead San Antonio class ship (LPD 17) and the first two follow-on ships (LPD 18 and LPD 19) before detail design even began, preventing the Navy from leveraging information that would be gained during detail design when negotiating target prices for these three ships. In contrast, the Navy’s Virginia class and Columbia class submarine programs had or planned to have a high level of design complete prior to the award of the lead ship construction contract, thus enabling the government to benefit from the knowledge gained from detail design in negotiating prices for construction. Along with a shift away from detail design activities prior to the frigate award and a shortened time frame before the award, the Navy moved away from its planned government-driven design process to a less prescriptive contractor-driven design process, adding potential risk. This approach is similar to what the Navy used for the original LCS program, whereby the shipyards were given performance specifications and requirements and systems that would be provided by the government, but then selected 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 some non-standard equipment, with less commonality with LCS and the rest of the Navy’s ships. In addition to the prevailing cost and design unknowns that pose risk to the Navy’s accelerated frigate acquisition plans, uncertainties remain regarding the operational capabilities of LCS that are relevant to the frigate. Some testing of operational capability already has been performed for LCS seaframes and the surface warfare mission package; however, the Navy does not plan to demonstrate operational capability in initial operational test and evaluation for the final surface warfare mission package until 2018 or demonstrate operational capability through initial operational test and evaluation for the anti-submarine warfare mission package until 2019. Additionally, the Navy has not demonstrated that LCS will achieve its survivability requirements—the LCS program office is planning for the final survivability assessment report to be completed in fiscal year 2018. While preliminary results from full ship shock trials in 2016—live fire testing of the survivability of LCS and its subsystems against underwater shocks (i.e., explosions)—suggest some positive findings, DOT&E continues to have questions about LCS’s survivability against more significant underwater shocks. Comprehensive reporting on the results of shock testing is not expected until later in 2017, which should provide a better understanding of any issues with the seaframes’ response to underwater shock that have implications for the frigate design. In addition to shock trials, both LCS variants sustained some damage in trials completed in rough sea conditions. Although the Navy indicated that the results of these trials have been incorporated into the structural design of both prospective frigate variants, the Navy has not completed its analytical reports of these events. Results from air defense testing also indicate capability concerns, and both seaframe variants were found to have significant reliability and maintainability issues during several tests and trials. Further, DOT&E has expressed concern that LCS effectiveness with its mission packages remains undemonstrated, which means questions persist about the LCS’s ability to perform many of its missions. These unknowns, in turn, will be carried over to the frigate program until the mission package capabilities that will also be employed by the frigate are fully demonstrated on the LCS. DOD has made some progress with the frigate acquisition approach over the last year that is consistent with a recommendation we made in June 2016. Specifically, we recommended that the Secretary of Defense require that before a downselect decision is made for the frigate, the program must submit appropriate milestone documentation, such as an independent cost estimate and a plan to incorporate the frigate into DOD’s Selected Acquisition Reports that are provided to Congress. The frigate’s requirements have been finalized, with Joint Requirements Oversight Council approval received for its capabilities development document in 2016, and the Navy is in the process of establishing a service cost position. DOD’s Office of Cost Assessment and Program Evaluation also plans to complete an independent cost estimate in fiscal year 2018. Still, if current acquisition plans hold, the Navy will ask Congress to consider authorizing what the Navy calls a block buy of 12 frigates and funding the lead frigate when the fiscal year 2018 budget is proposed. This authorization decision involves potential future commitments of about $9 billion based on early budget estimates. As indicated in table 4, the Navy’s request for authority from Congress appears premature, since significant uncertainties will remain for the cost and design changes needed to turn an LCS into a frigate, and relevant questions regarding LCS operational capability will remain unresolved. For example, under the Navy’s current plans, no formal cost estimate is expected to be completed before Congress is asked to make such a decision. Our prior work on best practices in weapon system acquisition has emphasized the importance of attaining key knowledge regarding cost, design, and capability expectations before making major commitments. While a block buy contracting approach may provide cost savings and other benefits for an acquisition program, it also may present challenges, such as reduced funding flexibility. For example, the LCS block buy contracts provide that a failure to fully fund the purchase of a ship in a given year would make the contract subject to renegotiation. DOD has pointed to this as a risk that the contractors would demand higher prices if DOD deviated from the agreed to block buy plan. Thus, once the frigate block buy contract is authorized and funded, DOD and Congress may once again have a notable disincentive to take any action that might delay procurement. This has been the case with LCS, even when it became apparent that the program was underperforming. The existing and planned LCS construction workloads at both shipyards suggest that a request in 2017 to authorize the frigate (with the fiscal year 2018 budget request) may not only be premature, but also unnecessary. Although the Navy has argued that pausing LCS production would result in loss of production work and start-up delays to the frigate program, current schedule delays for LCS under construction and the projected schedules for the yet-to-be-awarded LCS show that both shipyards have substantial workloads remaining that could offset the need to award the frigate in 2018 as planned. The Navy’s concern about shipyard workload also does not account for the possibility of continued delays in the delivery of LCS. Deliveries of almost all LCS under contract at both shipyards (LCS 5-26) have been delayed by several months, and, in some cases, close to a year or longer. Despite having had 5 years of LCS construction to help stabilize ship delivery expectations, the program did not deliver four LCS in fiscal year 2016 as planned. As figure 3 depicts, delays that have occurred for previously funded ships have resulted in a construction workload that extends into fiscal year 2020. This prolonged workload, when combined with the two LCS awarded in 2016 and two more LCS that have been authorized by congressional conferees and the Navy plans to award in fiscal year 2017, takes construction at both shipyards into 2021. With 13 LCS in various phases of construction (LCS 9, 11-22) and 3 more (LCS 23, 24, and 26) set to begin construction later in fiscal year 2017, delaying a decision on the frigate until fiscal year 2019 would enable the Navy and the shipbuilders to improve knowledge on cost, design, and operational capability of LCS that relates directly to the frigate. This, in turn, would offer Congress an opportunity to be better informed on the expectations for the frigate before committing substantial taxpayer funds to this program. The Navy’s impending fiscal year 2018 budget request presents a key opportunity for Congress to affect the way forward for the frigate program by ensuring the Navy possesses sufficient knowledge on cost, design, and capability before authorizing an investment of a potential $9 billion for a program that has no current formal cost estimate—independent or otherwise, will not have begun key detail design activities, has significant unknowns in regards to operational performance of the ship upon which it will be based, and based on the existing and planned shipyard workloads, has no industrial base imperative to begin construction in the Navy’s planned time frame. The block buy pricing the Navy expects to receive from LCS contractors in 2017 will be for the basic LCS seaframes that the Navy has acknowledged do not meet its needs. As we stated above, the two LCS shipbuilders—when faced with the prospect of a downselect in 2010— provided competitive pricing that propelled the Navy to continue production at both shipyards. Those prices have not been shown to be achievable. Even if LCS prices offered once again appear favorable, the ships ultimately are intended to be frigates, and the upgrade cost—to be proposed by the shipyards later—is a significant unknown. A decision by Congress to authorize the block buy of 12 frigates is effectively the final decision for the entire planned buy of 40 LCS and frigates. According to the Navy’s approved acquisition strategy, the frigates would still require annual appropriations and Congress could thus conduct oversight of the program through that process; however, it will likely be more difficult to make decisions to reduce or delay the program should that become warranted, as the Navy may point to losses in favorable block buy prices, as has been done previously with LCS. We recognize that the Navy had to revise its frigate acquisition plans based on the Secretary of Defense’s direction to reduce quantities and select a single ship design. However, the direction did not necessitate an acceleration of the frigate procurement and the corresponding shift away from a planned approach that would have provided substantially improved cost, design, and capability information to inform the frigate acquisition decisions. Reverting back to a frigate award in fiscal year 2019 would provide time to complete realistic cost estimates, build detail design knowledge, and make significant progress in understanding the operational capability and limitations of LCS, upon which the frigate design will be based. To ensure sound frigate procurement decisions, Congress should consider not enacting authority pursuant to the Navy’s request for a block buy of 12 frigates in the fiscal year 2018 budget and consider delaying funding of the lead frigate until at least fiscal year 2019 when sufficient cost, design, and capability knowledge is expected to be available to inform decisions. To ensure the department and the shipbuilders have sufficient knowledge of the frigate’s anticipated cost and design during the procurement process, the Secretary of Defense should direct the Secretary of the Navy to delay frigate procurement plans and the award of the lead frigate contract until at least fiscal year 2019 when cost estimates will be completed, detail design could be underway, and significant progress will have been made in demonstrating through testing the operational capabilities of LCS that are relevant to the frigate. We provided a draft of this report to DOD for review and comment. Its written comments are reprinted in appendix I of this report. DOD partially concurred with our recommendation to delay procurement plans and the award of the lead frigate contract until sufficient cost, design, and capability knowledge is available to inform decisions. In its response, DOD acknowledged that the Navy’s final contract decision includes risks, but stated that it believes the current plan offers an acceptable tradeoff between technical and affordability risks. DOD highlighted two actions that it believes will allow the department to assess program risk before moving forward: (1) annual frigate program review activities in 2017 intended to ensure risks are understood prior to the release of the formal frigate request for proposals, and (2) the planned completion of an independent cost estimate in fiscal year 2018 by the Office of Cost Assessment and Program Evaluation, which is expected to inform a 2018 annual program review prior to a contract award. While these are positive oversight actions, the assessments of design risk and maturity for these reviews will lack any frigate-specific detail design information, which leads us to maintain that waiting until at least fiscal year 2019 to procure the first ship and to make decisions on future frigate procurements would provide DOD and Congressional decision-makers with a more comprehensive understanding of frigate cost, design, and capability expectations before making substantial commitments to the program. This lack of knowledge, coupled with the ongoing and planned LCS construction workload at both shipyards, present, in our view, a compelling rationale for delaying a frigate decision. DOD also separately provided technical comments on our draft report. We incorporated the comments as appropriate, such as to provide additional context in the report. In doing so, we found that the findings and message of our report remained the same. In some cases, the department’s suggestions or deletions were not supported by the preponderance of evidence or were based on a difference of opinion, rather than fact. In those instances, we did not make the suggested changes. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of the Navy, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or mackinm@gao.gov. 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. Littoral Combat Ship and Frigate: Slowing Planned Frigate Acquisition Would Enable Better-Informed Decisions. GAO-17-279T. Washington, D.C.: December 8, 2016. Littoral Combat Ship and Frigate: Congress Faced with Critical Acquisition Decisions. GAO-17-262T. Washington, D.C.: December 1, 2016. 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: Navy Complied with Regulations in Accepting Two Lead Ships, but Quality Problems Persisted after Delivery. GAO-14-827. Washington, D.C.: September 25, 2014. Littoral Combat Ship: Additional Testing and Improved Weight Management Needed Prior to Further Investments. 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. Michele Mackin at (202) 512-4841 or mackinm@gao.gov. In addition to the contact above, Diana Moldafsky, Assistant Director; Pete Anderson; Jacob Leon Beier; Laurier Fish; Kristine Hassinger; C. James Madar; Sean Merrill; LeAnna Parkey; Anne Stevens; and Robin Wilson made key contributions to this report. | The Navy envisioned a revolutionary approach for the LCS program: dual ship designs with interchangeable mission packages intended to provide mission flexibility. This approach has fallen short, with significant cost increases, schedule delays, and reduced capabilities—some of which have yet to be demonstrated. The LCS acquisition approach has changed several times. The latest change led to the frigate—a ship that involves minor modifications to an LCS design. The House report 114-537 for the National Defense Authorization Act for Fiscal Year 2017 included a provision for GAO to examine the Navy's plans for the frigate. This report examines the Navy's plans for the frigate acquisition as well as remaining opportunities for oversight. To conduct this work, GAO reviewed documentation and interviewed Department of Defense (DOD) officials, and leveraged prior GAO reports on shipbuilding and acquisition best practices. The Navy's current acquisition approach for its new frigate—a ship based on a Littoral Combat Ship (LCS) design with minor modifications—requires Congress to make significant program decisions and commitments in 2017 without key cost, design, and capability knowledge. In particular, the Navy plans to request authority from Congress in 2017 to pursue what the Navy calls a block buy of 12 planned frigates and funding for the lead ship, which the Navy intends to award in 2018. Approval of these plans would effectively represent the final decision for the entire planned buy of 40 LCS and frigates. According to the Navy's approved acquisition strategy, the frigates would still require annual appropriations, so Congress would maintain its oversight through its annual appropriation decisions; however, any decision to reduce or delay the program, should that become warranted, could nevertheless be more difficult as the Navy may point to losses in favorable block buy prices, as has been done previously with LCS. The Navy's impending request presents a key opportunity for Congress to affect the way forward for the frigate program by ensuring the Navy possesses sufficient knowledge on cost, design, and capability before authorizing an investment of a potential $9 billion for a program that • has no current formal cost estimate—independent or otherwise, • will not begin key detail design activities until late fiscal year 2018, • has significant unknowns in regards to operational performance of the ship upon which its design will be based, and • based on the existing and planned shipyard workloads, has no industrial base imperative to begin construction in the Navy's planned time frame. The Navy's previous frigate acquisition plans included achieving a higher degree of ship design knowledge before awarding the lead ship in fiscal year 2019, as the plans included significant detail design activities prior to contract award. As GAO has previously found, such an approach—which has been supported by shipbuilders—offers greater confidence in the understanding of design changes and how they will affect ship construction costs. Further, as GAO's work on best practices for program cost estimates suggests, the Navy's prior plans for frigate design efforts and an award in fiscal year 2019 would have provided more information on which to base a decision, including a better understanding of risks and costs. The previous plans also better aligned with LCS test plans to improve the department's understanding of the operational capability and limitations for each ship variant. This knowledge could then be used to inform the Navy's decision on which LCS-based design for the frigate it will pursue. In addition to the valuable knowledge to be gained by not pursuing the frigate in the planned 2018 time frame, the existing and planned LCS construction workload for both shipyards is another important factor to consider. Specifically, each shipyard has LCS construction demands that extend into 2021, suggesting no imperative for the Navy to award the frigate in 2018. Delaying the frigate award until at least fiscal year 2019—when more is known about cost, design, and capabilities—would enable better-informed decisions and oversight for this potential $9 billion taxpayer investment. Congress should consider not enacting authority pursuant to the Navy's request for a block buy of 12 frigates in fiscal year 2018 and delaying funding of the lead frigate until at least fiscal year 2019, when more information is available on the ship's cost, design, and capabilities. GAO also recommends that DOD delay its procurement plans until sufficient knowledge is attained. DOD partially concurred with the recommendation but is not planning to delay frigate procurement. GAO continues to believe the recommendation is valid. |
As the nation’s principal border agency, the Customs Service has a significant narcotics interdiction role and is increasingly relying upon technology to help implement that role. Equipment and technology used by Customs for screening and drug interdiction activities include automated databases, portable contraband detectors (“busters”), sonic and laser range finders, fiber-optic scopes, and X-ray systems. Nonintrusive technology, such as X-ray systems, allow Customs staff to inspect for contraband without having to physically enter into or unload vehicles or containers. According to its February 1998 Five-Year Technology Acquisition Plan for the Southern Tier, Customs currently uses over 800 items of nonintrusive inspection technology, primarily for inspecting inbound vehicles and containers. Nearly 50 percent ($289.1 million) of Customs’ proposed 5-year technology investment of $631.4 million is for new nonintrusive inspection equipment, including fixed-site and mobile X-ray systems for inspecting tank trucks, railcars, and sea containers. For counterterrorism and other purposes, nonintrusive inspection technologies are also important for supporting the missions of DOD and FAA. DOD, for example, has evaluated PFNA and other technologies for possible force protection uses. Also, FAA has considered various technologies for screening air baggage and cargo for explosives and contraband. Whereas X-ray technology is widely used, PFNA or neutron interrogation technology has not been operationally fielded anywhere in the world. A claimed potential advantage of PFNA technology is that it can be used to inspect fully loaded trucks and containers and specifically identify drugs and explosives (“material specificity”) automatically without human interpretation. In contrast, X-ray inspection technology identifies (with human interpretation) anomalous “shapes or shadows” in empty, partially loaded, and fully loaded vehicles and containers, which could result in false alarms and, in turn, might require further intrusive inspection for resolution, such as by unloading the vehicles and containers. During fiscal years 1989 to 1998, according to Ancore officials, PFNA “laboratory” funding totaled about $60 million—with the large majority provided by DOD (about $28.4 million) and the Eurotunnel consortium(about $20 million), and the remainder by FAA (about $6.5 million) and the vendor or its parent company (about $5 million). The most recent congressional funding-related guidance regarding PFNA is as follows: The DOD Appropriations Act for fiscal year 1999, P.L. 105-262, directs DOD to spend $3 million in prior-year PFNA-related funds through cooperation with ONDCP. According to DOD officials, the actual amount available for expenditure will be about $2.7 million, which reflects general budget reductions mandated by Congress and the Office of the Secretary of Defense. DOD must obligate its PFNA funds by September 30, 1999, or the funding authority will expire. The conference report (H. Conf. Rep. 105-825) on the Omnibus Appropriations Act for fiscal year 1999, P.L. 105-277, indicates that $2.5 million is for FAA to develop PFNA. Also, as mentioned earlier, Senate Report 105-251 (July 1998) on the Treasury and General Government Appropriations bill for fiscal year 1999 directs the Commissioner of Customs to enter into negotiations with the private sector to conduct a field test of PFNA technology at no cost to the federal government. In conducting our work, we interviewed responsible officials at and reviewed applicable documents obtained from the Customs Service, DOD, FAA, ONDCP, and Ancore Corporation. We requested comments on a draft of this report from the Customs Service, DOD, FAA, ONDCP, and Ancore Corporation. Their comments are discussed near the end of this letter. We performed our work from October 1998 to February 1999 in accordance with generally accepted government auditing standards. Appendix I presents more details about our objectives, scope, and methodology. Customs, DOD, and FAA are making plans to comply with their respective congressional guidance on PFNA. In November 1998, the Commissioner of Customs met with Ancore representatives to discuss field testing of PFNA. Also, in November 1998, DOD officials told us that they would begin drafting, with Ancore’s participation, a rough or preliminary plan with general parameters for field testing a PFNA system. In December 1998, Ancore submitted a written proposal to Customs. Specifically, Ancore proposed that a 4-month Customs/DOD field test be conducted at a U.S. sea or land port of entry, at an estimated cost ranging from $5 million to $5.5 million, including the cost of a site facility. In its proposal, Ancore mentioned the availability of $2.7 million from fiscal year 1998 DOD appropriations. Ancore indicated that this money could be used for system engineering modifications for ease of relocation, system shipment and installation, and operation and maintenance of the system throughout the test. Ancore asked Customs to fund the remaining amount needed for the field test, $2.3 million to $2.8 million, to be used for constructing a facility to house the PFNA system, preparing related infrastructure, and modifying an existing automated ground vehicle. Also, Ancore proposed that Customs’ responsibilities for the test would include selecting a test site, ensuring the availability of real drugs and other contraband for inspection if real drugs are to be used, and providing cargo- handling labor and equipment. In January 1999, the Commissioner of Customs responded in writing to Ancore’s proposal. In his response, the Commissioner expressed interest in working with Ancore to conduct a field test. The Commissioner said, however, that before Customs could make a final decision on the proposed test, a more detailed description of respective responsibilities was needed. Also, the Commissioner indicated that after receiving the requested detailed information, Customs could select a site and make more precise estimates of funding needed. He also stated that Customs would be responsible for preparing the final test report. As reflected in his January 1999 response to Ancore’s proposal for a field test, the Commissioner of Customs is considering whether Customs should contribute to the funding of such a test. In this regard, recognizing the no- federal-cost language of Senate Report 105-251, in February 1999, Customs officials told us that they were working closely with applicable congressional committees and subcommittees. In December 1998, Ancore submitted a written proposal to FAA for use of its fiscal year 1999 PFNA funds ($2.5 million). Ancore proposed to (1) build on previous FAA development and testing efforts to modify the existing land/sea container and truck inspection system for FAA’s specific air cargo inspection requirements and (2) conduct a laboratory test. Given the vulnerability of aircraft to explosives, FAA requires the modifications in order to improve the system’s capability to detect small amounts of target materials. In January 1999, a FAA official told us that FAA had contacted Customs and DOD about the possibility of working jointly to conduct a field test. However, the FAA official noted that detailed discussions with Customs, DOD, and Ancore might be needed to determine whether a joint test could adequately cover the combined counterdrug and counterterrorism operational requirements of the three agencies. Further, the FAA official said that, if a three-agency field test is conducted, most of FAA’s funds would be used for engineering modifications to PFNA components to allow the system to detect small amounts of target materials. In January 1999, a Customs official told us that, in order to minimize the expenditure of federal government funds, he was hopeful that the three agencies could agree on and implement a joint field testing plan. Also, Customs, DOD, FAA, and ONDCP officials indicated that it might be appropriate to form a “configuration board” or test review group made up of agency officials to evaluate the joint agency test plan before it is implemented to ensure that all operational requirements are considered and include advisory representation from the National Academy of Sciences on the configuration board to lend scientific advice and expertise, objectivity, and credibility. Regarding a field test location, Ancore’s proposal would give Customs the responsibility for selecting a site. Initially, Customs officials told us that the Army’s Thunder Mountain Evaluation Center (Fort Huachuca, AZ) would be considered as a possible test site rather than a port of entry. However, after considering Ancore’s proposal, the Commissioner of Customs decided that conducting a field test at a port of entry would be more appropriate. DOD officials expressed no preference for a location; rather, the officials indicated that DOD probably would defer to Customs—the agency that has a primary counterdrug role and potentially the most need for PFNA technology. FAA officials prefer having the field test at an airport or a seaport and stated their least preferred site is Fort Huachuca. ONDCP officials prefer testing at a port of entry to ensure a realistic stream of commerce. Ancore officials also prefer testing at a port of entry for the same reason. In February 1999, Customs, DOD, FAA, and Ancore officials told us that four port-of-entry sites were being considered for the field test. These sites are two seaports in California (Long Beach and Oakland) and two land ports in El Paso, Texas. There is general agreement that PFNA’s technical feasibility has been proven in the laboratory. However, citing cost, size, and other operational concerns, the three prospective users—Customs, DOD, and FAA—do not foresee using a PFNA system in their missions or operations and, therefore, question the value of further testing. ONDCP, on the other hand, believes that an informed decision about the operational viability of a PFNA system cannot be made without first conducting a field test. Ancore expressed similar views about the need for field testing. In January 1998, the Department of the Treasury and DOD jointly issued an assessment report, which concluded that—although proven effective in a laboratory setting for detecting and distinguishing target materials—a PFNA system would not meet their respective counterdrug and counterterrorism needs. The joint assessment report cited several limiting factors of a PFNA system as follows: The $10 million cost of procuring and installing each PFNA system is excessive compared with other systems. Similarly, the estimated $1 million annual cost per system for operations and maintenance is excessive. The 15,000 square feet of physical space needed to accommodate a PFNA system for operations is excessive and would limit application of a PFNA system to installations that have no space restrictions. It is unlikely a PFNA system could ever achieve the mobility goal of being relocatable from one site to another within 3 to 5 days. Although a PFNA system can detect operationally significant quantities of cocaine, the system has throughput rate (e.g., number of vehicles or containers that can be screened per hour) and detection limitations regarding other contraband, such as explosives, nuclear weapons and materials, and chemical agents. Less than 10 DOD facilities worldwide could accommodate or would have requirements for a PFNA inspection system. Treasury and DOD therefore recommended terminating the PFNA program and using any remaining fiscal year 1998 funds for other purposes. Early in our review, in response to our inquiries, Customs and DOD reaffirmed the conclusions presented in the joint assessment and stated that the primary reasons for rejecting PFNA were the high cost and excessive space requirements. Customs believes PFNA will cost about $12 million per system to acquire and install at each port of entry, a cost that Customs considers excessive. In comparison, for example, for the cost of 1 PFNA system, Customs officials said that the agency can purchase 5 to 10 alternative inspection systems and deploy them at multiple ports of entry. Customs’ current 5-year technology acquisition plan (dated February 1998) does not include PFNA systems; rather, the plan calls for deploying X-ray systems and other alternative inspection technologies, such as gamma-ray imaging, to be used for counterdrug purposes. The officials stated that a PFNA system would be effective only at locations where it can screen vehicles and cargo that must pass through entry or “choke” points. Moreover, at our exit conference in February 1999, DOD officials emphasized that DOD does not want a PFNA system, does not envision using such a system in an operating environment, and would prefer using available PFNA funds for higher priorities. Despite some interest in PFNA in previous years, FAA currently does not envision a role for this technology in the agency’s security operations. As with Customs and DOD, FAA has concerns about the costs, size, and other operational aspects of a PFNA inspection system. Alternatively, FAA sees more advantages in other types of inspection technology, particularly scanning technology adapted from the medical field to detect a wide range of explosives. In fact, FAA has already officially certified alternative detection systems as meeting FAA standards. Moreover, FAA officials told us that the agency’s evolving or maturing operational philosophy has further lessened FAA’s interest in PFNA. The officials explained that FAA is putting more emphasis on “know-your- customer” concepts and on screening air cargo parcels before they are combined onto pallets. Ancore prepared a detailed response to Treasury’s and DOD’s January 1998 joint assessment report. In its response, Ancore made the following assertions: Treasury and DOD have not quantified the concept of “affordability.” However, PFNA is affordable because the capital cost of PFNA is lower than or the same as any of the existing systems claiming to be able to inspect fully loaded trucks and containers. The life-cycle cost of a system that lasts 10 to 30 years should be considered. The joint assessment claimed maintenance costs could be as high as $1 million per system per year, but the only time such costs were asked for, a fixed-price bid of $500,000 to $600,000 was given to the European consortium for maintenance for the first year. The operations cost is lower for PFNA than for X-ray because PFNA needs fewer people to look at images. The major cost of operating an inspection system is one that Customs regularly ignores (i.e., the cost of processing vehicles or containers rejected by a system). Such rejections can result from false alarms. Also, rejections include any vehicles or containers that the system cannot effectively inspect, such as fully loaded trucks. Yet, sometimes Customs uses the argument that manual unloading of vehicles or containers represents fixed costs that should not be considered in any comparative analyses. However, while retaining the same staff for opening trucks and containers, Customs could seize more contraband with PFNA because it provides a much higher detection rate than any other technique. Thus, PFNA would provide a better return on cost than other inspection technologies. A PFNA system can be accommodated in different size areas, depending on the site requirement. The current system, with the existing type of elecrostatic accelerator, protective shielding, and full- size truck interrogation tunnel, occupies about 4,000 to 5,000 square feet. Also, the joint assessment report disqualifies PFNA based on size, ignoring the space required for the alternative, namely partially or fully unloading trucks or containers. Use of a PFNA system, compared with the less efficient X-ray systems, results in a better utilization of the scarce real estate in ports of entry. The current throughput rate of a PFNA system is similar to or exceeds that of the X-ray system selected by Treasury to inspect empty trucks. The agreed-upon goal was to have a PFNA inspection system that could be moved from one location to another within 14 days. However, the joint assessment report said that Treasury wants a system that can be relocated within 3 to 5 days. Ancore has been in discussions with barge manufacturers about mounting the PFNA system on a barge, which could be towed from one port to another as a method for meeting Treasury’s time requirement. In response to our inquiries, Ancore officials reaffirmed their disagreement with the joint assessment report’s conclusions. Further, Ancore’s officials commented that a fairly designed and conducted field test would demonstrate the operational effectiveness of a PFNA system. ONDCP’s position is that a PFNA system should be operationally field tested. ONDCP officials noted that the technology has successfully passed laboratory tests, which proved the physics of neutron interrogation. In a 1996 report on inspection systems, ONDCP concluded that: “The state-of-the art in PFNA inspection systems is not sufficiently developed for current operational use. Any field implementation of the current PFNA system should be in an operational test bed environment.” ONDCP recommended that a test bed at a port of entry be procured to facilitate gathering data and making a more informed, analytical decision. More recently, in its July 1998 10-year plan, ONDCP characterized neutron-based inspection technology as an emerging technology (7 to 10 years out) rather than an off-the-shelf technology. In responding to a draft of the plan, Customs urged ONDCP to remove all references to PFNA because it did not want the plan to be construed as representing Customs support for a PFNA system. In response to our inquiries, the Director of ONDCP’s Counterdrug Technology Assessment Center said that Customs seemed to have rejected PFNA without the benefit of sufficient, empirical data. According to the Director, PFNA warrants field testing to provide a sound basis for decisionmaking. A point not in dispute is that PFNA’s technical feasibility has been proven in the laboratory. Nonetheless, agency officials said that solving the physics problem does not solve the operational problems. In this regard, in addition to costs, the principal areas of controversy about a PFNA inspection system involve “operational” rather than “physics” issues. Even the issue of system size or space requirements is in dispute. In the absence of field testing, there may be no definitive answer as to whether a PFNA system has operational merit—particularly if these disagreements continue. The prospective users—Customs, DOD, and FAA—seriously question whether a PFNA system has operational merit and, thus, also question the need for field testing. On the other hand, ONDCP, which coordinates counterdrug technology research and development within the federal government, questions rejecting a PFNA system on operational grounds when no field testing has been conducted. Also, Ancore believes a field test of PFNA will demonstrate its operational effectiveness. Despite their views on PFNA, Customs, DOD, and FAA are planning to comply with their respective congressional guidance, and Customs said it is working with Congress to clarify its own funding guidance. These agencies recognize that, if a test is to be conducted, a joint, cooperative effort would be the most efficient use of government funds and that a configuration or test review board with advisory representation from the National Academy of Sciences may be appropriate to evaluate the test plan before implementation. On February 24, 1999, we provided a draft of this report for review and comment to the Customs Service, DOD, FAA, ONDCP, and Ancore Corporation. We received either written or oral comments during the period March 9-15, 1999, from the Director, Applied Technology Division, Office of Information and Technology, the Customs Service; the Assistant for Science and Technology, Office of Assistant Secretary of Defense for Special Operations and Low Intensity Conflicts, the Department of Defense; the Scientific Advisor, Office of Civil Aviation Security, the Federal Aviation Administration; the Director, Counterdrug Technology Assessment Center, the Office of National Drug Control Policy; and the President/Chief Executive Officer of the Ancore Corporation. In its written comments, Customs said that: The report accurately reflects the agency’s position on the field test and discussions with the vendor, as well as the current status of interagency planning. Customs continues to differ with Ancore, as summarized in the report. In its written comments, DOD concurred with the report. FAA orally advised us that the agency had no comments on the draft. ONDCP, in its written comments, said that our presentation of its views was essentially correct and added the following: Additional emphasis on a national policy to pursue innovative and emerging technologies is needed. A continued investment in research and development is essential to improving interdiction capabilities. ONDCP’s views should not be misinterpreted to indicate that the focus of technology development is specific to PFNA or to Ancore’s views. As presented in ONDCP’s latest Ten-Year Counterdrug Technology Plan and Development Roadmap, PFNA is viewed as one of many potential candidates that fall within emerging technologies and neutron interrogation. In its written comments, Ancore said that the report was factual and correctly described the status of operational testing. Further, Ancore commented substantially as follows: Ancore has always maintained that an effective national drug interdiction program requires having a “system of systems,” i.e., deploying a variety of complementary nonintrusive systems, including X-ray and PFNA, as well as continuing to rely on intelligence. The effectiveness of the overall interdiction effort will be severely affected if this complementary deployment excludes PFNA and its high- performance capabilities (e.g., selectivity, material specificity, and automatic decision). Also, Ancore had a few technical comments and clarifications, which have been incorporated in this report where appropriate. We are sending copies of this report to Representative Jim Kolbe, Chairman, and Representative Steny H. Hoyer, Ranking Minority Member, Subcommittee on Treasury, Postal Service, and General Government, Committee on Appropriations, House of Representatives; Representative J.C. Watts; and to other relevant congressional committees. We are also sending copies of this report to: The Honorable William Cohen, Secretary of Defense; The Honorable Robert E. Rubin, Secretary of the Treasury; The Honorable Raymond W. Kelly, Commissioner of Customs; The Honorable Rodney E. Slater, Secretary of Transportation; The Honorable Jane F. Garvey, Administrator, FAA; The Honorable Barry R. McCaffrey, Director, ONDCP; The Honorable Jacob Lew, Director, Office of Management and Budget; and Mr. Tsahi Gozani, President and Chief Executive Officer of the Ancore Corporation. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix II. If you or your staffs have any questions about this report, please contact me on (202) 512-8777. Our objectives were to provide information about (1) the status of plans for field testing a pulsed fast neutron analysis (PFNA) inspection system for counterterrorism and/or counterdrug purposes and (2) federal agency and vendor views on the mission viability of such a system. Initially, to obtain background and overview perspectives on PFNA technology, we conducted a literature search to identify past studies, reports, and other relevant materials, including appropriations acts and other congressional guidance. In directly addressing the objectives, we interviewed responsible officials at applicable federal agencies. Our contacts included the following: Customs Service: Our primary meetings were with the Director and other staff of the Applied Technology Division, a component of Customs’ Office of Information and Technology. In addition, we met with representatives from the Office of Field Operations and the Office of Finance. Department of Defense (DOD): We interviewed representatives of DOD’s interoffice project for developing PFNA: (1) the project leader from the Office of the Assistant Secretary of Defense for Special Operations and Low Intensity Conflict and (2) the project manager from the Department of the Navy’s Office of Special Technology. DOD develops technologies for detecting explosives and chemical agents for its counterterrorism activities and narcotics for Customs’ counterdrug programs. Federal Aviation Administration (FAA): We mainly interviewed officials in the Office of Civil Aviation Security and its research and development division in Atlantic City, NJ. Office of National Drug Control Policy (ONDCP): Our principal contact was the Director of the Counterdrug Technology Assessment Center. Established within ONDCP by Congress in fiscal year 1991, the Center serves as the federal government’s central research and development organization for counterdrug enforcement. Also, we contacted the PFNA vendor, Ancore Corporation. During our November 1998 visit to Ancore’s headquarters and facilities in Santa Clara, CA, we watched a brief demonstration of the PFNA technology. Also, we were provided detailed briefings by senior executives, including the President and Chief Executive Officer, the Chief Operating Officer, and the Vice President for Programs and Business Development. To better understand federal agency and vendor views on the PFNA system, we obtained copies of various documents on its capabilities. Two of the primary documents we reviewed were (1) the January 1998 Joint Assessment of the Pulsed Fast Neutron Analysis Cargo Inspection System by Departments of Defense and Treasury and (2) Ancore’s May 1998 response to the joint assessment. We also reviewed relevant documents on congressional guidance on the development of counterterrorism and PFNA laboratory test results, other technical and claimed operational capabilities of PFNA, Customs’ narcotics inspection operations and 5-year technology development and acquisition plans, ONDCP’s assessments of inspection technologies and 10-year plans for PFNA contract and budget data. However, our review of these documents did not constitute a comprehensive or an independent technical analysis of PFNA. That is, the scope of our work did not include determining whether the PFNA technology is ready for field testing or whether a PFNA system has operational merit. James D. Moses, Evaluator-in-Charge Samuel L. Hinojosa, 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. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO provided information on the operational viability of pulsed fast neutron analysis technology (PFNA), which is designed to directly and automatically detect and measure the presence of specific materials by exposing their constituent chemical elements to short bursts of subatomic particles called neutrons, focusing on: (1) the status of plans for field testing a PFNA inspection system for counterterrorism and counterdrug purposes; and (2) federal agency and vendor views on the operational viability of such a system. GAO noted that: (1) the Customs Service, the Department of Defense (DOD), the Federal Aviation Administration (FAA), and the Ancore Corporation recently began planning to field test PFNA; (2) because they are in the early stage of planning, they do not expect the actual field test to begin until mid to late 1999 at the earliest; (3) generally, agency and vendor officials estimate that a field test covering Customs' and DOD's requirements will cost at least $5 million and that the cost could reach $8 million if FAA's requirements are included in the joint test; (4) Customs officials told GAO they are working closely with applicable congressional committees and subcommittees to decide whether Customs can help fund the field test, given that Senate Report 105-251 directs the Commissioner of Customs to enter into negotiations with the private sector to conduct a field test of PFNA technology at no cost to the federal government; (5) generally, a complete field test would include: (a) preparing a test site and constructing an appropriate facility; (b) making any needed modifications to the only existing PFNA system and its components; (c) disassembling, shipping and reassembling the system at the test site; and (d) conducting an operational test for about 4 months; (6) according to agency and Ancore officials, test site candidates are two seaports in California (Long Beach and Oakland) and two land ports in El Paso, Texas; (7) federal agency and vendor views on the operational viability of PFNA vary; (8) while Customs, DOD, and FAA officials acknowledge that laboratory testing has proven the technical feasibility of PFNA, they told GAO that the current Ancore inspection system would not meet their operational requirements; (9) among other concerns, Customs, DOD, and FAA officials said that a PFNA system not only is too expensive (about $10 million to acquire per system) but also is too large for operational use in most ports of entry or other sites; (10) accordingly, these agencies question the value of further testing; (11) Ancore disputes these arguments, believes it can produce an operationally cost-effective system, and is proposing that a PFNA system be tested at a port of entry; and (12) the Office of National Drug Control Policy has characterized neutron interrogation as an emerging or future technology that has shown promise in laboratory testing, and, thus, warrants field testing to provide a more informed basis for deciding if PFNA has operational merit. |
The Army Materiel Command initiated an effort in 1999 to replace its existing materiel management systems—the Commodity Command Standard System and the Standard Depot System—with LMP. In addition to replacing these systems, which have been used for over 30 years to manage inventory and depot maintenance operations, the Army intended for LMP to transform logistics operations in six core processes: order fulfillment, demand and supply planning, procurement, asset management, materiel maintenance, and financial management. According to the Army, the implementation of LMP is intended to help the Army reduce inventory, improve supply and demand forecast planning, and provide a single source of data for decision making. When LMP is fully implemented, it is expected to include approximately 21,000 users at 104 locations and will be used to manage more than $40 billion worth of goods and services. LMP became operational at the Army Communications-Electronics Command and Tobyhanna Army Depot in July 2003 and was originally expected to be fully deployed by fiscal year 2005. However, because of problems experienced during the deployment, the Army decided to delay implementation until the problems were resolved. In May 2009, LMP became operational at the Army Aviation and Missile Command and Corpus Christi and Letterkenny Army Depots. The third and final deployment of LMP began on October 1, 2010, at depots, arsenals, and sites within the Army Sustainment Command, the Joint Munitions and Lethality Life Cycle Management Command, and the Tank-automotive and Armaments Command. Preparations for the third and final deployment of LMP began in December 2008, and it is the largest of the three deployments, affecting approximately 11,000 users at 83 sites across the globe. LMP program management officials told us that 29 of these sites will significantly use LMP. The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 indicates that the executive-level oversight of business systems modernization and overall business transformation—including defining and measuring success in enterprise resource planning—is the responsibility of a military department-level chief management officer. In the case of the Army, the Under Secretary of the Army serves as the Chief Management Officer. In this capacity, the Under Secretary of the Army provides oversight for business systems modernization, such as LMP. Prior to transitioning to LMP, the Army is directed to certify that each Army depot is prepared to transition. Specifically, in House Armed Services Committee Report 110-652 accompanying the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, the committee directed the Secretary of the Army to certify to the Senate Committee on Armed Services and the House Committee on Armed Services that each Army depot is prepared for the transition to LMP. On September 20, 2010, the Secretary of the Army certified to the chairmen and ranking members of the committees that the Tank-automotive and Armaments Command, the Joint Munitions and Lethality Life Cycle Management Command, their subordinate industrial sites, and the Army Sustainment Command were prepared for transition to the LMP automated information system. According to Army officials, based on the timing of this memorandum, the Army intended to begin using the system at the third deployment locations on October 21, 2010, to manage operations for fiscal year 2011. With the exception of this certification, the Army is not presently required to report to Congress other information specifically focused on LMP implementation on a regular basis. The Army has improved its LMP implementation strategy from the previous two deployments, but continues to face several problems that may prevent LMP from fully providing its intended functionality at each of the third deployment locations. While the Army has improved its data testing strategy for the third deployment, data quality problems continue to persist at locations that previously deployed LMP, which prevent these locations from using LMP as intended. Furthermore, the Army has yet to develop fully the software capabilities needed to achieve the intended LMP functionality for some sites, which may limit their ability to perform certain tasks, such as maintaining accountability of ammunition. Although the Army has mitigation plans in place if the software capabilities are not delivered on time or as intended, these mitigation plans will increase costs. Our prior reviews of LMP identified weaknesses in the Army’s efforts to effectively implement the processes needed to reduce risks to acceptable levels. During our current review, we found that the Army had taken action on some of these areas. For example, we previously recommended that the Army use system testers that are independent of the LMP system developers to help ensure that the system is providing its users the intended capabilities. Based on our observations of the third deployment, the Army implemented this recommendation and testing activities were being conducted by LMP users as opposed to the LMP system developers. Additionally, to assist in the preparation for the third deployment of LMP, we previously recommended that the Army establish performance metrics that will enable the Army to assess whether the deployment sites are able to use LMP as intended. The Army developed performance measures to monitor the progress of LMP implementation and finalized these measures on September 30, 2010. These measures, if effectively implemented, should enable the Army to determine the extent to which the third deployment sites are able to use LMP as intended. The Army does not have reasonable assurance that the data used by LMP are of sufficient quality to enable the commands, depots, and arsenals to perform their day-to-day missions using LMP as intended. The Army initiated a testing strategy to determine data accuracy, but it has not provided reasonable assurance that the data used by LMP can support the LMP processes. As we have previously reported, testing is a critical process utilized by organizations with the intent of finding errors before a system is implemented. Although the Army implemented new testing activities to support the third deployment of LMP, these activities were designed to assess whether the sites could use the software but did not evaluate whether the data loaded into LMP are of sufficient quality to support the LMP processes. LMP program management officials told us that these testing activities were not designed to assess data quality. Instead, the Army conducted data quality audits to determine whether select data elements were accurate. Based on our observations, the data quality audits did not effectively assess whether the data would work in the LMP system. Based on our observations during the second deployment of LMP, we previously recommended that the Army direct the Army Materiel Command to improve its testing activities to obtain reasonable assurance that the data are of a quality that can be used by LMP to support the LMP processes. The Army concurred with our recommendation and stated that the third deployment would involve improved testing as well as additional efforts to enhance the quality of the data. The Army implemented two new test activities—the Process and Data Integration Test and the Business Operations Test—for the third deployment of LMP. According to Army officials, these test activities incorporated some lessons learned from the second deployment of LMP. The Process and Data Integration Test, which was conducted from April 2010 through June 2010, was intended to test an end-to-end business process using migrated, validated business data from critical weapons systems. The Business Operations Test, which was conducted from July 2010 through September 2010, was intended to be an activity where users would perform transactions in the LMP system using local data, from their home stations, which would bring data, business processes, standard operating procedures, and end user training materials together to ensure success. LMP program management officials told us in January 2010 that these tests were an improvement over the tests used during the second deployment of LMP. Specifically, LMP program management officials stated that the Process and Data Integration Test was an improvement because the test activity would assess the compatibility of the migrated data to support LMP processes, such as verifying that invoices and goods receipts can be processed against purchase orders. Also, LMP program management officials stated that the Business Operations Test was an improvement because the sites would select commodities at their sites and then execute an end-to-end process to ensure that the LMP processes work. According to LMP program management officials, the two testing activities were linked because the test scripts used during the Process and Data Integration Test would be used to develop the test scripts for the Business Operations Test. LMP program management officials also told us in June 2010 that both tests would be used to determine whether the software is meeting the operational requirements of the third deployment locations, and that the Business Operations Test, in particular, would evaluate whether the data used by LMP can support the envisioned LMP processes. Based on our observations at the third deployment sites, the Army’s tests were not effective in evaluating whether the quality of the data used in LMP could support the LMP processes. Specifically, officials at several of the sites we visited stated that they had observed shortcomings in the Process and Data Integration Test. For example, officials at the Army Sustainment Command told us that at the time the Process and Data Integration Test activity was conducted, their data had yet to be loaded into LMP. Accordingly, these officials stated that the Process and Data Integration Test activity used data from the second deployment of LMP. Officials at sites from the Joint Munitions and Lethality Life Cycle Management Command also identified other problems with the Process and Data Integration Test activity, such as test scripts that were incorrect or not reflective of their business processes because the software necessary to support their operations was still being developed. Officials at a Tank-automotive and Armaments Command site expressed similar sentiments, noting that the test scripts used during the Process and Data Integration Test activity did not reflect some of their business processes, such as building items in support of foreign military sales. Similarly, officials at several other sites told us that the test scripts used were out of sequence, so the test scripts had to be corrected in order to reflect how the location conducted its business. We also observed challenges related to the Army’s Business Operations Test activity. Specifically, officials at several sites told us in July and August 2010 that some of the test scripts they executed during the Business Operations Test activity were not reflective of their business processes. For example, during our site visits in August, officials at one site told us that although manufacturing represented more than 90 percent of their workload, they spent the first 5 weeks of the Business Operations Test activity evaluating whether they could perform repair operations. Additionally, the officials stated that during the course of this testing, some of the data necessary to conduct the test were missing and other data did not load correctly into LMP and had to be generated for the test. For example, officials told us that in order to test whether they were able to conduct materiel requirements planning, which is the process used to determine the number of parts needed to support a repair, the test managers had to create the data that listed the component parts for the item so that the test scripts could be executed. At another site, officials told us that the data that were necessary to assign a production order to their location were not in LMP, and that in order to conduct the tests, the test managers directed them to use the data from a different command. Site officials also told us that they were limited in the number of commodities that they could test. For example, officials at one site told us that they manage more than a thousand different items. However, because of time constraints, they were only able to test one item. Furthermore, the Business Operations Test activity did not exercise the full range of data. For example, officials at one site told us that an item they tested contained multiple levels of data; however, the test script directed them to evaluate only the first and second levels of data. Accordingly, the Business Operations Test activity did not assess whether the data could support the actual functions that the site would need to perform once LMP was deployed. On August 13, 2010, we shared our observations with LMP program management officials, and on August 18, 2010, LMP program management officials told us that the Business Operations Test activity was intended to test the software using the data from the sites and that this test would identify and document data and training issues. However, they noted that while the test would provide indicators related to data issues, it would not provide an overall data accuracy assessment. LMP program management officials stated that the data audits being conducted by the Army Logistics Support Activity were the best indicator for data accuracy. According to Army officials, these audits were intended to provide an initial assessment of data accuracy and then serve as an ongoing measurement as part of the Army’s strategy to ensure the accuracy of the data. LMP program management officials stated that in response to our observations, the Army would accelerate the time frame for the data accuracy audits. LMP program management officials stated that these data accuracy audits were completed on September 30, 2010. Additionally, LMP program management officials stated that these audits were not designed to be an automated data test, but rather an inspection by subject matter experts to ensure that the data were accurate. Although an important step, based on our observations at the third deployment sites, the Army’s data audits do not provide reasonable assurance that the data are of sufficient quality to support the LMP processes. According to Army officials, the data audits do not include all data elements. Consequently, when the sites conducted simulations, they identified data errors that had not been identified by the audits. Officials at one of the sites we visited told us that they had conducted an extensive process to build and validate their data, including having subject matter experts review individual data elements and compare the data elements against the technical data for that item. However, the officials stated that they had discovered through simulations that some of the data that had transferred into LMP from the legacy systems—and had undergone audits—still contained errors. The officials stated that these errors, which were related to an incorrect unit of measure, would have prevented them from using LMP as intended. Officials at another site we visited in June 2010 told us that during a simulation they conducted in between the planned testing activities, they discovered that an item that takes 5 days to repair was projected to take 5 years to repair. Officials at this site stated that after they visually inspected and corrected the data elements, they conducted another simulation, and the projected time to complete repairs dropped from 5 years to 3 years. According to LMP program management officials, the sites would have the opportunity to conduct simulations to assess their data upon completion of testing activities. We observed simulations being conducted at Anniston Army Depot on September 22, 2010, and Red River Army Depot on September 23, 2010. These simulations were useful, in part, but also had weaknesses. For example, depot officials told us that the simulations enabled the depots to identify data errors and develop processes to correct data errors after LMP is deployed and provided an opportunity to perform actual tasks in LMP. While these simulations and the innovative actions taken at both depots—such as developing mitigation strategies to correct data errors—reduce the risk that data problems will adversely affect the depots after LMP is deployed, these simulations also revealed weaknesses in the Army-wide testing activities. For example, depot officials told us that the simulations revealed problems with the data audits being conducted by the Army Logistics Support Activity. Specifically, depot officials told us that the data reviewed by the Army Logistics Support Activity were generally considered to be accurate in over 90 percent of the cases. However, when conducting simulations, depot officials stated that they found data errors that would have prevented the LMP processes from being exercised. Additionally, depot officials told us that the data audits identified data errors that would affect their ability to use LMP but were also beyond their ability to correct because the data elements were managed by other Army or DOD organizations. While the simulations we observed at Anniston Army Depot and Red River Army Depot are a positive step, they may not be representative of the Army’s actions. During our visit to these depots in June 2010, officials at both depots told us that they intended to conduct simulations as soon as practicable. In contrast, according to the LMP program management office, other locations would not be able to begin simulations until October 4, 2010. Additionally, the strategies used to conduct simulations at both depots we visited were site specific and different from each other. Depot officials told us that they had developed their simulation strategy internally and without direction from the Army or the LMP program management office, and LMP program management officials told us that there was not a formal requirement to conduct simulations. As a result, there was likely to be variation in how the 29 sites conducted simulations, if at all. Depot officials told us that the simulations did not mirror all of the functions in LMP that would be used in performing their day-to-day mission of repairing and overhauling items that were needed by the warfighter and were not representative of the LMP environment. Moreover, depot officials told us that they did not expect that the corrections they made to fix data errors identified during the simulations would transfer correctly into LMP because based on their experience the process of migrating data between systems introduces errors. However, depot officials told us that on September 23, 2010, officials from the LMP program management office told them that the depots would have access to the actual LMP environment on October 14, 2010. Depot officials stated that they intended to conduct additional simulations using LMP until the system was deployed on October 21, 2010. Depot officials also stated that they would continue to correct the data in LMP after the system was deployed. Persistent data issues have prevented Corpus Christi Army Depot and Letterkenny Army Depot—the two depots that deployed LMP in May 2009—from achieving the intended benefits from LMP. Although officials at both locations acknowledged that the system is an improvement over the previous legacy systems, officials also told us that they are unable to always use the system as intended. For example, as we previously reported, one of the intended benefits that LMP was expected to provide the depots was the ability to automatically calculate the materiel requirements for a repair project. According to an Army regulation, this process—known as materiel requirements planning—works to ensure that repair parts and components are available to meet the maintenance, repair, overhaul, or fabrication schedule while maintaining the lowest possible level of inventory. Officials at both locations told us that while the LMP software was capable of automatically conducting materiel requirements planning, the data that LMP uses to conduct the calculations are inaccurate. Accordingly, officials at both depots told us that they must either adjust the settings within LMP to ensure that each calculation matches the planned delivery time or manually input the specific requirements. Officials at both locations told us that they have developed strategies and are conducting reviews to address data quality problems. For example, officials at Letterkenny Army Depot told us that they have completed addressing data issues for about half of their major systems since May 2009. Similarly, officials at Corpus Christi Army Depot told us that they were continuing to address data quality problems, and that this was a long-term process that could take years. Inaccurate data are also affecting the Army’s ability to use other management systems. For example, the Army uses the Army Workload and Performance System to determine, among other things, whether the workforce at a depot matches the projected workload. Army officials told us that because the Army Workload and Performance System relies on data from LMP in order to generate the reports, inaccurate data in LMP will result in inaccurate reports. For example, Army officials showed us a report from the Army Workload and Performance System that compared the projected workload at Corpus Christi Army Depot and Letterkenny Army Depot against the planned workforce and, according to that report, the workforce needed to accomplish the projected workload was higher than previous levels. Specifically, Letterkenny Army Depot, which normally requires approximately 1,800 resources per day, was projected to need 6,000 resources per day to address the projected workload. Similarly, Corpus Christi Army Depot, which normally requires approximately 2,900 resources per day, was projected to need nearly 14,500 resources per day. Army officials stated that these incorrect reports were related, in part, to incorrect data that had been loaded into LMP. Army officials at the depots also told us that their ability to use the Army Workload and Performance System was directly related to the quality of the data in LMP, and that until the data in LMP are corrected, they do not expect the reports to be accurate. Despite the data issues, depot officials at both Corpus Christi Army Depot and Letterkenny Army Depot stated that LMP is an improvement over the previous legacy systems because it has increased visibility over assets and provided a single source of data for decision making. For example, officials at Corpus Christi Army Depot told us that LMP has enhanced their ability to share information and interact with original equipment manufacturers, and that they now have increased visibility over contractor-managed inventories compared to that under the legacy systems. Similarly, Letterkenny Army Depot officials told us that LMP provides the Army increased visibility over items they maintain in inventory, and depot officials told us that a unit in Afghanistan was able to identify and requisition an item from the depot’s inventory that was not available in the supply system. As we previously reported, these capabilities were not available in legacy systems. Additionally, Letterkenny Army Depot officials told us that as they improve the quality of their data, they expect to be able to improve their ability to use LMP for evaluating repair overhaul factors as well as forecasting workloads and parts requirements. The Army’s software development schedule and subsequent testing of capabilities needed by several locations was not expected to be delivered until after September 2010. Unlike operations under the previous deployments of LMP, the operations at some of the third deployment locations are unique and therefore require additional capabilities. For example, the Army Sustainment Command and the Joint Munitions and Lethality Life Cycle Management Command require LMP to interface with existing systems in order to perform their day-to-day missions. In contrast, some sites within the Tank-automotive and Armaments Command use existing systems to collect manufacturing data that will no longer be available once LMP is deployed. The Army has developed mitigation plans to address the shortfalls in capability, but those plans often involve hiring additional staff or employing time-consuming manual processes. The Army has yet to develop the software functionality needed by the Army Sustainment Command to perform its mission under LMP, but Army officials expect the functionality to be delivered prior to LMP deployment. The Army Sustainment Command uses an automated information system called the Army War Reserve Deployment System (AWRDS) to track inventory and transfer accountability of pre-positioned stocks to units. In a briefing to the Army Materiel Command in December 2009, officials at the Army Sustainment Command stated that the interface between LMP and AWRDS was critical to a go-live decision and a key to the success of Army Sustainment Command operations in Southwest Asia. During that briefing, officials at the Army Sustainment Command also stated that full development of the interface between LMP and AWRDS was scheduled for completion and testing in March 2010, and that the functionality was scheduled for release in May 2010. However, development and delivery of the LMP and AWRDS interface was delayed and, according to LMP program management officials, the Business Operations Test activity for this interface occurred from August 30, 2010, through September 3, 2010. During the Business Operations Test activity, LMP program management officials told us that all but one of the test cases passed, and that this issue is currently under review. The Army Sustainment Command also requires additional software functionality to conduct a mass upload—which is the automated movement of thousands of items of inventory between the Army Sustainment Command and the warfighter. Army officials stated that LMP provides this capability, but only through the use of manual processes that Army officials said are time consuming and staffing resource intensive. The expected delivery date of this functionality was October 11, 2010; however, Army officials stated on October 14, 2010, that testing on the functionality was still in process. Army Sustainment Command officials stated that without this capability, users would have to enter information manually into LMP, which would require certain locations to hire additional staff to accommodate the workload and mitigate the effects of the missing capability. On August 27, 2010, the Commander of the Army Sustainment Command endorsed the recommendation to deploy LMP on October 13, 2010, but noted that AWRDS/LMP interface testing would not be completed until September and that training materials for the new software had yet to be made available for end users. The Army is continuing to develop the software functionality that the Joint Munitions and Lethality Life Cycle Management Command needs to perform its mission using LMP, but Army officials said that full functionality will not be available until after LMP has been deployed. The Joint Munitions and Lethality Life Cycle Management Command conducts operations related to the production, management, and maintenance of ammunition. Officials at Joint Munitions and Lethality Life Cycle Management Command sites told us that LMP—unlike the systems that they currently have in place that will be replaced once LMP is deployed— did not enable them to ship, receive, inventory, and perform stock movements for ammunition. LMP program management officials told us that this missing functionality was identified in 2009, and that development of this functionality began in January 2010. The Army plans to deliver the ammunition-specific functionality and interfaces in phases through March 2011. Joint Munitions and Lethality Life Cycle Management Command officials stated that they have developed strategies to enable them to conduct operations in the event that the new software functionality is not delivered on time or does not provide the intended capability. For example, in the event that this functionality is not delivered or does not operate as expected, the Joint Munitions and Lethality Life Cycle Management Command expects to hire 172 additional personnel to perform manual data entry until the software can provide the required and agreed-upon functionality. Joint Munitions and Lethality Life Cycle Management Command officials stated that this mitigation plan would enable them to deliver ammunition to the warfighter. However, they also stated that this mitigation strategy will remove efficiencies associated with automation of these activities that are present in the legacy systems being replaced by LMP and lead to a degradation of data integrity and inventory accuracy. During our visits to the Joint Munitions and Lethality Life Cycle Management Command sites, officials provided examples of the effect of lost visibility and accountability of ammunition on their operations. Officials at one site told us that the intended benefit from LMP usage was to provide a common data set and real-time visibility over ammunition. However, in the event that the software capability is not delivered, the officials stated that their mitigation strategy would be to track ammunition using “pencils and index cards.” While this strategy would enable some accountability over ammunition, the site would not be able to achieve the intended benefit of real-time visibility over ammunition. Officials at another site told us that their mitigation strategy would enable them to continue to ship ammunition to the warfighter. However, manually entering data into LMP would also reduce their ability to track ammunition. For example, officials told us that the existing systems are capable of tracking the serial numbers assigned to missiles, as well as the serial numbers of a missile’s component parts—such as the warhead and the guidance system—and that the software necessary for LMP to be able to provide this capability was expected to be delivered on October 12, 2010. However, as of October 14, 2010, development of this capability was only partially completed. The officials stated that without this capability, their mitigation strategy of manually entering data into LMP would cause delays in their ability to track the individual serial numbers and, in the event that a missile component needed to be recalled, would make finding missiles that have components that are being recalled difficult, especially if those missiles had been shipped to a customer. On August 20, 2010, the Executive Director of the Joint Munitions and Lethality Life Cycle Management Command signed a memorandum that stated that the command was prepared for the deployment of LMP. The memorandum also stated that the tasks that had yet to be completed, upon which deployment was contingent, were development of, training on, and testing of the ammunition functionality. The memorandum also stated that in the event that all ammunition functionality is not in place by the go-live date, the Joint Munitions and Lethality Life Cycle Management Command is prepared to exercise its documented mitigation strategy until such time as the functionality is available in LMP, with the understanding that the use of the mitigation strategy will increase costs and decrease inventory accuracy. Certain functionality that the arsenals under the Tank-automotive and Armaments Command need to perform their missions will not be deployed until after LMP is deployed. These arsenals currently have systems— commonly referred to as manufacturing and execution systems—in place to report manufacturing data and track the status of items being manufactured. According to Tank-automotive and Armaments Command officials, the arsenals will lose this capability once LMP is deployed until a replacement system is fielded. According to LMP program management officials, LMP was never intended to provide this capability. Instead, the Army has another project to develop this capability and integrate it with LMP. According to Army officials, this project is expected to provide the needed functionality and be deployed to the LMP locations that need it in phases. The first phase of this system improvement effort is expected to occur in February 2011 with the final delivery to occur in July 2011. In order to compensate for this lost capability, officials at the Tank- automotive and Armaments Command developed a mitigation strategy that includes hiring an estimated 95 additional people in order to manually perform the actions in LMP that were once handled by the legacy systems. Tank-automotive and Armaments Command officials stated that these personnel will be needed until the manufacturing and execution system is fielded and effectively implemented. In an August 30, 2010, memorandum, the Commander of the Tank- automotive and Armaments Command confirmed the command’s preparedness to deploy LMP on October 13, 2010, with minimal impact to mission accomplishment. The memorandum, however, identified a number of the Commander’s concerns, such as the potential requirement to hire an estimated 95 additional people to manage the manual efforts required to address the lack of a manufacturing and execution solution, as well as potential out-of-pocket costs that could approach an unbudgeted $300 million in the near term. The intention behind an enterprise resource planning system, like LMP, is to enhance the effectiveness and efficiency of an organization. Implementation of these types of systems is a complex endeavor, and the ability to gain these efficiencies depends on the quality of the data in the system. As illustrated by the experiences at the locations that deployed LMP in May 2009, data quality continues to be a challenge. The Army, however, has not adopted a testing strategy that provides adequate insight on whether the data loaded into LMP can support the LMP processes. Moreover, the functionality that is required to support some of the locations is still being developed, so the Army does not have reasonable assurance that the system is meeting its needs before LMP is deployed. Without software that is working and data of sufficient quality to use in the system, the Army’s ability to gain the anticipated increase in its effectiveness and efficiency for its $1 billion investment remains unclear. Although the Army has mitigation strategies in place that are expected to address potential shortcomings, the Army expects that these strategies will increase costs and decrease accuracy of inventory, which are the opposite effects of what LMP functionality was intended to provide. Accordingly, given the delays in implementing LMP and the long-standing problems that have precluded the Army from realizing LMP functionality, additional oversight and reporting is needed to better inform Congress of the Army’s progress in addressing these problems and the status and costs of the mitigation strategies the Army is employing. Given the long-standing challenges associated with the Army’s implementation of LMP and the need for mitigation strategies that may result in increased costs until LMP is fully functional, we are recommending that the Secretary of Defense direct the Under Secretary of the Army as the Army’s Chief Management Officer to report to Congress within 90 days of the beginning of the LMP third deployment on the progress of LMP implementation at the Army depots, arsenals, and life cycle commands, and provide periodic updates to Congress until such time as the mitigation strategies are no longer necessary. This report should identify the extent to which the third deployment sites are able to use LMP as intended, the benefits that LMP is providing, an assessment of the Army’s progress in ensuring that data used in LMP can support the LMP processes, timelines for the delivery of software and additional capabilities necessary to achieve the full benefits of LMP, and the costs and time frames of the mitigation strategies. In written comments on a draft of this report, DOD agreed with our findings with respect to data, software development, and systems, and also agreed on the need to implement prior LMP recommendations with which the department has previously concurred. DOD stated that the Army has established additional oversight of the third deployment of LMP and has no issues with GAO’s facts, observations, or recommendations, as stated in this report. DOD also stated that the Army Materiel Command is working closely with the LMP Project Office and third deployment sites to establish appropriate management controls. With respect to our recommendation, DOD stated that the department fully understands Congress’s interest in this deployment and that the Army will comply with GAO’s recommendation and the prescribed reporting timetable and conditions. The department’s written comments are reprinted in appendix I. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretary of the Army; and the Director, Office of Management and Budget. The report also is available at no charge on the GAO Web site at http://www.gao.gov. Please contact William M. Solis at (202) 512-8365 or solisw@gao.gov, Asif A. Khan at (202) 512-9869 or khana@gao.gov, or Nabajyoti Barkakati at (202) 512-4499 or barkakatin@gao.gov if you or your staff have questions on matters discussed in this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contacts named above, J. Chris Martin, Senior-Level Technologist; David Schmitt, Assistant Director; Darby Smith, Assistant Director; Jim Melton; Gilbert Kim; Grace Coleman; and Michael Shaughnessy made key contributions to this report. | The Logistics Modernization Program (LMP) is an Army business system that is intended to replace the aging Army systems that manage inventory and depot repair operations. From 1999 through 2009, the Army expended more than $1 billion for LMP. LMP was originally scheduled to be completed by 2005, but after the first deployment in July 2003, the Army delayed fielding because of significant problems. The Army later decided to field the system in two additional deployments: the second in May 2009 and the third in October 2010. GAO was asked to evaluate the extent to which the Army will achieve the intended functionality (e.g., supply chain management and materiel maintenance) from LMP for the commands, depots, and arsenals participating in the third deployment. To do this, GAO reviewed Army plans and policies related to LMP and met with Army officials at three Army commands and several third deployment sites. The Army has made improvements to its LMP implementation strategy, but it may not fully achieve the intended LMP functionality in its third deployment, which began in October 2010, because it has not corrected long-standing data inaccuracies and has not fully developed the software and systems needed to support critical functionality. Specifically: (1) GAO previously recommended that the Army improve testing activities to obtain reasonable assurance that the data used by LMP can support the LMP processes. The Army implemented data audits and new testing activities to improve data accuracy, but data issues persist, which could impede LMP functionality. According to Army officials, these new testing activities were designed to assess how well the LMP software functions but not how well the data work in LMP. Third deployment locations were also able to perform individual tests on the data, but these activities were not coordinated or managed by the Army. As a result, the audits and new testing activities did not provide the Army reasonable assurance that the data in LMP are of sufficient quality to achieve the intended LMP functionality once the system has been deployed. Without this assurance, the Army may experience the same data-related problems during the third deployment that were experienced during the second deployment, which prevented Corpus Christi and Letterkenny Army Depots from using LMP functionality as intended. (2) The Army's software development schedule and subsequent testing of capabilities needed by several locations are not expected to be delivered until after September 2010, but costly mitigations may be required if delivery is delayed. Unlike the previous deployments of LMP, the operations at some of the third deployment locations require additional capabilities. For example, the Army Sustainment Command and the Joint Munitions and Lethality Life Cycle Management Command perform missions that require LMP to interface with existing systems in order to perform day-to-day missions. If the software capabilities are not operating as intended, several sites will not have the necessary LMP functionality to perform their missions. The Army has mitigation plans to address this functionality gap. For example, the Joint Munitions and Lethality Life Cycle Management Command plans to hire 172 additional personnel, and the Tank-automotive and Armaments Command expects to hire 95 additional personnel to perform manual data entry until the capability is delivered. The Army expects that these mitigation plans will increase costs. Prior to transitioning to LMP, the Army is directed to certify that it is prepared to make the transition, but it is not required to regularly report to Congress specifically on LMP implementation. Congress therefore lacks complete and ongoing information to aid in its oversight of this program characterized by implementation delays and long-standing problems that have precluded LMP functionality at the sites included in the first two LMP deployments. GAO previously recommended that the Army address issues related to its implementation of LMP. GAO recommends further that the Army periodically report to Congress on the progress of LMP, including its progress in ensuring that the data used in LMP can support the system, timelines for the delivery of software necessary to achieve full benefits, and the costs and time frames of its mitigation strategies. DOD agreed with GAO's findings and recommendation. |
DOD and VHA provide health care, including medications for psychiatric, pain, and sleep conditions, to servicemembers and veterans through their respective health care systems. DOD provides health care to active duty servicemembers; Reserve and National Guard members on active duty; and other beneficiaries, such as family members and retired servicemembers, through TRICARE, its health care program. TRICARE beneficiaries can obtain comprehensive health care services—including outpatient and inpatient care, mental health care, and prescriptions for medications—through a direct-care system of MTFs operated by the Departments of the Army, Navy, and Air Force, or through a purchased- care system of civilian health care providers. Prescription medications can be obtained through MTF pharmacies, retail pharmacies, and the TRICARE mail-order pharmacy. DOD is required by law to make all clinically appropriate medications available to servicemembers, and, with the exception of certain classes of medications, such as weight-loss medications, DOD makes all Food and Drug Administration-approved prescription medications available. DOD’s formulary process is administered by DOD’s Pharmacy and Therapeutics Committee, and the formulary includes a list of medications that all MTFs must provide and medications that an MTF may elect to provide on the basis of the types of specialized services that the MTF offers (such as cancer medications). DOD classifies certain medications as “nonformulary” on the basis of its evaluation of their cost and clinical effectiveness, and DOD’s nonformulary classification applies to all MTFs and DOD’s purchased- care system. Nonformulary medications are available to beneficiaries at a higher cost, unless the provider can establish medical necessity. Veterans who served in active military duty, and were discharged or released under conditions other than dishonorable are generally eligible for VHA health care. In general, veterans must enroll in VHA health care to receive VHA’s medical benefits—a set of services that includes a full range of hospital and outpatient services, mental health care, and prescription medications. VHA provides health care services at various types of facilities, including VAMCs and community-based outpatient clinics. Veterans may obtain prescription and over-the-counter medications through VAMC or community-based outpatient clinic pharmacies, VHA’s mail-order pharmacy, or through certain non-VHA pharmacies. VA’s formulary provides access to medications for eligible beneficiaries. VHA manages VA’s formulary and makes decisions about whether to add medications to the formulary on the basis of clinical and cost effectiveness and, like DOD, provides access to nonformulary medications when providers establish medical necessity. Because VHA only fills prescriptions written by VHA providers or providers VHA has authorized its patients to see, VHA generally has direct control over the medications that are prescribed to its patient populations. PTSD is a trauma and stressor-related disorder that can occur after a person is exposed to a traumatic or stressful event such as a death or serious injury; its onset may be delayed. As defined in the fifth edition of the Diagnostic and Statistical Manual of Mental Disorders, to be diagnosed with PTSD, patients must have experienced four types of symptoms that continue for more than 1 month after the event: persistently re-experiencing the event such as through flashbacks persistently avoiding trauma-related stimuli such as places or situations that are reminders of the event; negative changes in cognitions and mood that began or worsened after the event, such as persistent negative beliefs about oneself or the world; and changes in arousal and reactivity that may include aggressive or self-destructive behavior and insomnia. The symptoms cause significant distress or impairment—for example, in the patient’s social relationships and work life—and the duration of symptoms varies, according to the Diagnostic and Statistical Manual of Mental Disorders. That is, some patients with PTSD have symptoms for less than 3 months while others may experience symptoms for longer than a year and sometimes for many years. In addition to providing medication therapy, DOD and VHA provide psychotherapy, which has been shown to be effective in the treatment of PTSD in clinical research studies, as well as other types of therapies. Mild TBI (also known as a concussion) is caused by a blow or jolt to the head that temporarily disrupts the normal function of the brain. The diagnosis is based on several factors including that the patient has an alternation of consciousness that may last from a moment up to 24 hours or has a loss of memory for the events immediately before or after the injury that lasts for a day or less. There are many causes of this condition—such as blasts and car accidents—and, while not all patients with mild TBI have symptoms, those that do typically experience symptoms immediately following the event. Headache is the most common symptom, and other common symptoms include dizziness, fatigue, irritability, and insomnia. A very small proportion of patients with mild TBI have symptoms that persist beyond 6 months, although symptoms may last longer after repeated mild TBIs. In addition to providing medication therapy for certain symptoms, DOD and VHA provide other services for the treatment of mild TBI symptoms which may include physical and occupational therapy and neuropsychological care. Servicemembers that are diagnosed with mild TBI as a result of combat also have a higher risk of experiencing PTSD. Additionally, servicemembers with either PTSD or mild TBI often experience other co- occurring conditions, such as chronic pain, which may be related to their combat-related injuries. As we previously have reported, the length of time that servicemembers take to transition their health care from DOD to VHA or another health care system varies. Some servicemembers may not transition their care to VHA at all and instead seek care from other health care systems and providers. Of those transitioning to VHA, some servicemembers separate from the military and have their first appointment at VHA the following week. Others may take more time to transition to VHA, waiting months or years before scheduling their first appointment. Effective transitions of care, including for servicemembers transitioning from DOD to VHA, should include education and counseling about medication adherence, medication lists at discharge, and a plan for how to get medications during transitions, according to the National Transitions of Care Coalition—a nonprofit organization that produces tools and resources to assist with such transitions. As we previously have reported, DOD and VHA have established several programs to assist servicemembers, such as those with PTSD or mild TBI, with care transitions, including help with medication management. For example, Army nurse case managers have procedures both to assess if servicemembers receiving care at MTFs have sufficient supplies of medications until their initial VAMC appointment and to share servicemembers’ medication lists with VA liaisons. VA liaisons, who are nurses or social workers stationed at MTFs, in turn, have procedures to ensure that VHA providers receive servicemembers’ medication lists and that transitioning servicemembers have adequate supplies of medications until their initial appointments. Another example is DOD’s inTransition Program. The inTransition Program is a confidential personal coaching program that helps servicemembers with mental health conditions as they move between health care systems or providers. The inTransition Program coaches are social workers who encourage transitioning servicemembers with mental health needs to continue their medications. The continuation of medication therapy, that is, prescribing the same medications when a servicemember separates from DOD and transitions to other health care systems including VHA, is another important element of effective care transitions. Continuing clinically appropriate medications during this transition is especially important for servicemembers and veterans with mental health or pain conditions, such as PTSD, whose symptoms may have been stabilized as a result of medications that DOD providers have prescribed. The treatment of symptoms with medications can enable patients with mental health conditions to return to near-normal functioning and can enhance the effectiveness of psychotherapy. DOD and VHA have jointly developed clinical practice guidelines related to PTSD and mild TBI, which include recommendations for the treatment of symptoms among servicemembers and veterans with these conditions. Each guideline includes a discussion of, and recommendations on, management of care for servicemembers and veterans with these conditions, such as screening and diagnosis, types of treatment interventions, and assessing treatment responses. The PTSD clinical practice guideline includes evidence-based recommendations to assist DOD and VHA clinicians in their decision making about which medications to prescribe to treat the symptoms of PTSD. The mild TBI clinical practice guideline also includes recommendations related to medications for treating the symptoms of the condition; these recommendations are based on expert opinions, rather than evidence- based research, because of the lack of published studies on mild TBI medication treatments. The guidelines state that the recommendations should not prevent providers from using their own clinical expertise in the care of an individual patient and should never replace sound clinical judgment. In addition to providing guidance for clinical decision making, the guidelines are intended to help improve the quality and continuum of care and the health outcomes for servicemembers and veterans with PTSD and mild TBI. The PTSD guideline recommends that patients with PTSD be offered certain types of antidepressants and discourages the use of benzodiazepines, a type of sedative. According to the guideline, the use of selective serotonin reuptake inhibitors or serotonin norepinephrine reuptake inhibitors (types of antidepressants) are strongly recommended because there is good evidence that they are effective in reducing the core symptoms of PTSD and are generally well tolerated by servicemembers and veterans with PTSD. In contrast, the guideline states that the use of benzodiazepines should be discouraged because of their lack of effectiveness in treating PTSD and because the risks may outweigh potential benefits. The guideline also states that there is evidence to suggest that benzodiazepines may worsen recovery and, once they are initiated, they can be very difficult to discontinue due to significant withdrawal symptoms. Additionally, the guideline states that the use of antipsychotics (atypical and conventional) to treat PTSD is not supported because the existing evidence is insufficient to warrant their use. The guideline specifically recommends against the use of one atypical antipsychotic (risperidone) to supplement the use of antidepressants in treating PTSD, based on evidence from a VA study. This study showed that risperidone did not reduce the symptoms of PTSD and its use did not justify the risk for adverse events. The mild TBI guideline provides general guidance on medications for treating the condition’s symptoms and on those medications that warrant particular caution, including antipsychotics and benzodiazepines. According to the guideline, there is insufficient evidence for recommending the use of one medication over another to treat the symptoms of mild TBI. As a result, the guideline provides general recommendations about medications, such as ibuprofen or naproxen— nonsteroidal anti-inflammatory medications—that may be used to treat common symptoms, such as tension headaches that occur periodically. Because some patients with mild TBI may experience seizures and confusion, the guideline cautions against the use of medications that can increase a patient’s susceptibility to seizures, including antipsychotics, and medications that can cause confusion, such as benzodiazepines. Further, the use of medications to treat the condition itself (brain injury) is not recommended since the Food and Drug Administration had not approved any medications for this purpose as of April 2009, as stated in the guideline. The PTSD and mild TBI guidelines also include clinical guidance for treating insomnia and pain in servicemembers and veterans with these conditions. The guidelines emphasize that, when possible, initial treatment for insomnia should begin with nonmedication options, and recommend treatments, such as good sleep hygiene practices and cognitive behavioral therapy. Should medications also be needed, the guidelines state that insomnia may be treated with the use of certain sleep medications that are not benzodiazepines, such as zolpidem. For pain, the guidelines recommend individualized treatment plans tailored to the types of pain the patient is experiencing. If medications are included in the treatment plans, the guidelines recommend, for example, that non- steroidal anti-inflammatory medications be used to treat pain resulting from injuries to the bones and muscles. The PTSD guideline further recommends that providers prescribe low doses of opioids or other centrally acting pain medications (which reduce the transmission of pain through the brain), if required, and only in the short term, because they can cause confusion, and then transition their patients to the use of non- steroidal anti-inflammatory medications. VHA monitors the prescribing of medications that are included in the PTSD guideline, but DOD and the Army do not monitor such prescribing among servicemembers. As part of its Psychotropic Drug Safety Initiative, which began in 2013, VHA tracks the prescribing of benzodiazepines, antipsychotics, and other psychiatric medications to treat veterans with PTSD. VHA tracks the prescribing of these medications quarterly at the VAMC, VISN, and national levels. Specifically, VHA tracks the percentage of veterans with PTSD who have been prescribed: (1) a benzodiazepine, (2) an antipsychotic (atypical and conventional) without a separate diagnosis of severe mental illness, and (3) medications from certain classes of psychiatric medications for 60 days or more. As part of the Psychotropic Drug Safety Initiative, VHA requires each VAMC to develop and implement a plan to improve on any measure for which the individual VAMC was performing significantly below the average of all VAMCs. This requirement encompasses measures focused on reducing prescriptions for benzodiazepines, antipsychotics, and other classes of psychiatric medications to treat veterans with PTSD. If a VAMC does not have any measures that meet the criteria, VHA still requires the VAMC to implement a plan to reduce prescriptions for psychiatric medications based on at least one measure, such as the percentage of veterans with PTSD who have been prescribed a benzodiazepine. In 2015, 22 VAMCs had developed plans to decrease the percentage of veterans with PTSD who are prescribed benzodiazepines and 26 had developed plans to decrease the percentage of veterans with PTSD who are prescribed antipsychotics (without a diagnosis of severe mental illness). Specifically, one VAMC created a clinical reminder in its electronic medical record that is activated when a veteran with PTSD (without a diagnosis of severe mental illness) is prescribed an atypical antipsychotic. To order the prescription, the VHA provider must justify why the medication is needed. This VAMC decreased the percentage of veterans with PTSD who had been prescribed antipsychotics by almost half, from 21.8 percent in 2013 to 11.5 percent in 2015. In addition to continually monitoring these measures, VHA officials told us that they review VAMCs’ improvement plans twice a year and provide VAMCs feedback. As part of the initiative, VHA provides patient-level data to VAMCs—such as information about each patient with PTSD who is prescribed a benzodiazepine along with the name of the provider who prescribed the medication—so that VAMCs can prioritize patients where prescribing practices can be improved. In 2013, VHA also began tracking annually the percentage of veterans with PTSD who are prescribed antidepressants and other medications including prazosin—a medication recommended for PTSD patients who experience nightmares—nationally and by VISN, and the results are shared with VISN pharmacy executives, who are responsible for tracking pharmacy and patient outcome data. In addition, VHA has begun a program, known as Academic Detailing, to make resources available to providers to assist them in incorporating evidence-based recommendations in the treatment of veterans with mental health conditions, including PTSD. In 2014, VHA developed a guide for clinicians on treating PTSD patients that summarizes key recommendations for medication treatment included in the PTSD guideline and provides other information, such as guidance on how to discontinue benzodiazepines by tapering their dosage over time. As part of the program, pharmacists meet one-on-one with providers that have a high proportion of patients who had been prescribed certain medications (e.g., benzodiazepines, opioids) for whom there are significant safety concerns, including risk for abuse, to identify and address any treatment gaps, according to a VHA official. Each VISN is responsible for implementing an Academic Detailing program and was required to have a program in place by September 30, 2015. VHA officials told us that as of October 2015, 6 of the 21 VISNs had fully implemented such a program. In contrast to VHA, neither DOD nor the Army monitors the prescribing of medications to treat servicemembers with PTSD in accordance with the guideline recommendations, on an ongoing basis. DOD officials told us that DOD relies on each military service to review the medication prescribing practices of its providers and helps facilitate medication reviews by generating reports for all MTFs that include a list of patients who are prescribed multiple psychiatric and pain medications. DOD officials also told us that they track the prescriptions of certain medications included in the PTSD guideline, such as antipsychotics, by individual military service but do not track prescriptions according to PTSD diagnosis on an ongoing basis. We found that the Army also does not monitor the prescribing of medications that are included in the guideline recommendations on an ongoing basis. Instead, Army officials told us they have emphasized the importance of the PTSD recommendations in their recently issued policies and provider training. Specifically, the Army issued a PTSD policy in 2012, reissued it in 2014, and provided related training on the medication recommendations in the guideline. The policy and training stated that prescribing benzodiazepines to patients with PTSD should be avoided and that prescribing atypical antipsychotics to patients with PTSD warrants caution, given concerns with potential adverse health effects. The Army issued a policy in 2012 that required MTFs to review their prescribing practices for atypical antipsychotics, but the policy did not apply to benzodiazepines, and it expired in 2014. Army officials stated that they issued the policy on atypical antipsychotics given concerns that these medications could be prescribed without sufficient clinical rationale by providers in the treatment of PTSD but said that they do not plan to re- issue it. Providers and pharmacists we interviewed from one Army MTF told us that they are continuing to conduct these reviews because they identified a higher-than-expected prescribing rate and believe improvements can be made with additional efforts, such as further education of providers. In contrast, providers and pharmacists we interviewed from another Army MTF said that they were no longer conducting the reviews because the policy expired. Army officials told us that they are focusing their monitoring efforts on the extent to which the clinical outcomes among servicemembers with PTSD improve over time. These officials added that they do not have the same level of concern about atypical antipsychotic prescribing for patients with PTSD as they did 5 years ago because they believe recent efforts to raise awareness about prescribing antipsychotics for PTSD have been effective. After we asked Army officials about the effects of the policy, they responded by conducting an analysis, which showed that the proportion of servicemembers with PTSD (without a separate diagnosis of severe mental illness) prescribed atypical and other antipsychotics decreased by almost half, from 19 percent in fiscal year 2010 to 10 percent in fiscal year 2014. Army officials stated that they could repeat their analysis, if needed, but did not identify any specific plans to do so. They added that they could similarly track the percentage of servicemembers with PTSD prescribed a benzodiazepine using the same data source. Although a decrease in the proportion of servicemembers prescribed atypical antipsychotics is important, the Army’s lack of ongoing monitoring of the prescribing of these medications may increase the risk that the PTSD guideline recommendations are not effectively followed. Federal internal control standards require federal agencies to have control activities in place to establish and review performance measures over time and then implement ongoing monitoring to assess the quality of performance and ensure that the findings of reviews are promptly resolved. Without ongoing monitoring of Army providers’ prescribing of antipsychotics and benzodiazepines to servicemembers with PTSD, the Army may be unable to identify and address prescribing practices that are inconsistent with the guideline and do not have a clinical justification. Neither VHA nor DOD and the Army monitor the prescribing of medications to treat mild TBI because the mild TBI guideline does not include specific medication recommendations. According to a VHA official, VHA does not conduct such monitoring because mild TBI is associated with a wide range of symptoms, and, thus, treatment regimens need to be individualized based on each patient’s symptoms. In addition, this official added that, in contrast to the PTSD guideline, the mild TBI guideline does not recommend the use of a particular medication over another and there are no strict contraindications for certain medications. DOD officials told us that the individual military services have processes in place to review the prescribing practices of its providers. Army officials stated that the Army has procedures in place that may include the review of medication prescribing decisions, including for mild TBI, such as peer reviews that are part of the Army’s privileging process. Army officials explained that each department within an Army MTF is responsible for developing standards for their specialty and monitoring, for example, whether providers follow related evidence-based medical practices, which may include prescribing medications. Army officials also stated that they are currently focusing their TBI monitoring efforts on tracking the clinical outcomes of TBI patients and have begun to pilot this effort in the TBI clinics at seven Army MTFs. Our review found that VA’s formulary included more than half of the psychiatric, pain, and sleep medications on DOD’s formulary. These medications are prescribed to treat symptoms that are common among servicemembers and veterans with PTSD or mild TBI. DOD and VHA officials we spoke with agreed that the formulary differences did not affect the continuation of medications for servicemembers transitioning from DOD to VHA. (See app. I for a complete list of the psychiatric, pain, and sleep medications on the DOD and VA formularies, as well as information on DOD prescriptions for these medications.) We also found that the vast majority of these medications that were actually prescribed by DOD in fiscal year 2014 were on both formularies. (See table 1.) Additionally, we found the most agreement between the formularies for psychiatric medications, with the medications on VA’s formulary representing 98 percent of the prescriptions that had been filled by DOD in fiscal year 2014. VHA officials told us that clinical considerations and cost are factors in determining whether to include a medication on the formulary. Specifically, they said they first consider which medications are the safest and most effective for treating each condition, and then they select the most cost-effective options. As a result of this process, the VA formulary includes fewer medications than DOD’s. For example, VHA officials told us that VA’s formulary did not include the pain medication piroxicam because the formulary already included safer alternatives. VHA officials also said the VA formulary only included two sleep medications because of concerns about the appropriateness of some sleep medications for the treatment of insomnia. Further, VHA officials and providers noted that sleep problems are often a symptom of other conditions, including those related to mental health, and, therefore, treating the underlying condition may also treat the insomnia. Rather than including more of these medications on the VA formulary, VHA has developed evidence-based clinical recommendations for treating insomnia, which includes off-label use of other types of medications, such as antidepressants; over-the- counter medications, such as antihistamines; and nonmedication treatments. DOD and VHA officials told us they do not believe that the differences between the formularies affected the extent to which VHA providers continued medications prescribed by DOD providers, when clinically appropriate. In support of this position, officials noted the results of VHA’s 2015 study on this issue. Specifically, VHA conducted this study to assess the extent to which differences in the DOD and VA formularies affected medication continuation and found that VHA providers infrequently changed or discontinued medications for nonclinical reasons, including formulary differences. As part of the 2015 study, VHA pharmacists reviewed DOD and VHA data on a sample of 729 servicemembers who transitioned from DOD to VHA in 2013 with a psychiatric, pain, or sleep medication to determine whether their medications were changed by VHA providers upon transition. For the 167 servicemembers whose medications were changed or discontinued, VHA pharmacists reviewed the individual medical records to determine the reasons why. VHA determined that 24 servicemembers (3 percent of the 729 servicemembers reviewed) had psychiatric, pain, or sleep medications that were changed or discontinued for nonclinical reasons, which could include formulary differences, upon transitioning to VHA. Consistent with the findings of the 2015 VHA study, providers, pharmacists, and case managers we interviewed at three VAMCs and two Army MTFs, as well as military and veterans’ stakeholder groups, were generally unaware of specific instances of medications being changed or discontinued for nonclinical reasons, including formulary differences. Although VHA providers and pharmacists said that this type of change could occur, they most commonly said that medications are changed for clinical reasons, such as side effects, the medication not working, interactions with other medications, and general disagreement with the prior treatment approach. Additionally, several VHA providers we interviewed said most of the psychiatric, pain, and sleep medications they would want to prescribe are already on the VA formulary, and we found that the majority of the medications providers said were not on the formulary have recently been added. For example, duloxetine, an antidepressant added to VA’s formulary in 2015, was a commonly mentioned nonformulary medication during our interviews with providers. Given the differences in the formularies, some stakeholders have suggested that DOD and VA establish a single formulary. The advantages and disadvantages of doing so would depend, in part, on the resulting formulary—that is, whether VA adopts all of the medications on DOD’s formulary or, instead, VA and DOD agree to a new list of medications. When we discussed the concept of a single formulary with officials, VHA officials expressed concern that adopting DOD’s formulary could diminish elements of their formulary process that they believe are important from a clinical and cost perspective. Specifically, VHA officials told us that adopting DOD’s formulary would result in including medications that VHA has determined to be less safe than other alternatives. For example, the DOD formulary includes a recently Food and Drug Administration-approved extended release opioid medication associated with a greater risk of overdose, if used incorrectly, due to the larger amount of the active ingredient present in the medication, compared to some other pain medications (such as immediate release opioids). VHA officials told us they decided not to include this medication on the formulary, given its ongoing efforts to improve the safety of opioid prescribing. In addition, the Congressional Budget Office estimated that VA’s costs would increase if it were to adopt the psychiatric, pain, and sleep medications on the DOD formulary. VHA officials explained that they are able to control pharmacy costs by requiring providers to prescribe the most cost-effective medications, unless there is a clinical reason to prescribe something else. Clinical reasons could include medication continuation or concerns about particular side effects for certain patients. A single formulary could also be achieved by DOD and VA collaboratively selecting which medications to include. This approach could result in cost savings for DOD if the new formulary excluded higher cost medications. Although VHA officials told us they would be supportive of this approach, DOD officials said they are not because they view it as a reduction of the benefit that they currently provide, and believe it is important to have a more comprehensive formulary to better accommodate prescriptions written by civilian health care providers. In addition, DOD officials told us that current law requires them to include all clinically appropriate Food and Drug Administration-approved medications. DOD officials told us that including more medications on the formulary is beneficial because individual patients respond differently to different medications. VHA’s nonformulary request process is one key effort that helps newly transitioned veterans, including those with PTSD or mild TBI, avoid medication discontinuations that could occur as the result of differences in the DOD and VA formularies, according to providers we interviewed and VHA documents we reviewed. Data provided by VHA show that the most commonly DOD-prescribed psychiatric, pain, and sleep medications not on the VA formulary are prescribed by VHA providers through this process. According to VHA policy, providers may request a medication not on the VA formulary by submitting a nonformulary request, which is reviewed by a pharmacist. The pharmacist, in turn, either approves or denies the request based on whether the provider has demonstrated that there is a clinical necessity for the medication. To be approved, requests for nonformulary medications must meet one of several clinical criteria. For example, a request will be approved if the provider has documented that the veteran has had an allergic reaction to a formulary medication. The pharmacist who reviews the request must approve or deny it within 96 hours, and a provider may appeal a request that a pharmacist initially denied. VHA monitors the rates in which VAMCs approve nonformulary requests and the extent to which they adjudicate the requests within the required timeframe of 96 hours. VAMCs report data quarterly to VHA on the number of nonformulary requests that their pharmacists approved and denied, the number of denied requests that providers subsequently appealed, and the number of appealed requests that were overturned. VHA does not collect data on the reasons why pharmacists deny nonformulary requests. VHA officials told us they do not collect such data because the only reason for a denial is that the provider did not establish clinical justification for the medication. VAMCs also report to VHA the number of nonformulary requests that pharmacists adjudicated outside of VHA’s required 96-hour timeline. For nonformulary requests that take longer than 96 hours to adjudicate, VAMCs are required to report the reasons for the delayed adjudication. For example, some of the reasons that VAMCs have reported include that a request was referred to a specialist (e.g., a physician or another pharmacist) for additional review and that the required documentation to determine the appropriateness of the request (e.g., lab value) was unavailable at the time of the request. VHA officials combine data from VAMCs within each of the VISNs to report nonformulary request data quarterly to VISN pharmacists. VHA officials told us they examine the data, among other things, to identify outliers across VISNs related to the number of nonformulary requests that take longer than 96 hours to adjudicate, and they discuss these results during quarterly meetings with VISN pharmacists who are responsible for overseeing the request process with their respective VAMCs. For example, in 2013, VHA officials identified a VISN with a relatively high number of nonformulary requests with delayed adjudication and discussed this outlier at a meeting with VISN pharmacists. This discussion led the VISN to implement several changes that ultimately resulted in a lower number of requests with delayed adjudication. Specifically, the VISN created an automated nonformulary request form that tracks how long each request takes from submission to adjudication. This change allows a provider that submits a nonformulary request, as well as the pharmacists that review the request, to be aware of requests that approach the required 96-hour timeframe for adjudication. VHA’s nonformulary request data show that pharmacists approved the majority of the nonformulary requests that providers submitted from fiscal years 2012 through 2014. Specifically, they approved 81 percent of the 2.1 million total nonformulary requests, or about 1.7 million, during this time period. (See table 2.) Of the 19 percent of requests that were denied (about 399,000), providers appealed 1 percent of these (about 4,600), and most were overturned (61 percent). Providers we interviewed from all three VAMCs told us that pharmacists approved the majority of nonformulary requests they submitted. Further, the vast majority of nonformulary requests that providers submitted from fiscal years 2012 through 2014 were adjudicated within 96 hours. Of the approximately 2.1 million nonformulary requests that providers submitted to pharmacists during this time, 98 percent were adjudicated within 96 hours. Providers we interviewed from the three VAMCs in our review told us that pharmacists adjudicated the majority of their nonformulary requests within the required timeframe, and several providers said they frequently received decisions on their requests within 1 or 2 hours of submitting them and sometimes sooner if they spoke directly with a pharmacist about the request. The VHA data also showed that the vast majority of requests that providers appealed were adjudicated within the required timeline of 96 hours (91 percent) from fiscal years 2012 through 2014. Of the nonformulary requests that took longer than 96 hours to adjudicate, three pain medications and one psychiatric medication were among the most frequently requested medications by providers. However, the extent to which requests for these four medications were ultimately approved or denied is unknown because VHA officials do not separately track the results of nonformulary requests for specific medications, including those taking longer than 96 hours to adjudicate. VHA issued a policy in January 2015 that instructs providers not to discontinue mental health medications initiated by DOD providers due to differences in the DOD and VA formularies; another key effort to help ensure medication continuation. VHA officials said that the reason for issuing this policy was to provide added assurance that patients with mental health conditions—who are among the most vulnerable—would not have their mental health medications changed or discontinued for nonclinical reasons upon transitioning from DOD to VHA. However, the policy lacks clarity regarding which types of medications should be considered mental health medications and, therefore, are not to be discontinued. Specifically, the policy is unclear on whether providers should continue (when clinically appropriate) all of the medications prescribed by DOD providers for patients with mental health conditions or only the psychiatric medications (such as antidepressants) that were prescribed specifically to treat their mental health condition. As pain and sleep medications treat symptoms that are commonly experienced by patients with mental health conditions, such as PTSD, VHA providers and pharmacists we interviewed had varying interpretations of whether these medications would be considered mental health medications under the new policy. For example, VHA providers had different interpretations about whether they should continue eszopiclone, a medication for the treatment of insomnia which is on DOD’s formulary, but not VA’s. Some VHA providers said they would have to switch medications for patients who transition from DOD on this medication to one on the VA formulary, unless there is a clinical reason not to do so. Other VHA providers said that the policy could cover other types of medications prescribed to patients with mental health conditions, such as sleep medications. In addition, in our review of VHA’s 2015 study of transitioning servicemembers, we found that among the 24 servicemembers whose medications were changed or discontinued for nonclinical reasons, more than half of them (13 of 24) had a pain or sleep medication changed. VHA officials acknowledged that the definition of a mental health medication could be subjective and that they intended the policy to be broad and to apply to any medication that is prescribed to treat a mental health condition. Therefore, they stated that pain and sleep medications should be considered mental health medications under the policy. However, they also noted that some pain and sleep medications are not intended for long term use, so providers may choose to discontinue prescribing them for clinical reasons. Given that VHA’s policy lacks clarity regarding which types of medications should be considered mental health medications, VHA providers may be inappropriately changing or discontinuing mental health medications due to formulary differences. Such changes could lead to adverse health effects, such as exacerbation of symptoms or new side effects. This lack of clarity in VHA’s policy is inconsistent with federal internal control standards, which state that agencies should establish control activities, such as developing clear policies, in order to accomplish the agency’s objectives. VHA officials told us that they are planning to conduct another study of transitioning servicemembers to determine if the new policy is having the intended effect. Specifically, VHA officials told us that they plan to review the prescriptions of about 5,000 servicemembers who transitioned from DOD to determine whether their medications were continued at VHA when clinically appropriate. VHA officials told us that they have been working with DOD officials to obtain the data needed to conduct this study. Servicemembers and veterans diagnosed with PTSD or mild TBI may experience significant difficulties and impairments in their social relationships and work life. VHA and DOD have jointly developed a clinical practice guideline for PTSD patients that includes evidence-based recommendations to aid clinicians in their decision making about which medications to prescribe to treat the symptoms of PTSD. However, the Army does not have a mechanism in place to monitor on an ongoing basis whether MTFs are prescribing medications that are consistent with these recommendations. Ensuring that medication regimens are continued when clinically appropriate is critical for servicemembers transitioning their health care from DOD to VHA, including those with PTSD and mild TBI. We did not find evidence that the differences in the DOD and VA formularies for these medications result in the inappropriate discontinuation of medications. Although VA’s formulary includes just over half of the medications on the DOD formulary, those on both formularies represent the most commonly DOD-prescribed psychiatric, pain, and sleep medications. However, we found that VHA’s new policy to ensure the continuation of mental health medications lacks clarity on the types of medications considered mental health medications, and, as a result, VHA providers may be inappropriately changing or discontinuing mental health medications due to formulary differences, potentially increasing the risk of adverse health effects for transitioning servicemembers. We recommend that the Secretary of Defense direct the Secretary of the Army to implement processes to review and monitor Army MTF prescribing practices for medications discouraged under the PTSD guideline and address identified deviations. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to clarify which types of medications are covered by VHA’s January 2015 policy on medication continuation. DOD provided written comments on a draft of this report, which we have reprinted in appendix II. In its comments, DOD agreed with our conclusions and generally concurred with our recommendation. DOD stated that any policy that it may issue related to the monitoring of prescribing practices would be directed toward all of the military services. DOD also provided technical comments, which we have incorporated in the report as appropriate. VA also provided written comments on a draft of this report, which we have reprinted in appendix III. In its comments, VA agreed with our conclusions and concurred with our recommendation. VA stated that it will issue written guidance to its providers clarifying which types of medications are covered by its 2015 policy on medication continuation, with an estimated completion date of March 2016. VA also provided technical comments, which we have incorporated in the report as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Veterans Affairs, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or draperd@gao.gov. 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. We found that the Department of Veterans Affairs (VA) formulary included 57 percent of the psychiatric, pain, and sleep medications on the Department of Defense (DOD) formulary, as of August 2015, and these medications represented the most frequently prescribed psychiatric, pain, and sleep medications on the DOD formulary in fiscal year 2014. (See table 3.) For a sample of psychiatric, pain, and sleep medications included on both the DOD and VA formularies and that were frequently prescribed by DOD providers in fiscal year 2014, we also compared the specific formulations that were available on each formulary. We conducted this supplemental analysis because DOD and Veterans Health Administration (VHA) officials told us that prescribing different formulations of the same medication may have clinical significance for certain medications or certain patients. Specifically, we reviewed differences in the medication formulations according to their available dosage form (e.g., liquid or tablet), modified release formulation (e.g., extended or immediate release), salt form (e.g., hydrochloride or sulfate), strength, and also their route of administration (e.g., oral or nasal). We selected the five psychiatric and five pain medications most frequently prescribed and filled by DOD for active duty servicemembers in fiscal year 2014 that were on both DOD and VA formularies. For sleep, the VA formulary only included two medications, so we reviewed the formulations for both. We found that the VA formulary included all of the formulations that were on the DOD formulary for 7 of these 12 medications. The formulation differences for the remaining 5 psychiatric, pain, and sleep medications resulted from differences in dosage form and modified release formulation. That is, 2 of the 5 medications were available on the DOD formulary but not the VA formulary in the liquid form, and the remaining 3 medications were available on the DOD formulary but not on the VA formulary in the extended release form. For example, the DOD and VA formularies both include immediate release formulations of the sleep medication zolpidem, but the DOD formulary also includes the extended release version. We obtained the perspectives of DOD and VHA officials regarding the clinical significance of the formulation differences that we observed, and they agreed that these differences were not generally clinically significant and would only have implications for specific patients, such as certain patients who cannot swallow pills and who would benefit from the liquid forms. In addition, DOD and VHA officials both said that the primary difference between immediate release and extended release medications would be the frequency with which the patient needs to take the medication, but there could be differences in their effectiveness for certain patients. VHA officials noted that the formulations of medications that are not included on the VA formulary are often those for which there is a limited need in their patient population, but, in situations where these specific formulations are clinically indicated, they would utilize the nonformulary request process to prescribe that medication. DOD officials agreed that some of the formulations not available on VA’s formulary are often not clinically indicated. In addition to the contact named above, Janina Austin, Assistant Director; Jennie F. Apter; Pamela Dooley; Joshua D. Ferencik; Jacquelyn Hamilton; Toni Harrison; Katie McConnell; and Daniel Ries made key contributions to this report. | Medication continuation, when clinically appropriate, is critical for transitioning servicemembers with PTSD or TBI who have been prescribed psychiatric, pain, or sleep medications. Adverse health effects may occur if these medications are inappropriately discontinued. The National Defense Authorization Act for Fiscal Year 2015 included a provision for GAO to assess transitions of care, particularly medication continuation for servicemembers with PTSD or TBI transitioning to VHA. GAO examined (1) the extent to which DOD and VHA developed and monitored recommended medication practices for PTSD and TBI; (2) the extent to which psychiatric, pain, and sleep medications on DOD's formulary are on VA's formulary, and how differences might affect medication continuation; and (3) key efforts VHA has to help ensure medication continuation, and the extent it is monitoring these efforts. GAO reviewed documents and analyzed DOD and VHA data from fiscal years 2012 through 2015; and interviewed DOD and VHA officials from headquarters and five Army and DOD facilities, selected for variation in size and location. GAO focused on the Army as the largest number of its servicemembers served in recent conflicts. The Department of Defense (DOD) and the Department of Veterans Affairs' (VA) Veterans Health Administration (VHA) have collaborated to develop clinical practice guidelines for post-traumatic stress disorder (PTSD) and mild traumatic brain injury (TBI). The mild TBI guideline does not include recommendations based on scientific evidence regarding the use of medications to treat symptoms because of a lack of available research; however, the PTSD guideline discourages the use of benzodiazepines (a sedative) and states that the use of antipsychotics to treat PTSD lacks support, based on available research. VHA monitors the prescribing of benzodiazepines and antipsychotics to treat PTSD nationally and by VA medical centers (VAMC) and requires VAMCs to implement improvement plans if their prescribing is significantly higher than the average of all VAMCs. GAO found that DOD relies on each military service to review the medication prescribing practices of its providers and that the Army does not monitor the prescribing of medications to treat PTSD on an ongoing basis. Without such monitoring, the Army may be unable to identify and address practices that are inconsistent with the guideline. Federal internal control standards require agencies to have control activities to establish performance measures, implement ongoing monitoring to assess performance, and ensure that the findings of reviews are promptly resolved. As of August 2015, VA's formulary included 57 percent of the psychiatric, pain, and sleep medications on DOD's formulary. These medications are prescribed to treat symptoms common among servicemembers and veterans with PTSD or mild TBI, and most of the DOD prescriptions in fiscal year 2014 for these medications (88 percent) were on both formularies. In addition, DOD and VHA officials GAO interviewed agreed that the differences did not affect the continuation of medications for servicemembers transitioning from DOD to VHA. VHA has two key efforts to help ensure continuation of medications for transitioning servicemembers, including those with PTSD or mild TBI, but a lack of clarity of one effort may limit its effectiveness. VHA's nonformulary request process is one key effort that helps ensure newly transitioned veterans avoid medication discontinuations due to differences between the DOD and VA formularies. VHA monitors nonformulary requests. VHA data show that 81 percent of requests submitted from fiscal years 2012 through 2014 were approved, and 98 percent of requests were adjudicated within VHA's required time frame of 96 hours. The other key effort is VHA's 2015 policy instructing its providers not to discontinue mental health medications initiated by DOD providers due to formulary differences. However, VHA providers GAO interviewed had varying interpretations of which medications are covered by this policy, and VHA officials acknowledged that the definition of a mental health medication could be subjective. Federal internal control standards state that agencies should establish control activities, such as developing clear policies. Because VHA's policy lacks clarity, VHA providers may be inappropriately discontinuing mental health medications due to formulary differences, which could increase the risk of adverse health effects for transitioning servicemembers. GAO recommends that the Army monitor prescribing practices of medications discouraged under the PTSD guideline and that VHA clarify its medication continuation policy. DOD and VHA concurred with the recommendations. |
The Office of the Under Secretary for Energy, Science and Environment comprises nine program offices, including the Offices of Environmental Management; Nuclear Energy, Science and Technology; and Science and accounts for about 57 percent of DOE’s fiscal year 2006 budget request (see fig. 1). ESE has five sites that collectively have substantial quantities of Category I special nuclear material. (See table 1.) For fiscal year 2006, DOE requested over $300 million for security at these five sites. This represents about 70% of the entire security budget request for ESE. (See table 2.) Contractors operate all of these sites. Within DOE’s Office of Security and Safety Performance Assurance, DOE's Office of Security develops and promulgates orders and policies to guide the department's safeguards and security programs. DOE’s overall security policy is contained in DOE Order 470.1, Safeguards and Security Program, which was originally approved in 1995. The key component of DOE's approach to security is the DBT, a classified document that identifies the characteristics of the potential threats to DOE assets. A classified companion document, the Adversary Capabilities List, provides additional information on terrorist capabilities and equipment. The DBT has been traditionally based on a classified, multiagency intelligence community assessment of potential terrorist threats, known as the Postulated Threat. The threat from terrorist groups is generally the most demanding threat contained in the DBT. DOE counters the terrorist threat specified in the DBT with a multifaceted protective system. While specific measures vary from site to site, all protective systems at DOE's most sensitive sites employ a defense-in-depth concept that includes the following: a variety of integrated alarms and sensors capable of detecting physical barriers, such as fences and antivehicle obstacles; numerous access control points, such as turnstiles, badge readers, vehicle inspection stations, radiation detectors, and metal detectors; operational security procedures, such as a “two person” rule that prevents only one person from having access to special nuclear material; and hardened facilities and vaults. Each site also has a heavily armed protective force that is often equipped with such items as automatic weapons, night vision equipment, body armor, and chemical protective gear. These protective forces comprise Security Police Officers that are classified into three groups: Security Police Officer-I, Security Police Officer-II, and Security Police Officer-III. Security Police Officer-Is are only assigned to fixed, armed posts. Generally, very few of these officers are used at ESE sites because of the limited roles they can fill. Security Police Officer-IIs generally are assigned to posts such as access control booths, or to foot or vehicle patrols. Finally, Security Police Officers-IIIs are responsible for operations such as hostage rescue and the recapture and recovery of special nuclear material. According to federal regulations, Security Police Officers-IIIs have more demanding physical fitness and training standards than Security Police Officers-Is or Security Police Officers-IIs. At the ESE sites we visited, protective forces work for private contractors and are unionized. The number of qualified Security Police Officers-IIs and Security Police Officers-IIIs at ESE sites is shown in table 3. Protective force duties and requirements, such as physical fitness standards, are explained in detail in DOE Manual 473.2-2, Protective Force Program Manual, as well as in DOE regulations (10 C.F.R. pt. 1046, Physical Protection of Security Interests). DOE issued the current Protective Force Program Manual in June 2000. Although protective forces are expected to comply with the duties and requirements established in DOE policies, deviations from these policies are allowed as long as certain approval and notification criteria are met. Following are the three types of deviations: Variances: Variances are approved conditions that technically vary from DOE security requirements but afford equivalent levels of protection. Waivers: Waivers are approved nonstandard conditions that deviate from DOE security requirements that, if uncompensated, would create a potential security vulnerability. As such, waivers require implementation of what DOE calls compensatory measures. Compensatory measures could include deploying additional protective forces or curtailing operations until the asset can be better protected. Exceptions: Exceptions are approved deviations from DOE security requirements that create a safeguards and security vulnerability. Exceptions are approved only when correction of the condition is not feasible, and compensatory measures are inadequate. In addition to complying with these security requirements, DOE protective systems, including protective forces, also must meet performance standards. For example, DOE sites are required to demonstrate that their protective systems are capable of defending special nuclear material against terrorist forces identified in the DBT. The performance of protective systems is formally and regularly examined through vulnerability assessments. A vulnerability assessment is a systematic evaluation process in which qualitative and quantitative techniques are applied to detect vulnerabilities and arrive at effective protection of specific assets, such as special nuclear material. To conduct such assessments, DOE uses, among other things, subject matter experts, such as U.S. Special Forces; computer modeling to simulate attacks; and force-on-force exercises, in which the site's protective forces undergo simulated attacks by a group of mock terrorists. In addition to their use in evaluating the effectiveness of physical protection strategies, DOE believes force-on-force exercises are the most realistic representation of adversary attacks that can be used to train protective forces. Through a variety of complementary measures, DOE ensures that its contractors are complying with DOE’s safeguards and security policies, including protective force duties and requirements, and that its systems are performing as intended. Contractors perform regular self-assessments and are encouraged to uncover any problems themselves. In addition to routine oversight, DOE orders require field offices to comprehensively survey contractors' operations for safeguards and security every year. DOE's Office of Independent Oversight and Performance Assurance provides yet another check through its comprehensive inspection program. This office performs comprehensive inspections roughly every 18 months at each DOE site that has specified quantities of Category I special nuclear material. All deficiencies (findings) identified during surveys and inspections require the contractors to take corrective action. Since the terrorist attacks of September 11, 2001, DOE security policies have been under almost constant reexamination and have undergone considerable change. For example, the department’s security polices have been undergoing a streamlining process for nearly 2 years. In addition, as we pointed out in our April 2004 report, DOE worked for almost 2 years to develop and issue a new DBT. When DOE issued its first post-September 11 DBT in May 2003, we recommended that DOE reexamine it because, among other things, it contained a terrorist threat that was less than the threat identified in the intelligence community’s Postulated Threat. DOE agreed to reexamine the 2003 DBT and issued a revised and more demanding DBT in October 2004. The October 2004 DBT significantly increased the terrorist threat to DOE facilities and required enhanced protection strategies for DOE facilities. Under the new DBT, sites with Category I special nuclear material will not have to be fully prepared to defend their sites against the terrorist threat contained in the new 2004 DBT until October 2008. By July 29, 2005, DOE sites will have to forward 2004 DBT implementation plans to the Deputy Secretary of Energy and, within 3 months, begin submitting quarterly DBT implementation reports. At the time of our review, cost estimates were still preliminary, but security officials at ESE sites said that they may require collectively an additional $384-$584 million over the next several years in order for all ESE sites with Category I special nuclear material to meet the 2004 DBT. We found that the majority of the 105 protective force members we interviewed at ESE sites generally believe that they currently are ready to perform their mission of protecting the site’s special nuclear material. Consistent with that belief, the five ESE sites we visited had the required training programs, facilities, and equipment, and the 105 protective force members whose records we reviewed were generally meeting the readiness requirements contained in the DOE orders and federal regulations. However, we did find some weaknesses at ESE sites that could adversely affect the ability of ESE protective forces to defend their sites. These include protective force officers’ lack of regular participation in force-on-force exercises; the frequency and quality of training opportunities; the lack of dependable communications systems; and insufficient protective gear, including protective body armor and chemical protective gear, and the lack of armored vehicles. Readiness is defined by the Department of Defense (DOD) as the ability of forces to deploy quickly and to accomplish specific goals and missions. In particular, DOD believes that a ready force should possess a sufficient number of experienced, trained, and properly equipped personnel. Through realistic and comprehensive training, these personnel are forged into a cohesive unit that can perform its tasks even under extreme conditions. DOE orders and federal regulations establish the framework for ensuring that DOE protective forces are ready to perform their mission. ESE protective force officers generally believe that they are ready to perform their mission. Specifically, 102 of the 105 officers we interviewed stated that they believed that they, and their fellow officers, understood what was expected of them should the site be attacked by a terrorist group. Moreover, 65 of the 105 officers rated the readiness of their site’s protective force as high, while 20 officers rated their protective force as somewhat or moderately ready to defend the site. Only a minority of the officers (16 of 105) we interviewed rated the readiness of their force to defend their sites as low. Two officers were uncertain of their forces’ readiness, and two did not respond to the question. In addition, the majority of officers we interviewed believed they and the protective force officers with whom they worked on a regular basis formed a cohesive unit that would be able to perform their most essential mission of protecting special nuclear material. Specifically, of the 105 officers we interviewed, 86 reported that they were satisfied with their jobs, 73 reported that their morale was high or at least moderately high, 91 reported that protective force officers had developed the necessary teamwork to defend the site against a terrorist attack, 84 officers responded that they had a high degree of confidence in their fellow officers in the event of a terrorist attack, and 88 reported that their fellow officers would be willing to risk their lives in defense of their site. As called for in DOE’s Protective Force Program Manual, readiness is achieved through appropriate training and equipment. Each of the five sites we visited had formally approved annual training plans. Each site generally had the training facilities, such as firearms ranges, classrooms, computer terminals, and exercise equipment, which enabled them to meet their current DOE and federal training requirements. Furthermore, each site maintained computerized databases for tracking individual protective force officers’ compliance with training requirements. To determine if these programs and facilities were being used to implement the DOE requirements and federal regulations, we focused on three key areas—firearms proficiency, physical fitness, and protective force officer equipment. DOE’s Protective Force Program Manual states that protective force officers must demonstrate their proficiency with the weapons that are assigned to them every 6 months. According to the training records of the 105 protective force officers we interviewed, 79 had met this proficiency requirement with their primary weapon, the M-4 or M-16 semiautomatic rifle. Of the 26 officers who had not met this requirement within the 6 month time frame, 11 officers were all located at one site with 8 of the 11 officers not meeting the requirement until 2 to 5 months after the required time. According to an official at this site, 7 of the 8 officers could not complete the requirement in a timely fashion because the site’s firing range was closed for the investigation of an accidental weapon discharge that had resulted in an injury to a protective force officer. Although the DOE Protective Force Program Manual provides guidance that allows for off-site training to meet requirements, officials noted that a stand-down of all firearms training prevented training requirements from being met. We determined that 2 of the 26 officers did not complete the requirement for medical reasons. We were not given reasons why the remaining officers did not meet the requirement. Under DOE regulations, protective force personnel employed by DOE contractors who are authorized to carry firearms must meet a minimum standard for physical fitness every 12 months. There are two standards for such personnel—Offensive Combative and Defensive Combative. All Security Police Officer-IIIs, which include DOE special response team members, must meet the Offensive Combative standard which requires a 1-mile run in no more than 8 minutes 30 seconds and a 40-yard prone-to-running dash in no more than 8 seconds. All other protective officers authorized to carry firearms must meet the Defensive Combative standard, which requires a one-half mile run in no more than 4 minutes 40 seconds and a 40-yard prone-to-running dash in no more than 8.5 seconds. According to the training records of the 105 protective force officers we reviewed, 103 of the 105 protective force officers had met the standard required by federal regulation for their position. Two officers who did not meet the requirement were on medical restriction. The records for another officer showed him as having met the requirement, but additional records provided by the site showed the officer had completed the run in a time that exceeded the standard. Site officials could not provide an explanation for this discrepancy. DOE’s Protective Force Program Manual sets a number of requirements for protective force equipment. Among these requirements are the following: Minimum standard duty equipment. All Security Police Officers are required to carry a minimum set of equipment, including a portable radio, a handgun, and an intermediate force weapon such as a baton. In addition, a mask to protect against a chemical attack must be carried or available to them. All Security Police Officer-IIs and Security Police Officer-IIIs must also have access to personal protective body armor. Firearms serviceability. Firearms must be kept serviceable at all times and must be inspected by a DOE-certified armorer at least twice a year to ensure serviceability. All DOE sites with armed protective force personnel are required to have the services of a certified armorer who is responsible for inspecting, maintaining, and repairing firearms. Firearms inventories. Issued firearms must be inventoried at the beginning of each shift, and an inventory of all firearms in storage must be conducted weekly. A complete inventory of all firearms must be conducted on a monthly basis. Appropriate equipment to counter the DBT. In line with DOE’s performance standards, DOE protective forces equipment must be tailored to counter adversaries identified in the DBT. To this end, sites employ a variety of equipment including automatic weapons, night vision equipment, and body armor. In most cases, each site’s protective forces carried or had access to the required minimum standard duty equipment. Most sites demonstrated that they had access to certified armorers, and each site maintained the required firearms maintenance, inspection, and inventory records, often kept in a detailed computerized database. We did not, however, conduct a detailed inspection of these records nor did we conduct an independent inventory of each site’s firearms. The appropriate policies and procedures were also in place for the inventory of firearms. In addition, some sites have substantially increased their protective forces weaponry since September 11, 2001, or have plans to further enhance these capabilities to meet the 2004 DBT. For example, one site provided us with a list of upgrades since September 11, 2001, including new M-4 carbines, grenade launchers, Barrett .50 caliber rifles, armor piercing ammunition, chemical and biological protection suits, and decontamination kits, as well as additional units that use specially trained dogs (K-9 units) and portable X-ray machines to detect explosives. While protective forces at ESE sites are generally meeting current DOE requirements, we identified some weaknesses in ESE protective force practices that could adversely affect the current readiness of ESE protective forces to defend their sites. These include protective force officers’ lack of regular participation in force-on-force exercises; the frequency and quality of training opportunities; the lack of dependable communications systems; and insufficient protective gear, including protective body armor and chemical protective gear, and the lack of armored vehicles. According to DOE’s Protective Force Program Manual, performance tests are used to evaluate and verify the effectiveness of protective force programs and to provide needed training. Performance tests can also identify protective systems requiring improvements, validate implemented improvements, and motivate protective force personnel. A force-on-force exercise is one type of performance test during which the protective force engages in a simulated battle against a mock adversary force, employing the weapons, equipment, and methodologies postulated in the DBT. DOE believes that force-on-force exercises are a valuable training tool for protective force officers. Consequently, DOE policy requires that force-on-force exercises must be held at least once per year at sites that possess Category I quantities of special nuclear material or Category II quantities that can be rolled up to Category I quantities. We asked protective force members whether they had participated in force-on-force exercises during their service at their site and when they most recently had participated. Eighty-four of the 105 protective force officers we interviewed reported that they had participated in a force-on-force exercise, but 8 reported they had never participated during their service at the site, and 13 did not respond to this question. Of the 84 protective force officers that had participated, 60 reported participating within 12 months of the interview, 10 had participated within the last 2 to 5 years, one had participated 13 years ago, one could not remember the last force-on-force he had participated in, 12 did not respond to the question. We were unable to verify whether protective force officers’ recollections were accurate because DOE sites are not required to track individual participation in force-on-force exercises. However, DOE’s Office of Security and Safety Performance Assurance 2004 review of protective forces found that the average protective force officer is only likely to participate in a force-on-force exercise once every 4 to 6 years. DOE’s Office of Security and Safety Performance Assurance has concluded that this frequency is not adequate for the training of protective forces. DOE’s 2004 protective force review also found that the frequency, quality, and rigor of performance tests and training exercises vary widely throughout the complex. Our interviews of protective force officers and protective force managers produced a similar result. For example, we asked protective force members whether they believed the force-on-force exercises they participated in were realistic and challenging. Only 23 of the 84 protective force officers that had participated in these exercises believed they were realistic while 23 stated they were somewhat realistic. In contrast, 38 officers believed that the force-on-force exercises they had participated in were not realistic. Twenty officers did not respond to the question. In addition, 33 of the 84 protective force officers reported that safety considerations interfered with the realism of the force-on-force exercises with some protective force officers stating that they were limited in the tactics they could employ. For example, some protective force officers stated that they were not allowed to run up stairwells, climb fences, or exceed the speed limit in patrol vehicles. Some protective force officers at one site reported that for safety reasons they were no longer allowed to deploy on the roof of a facility although this position provided a significant advantage over adversaries approaching the facility. Some contractor protective force managers agreed that safety requirements limited the kind of realistic force-on-force training and other forms of realistic training that are needed to ensure effective protective force performance. More broadly, most of the 105 protective force officers reported some negative attitudes about the training they had received. Specifically, 85 of the 105 protective force officers we interviewed identified a number of deficiencies with their training, especially regarding the frequency and quality of firearms and tactical training. The following deficiencies were identified: 43 protective force officers reported that there was a lack of adequate firearms training, with 13 officers noting that the only training they had was when they went to satisfy the semiannual DOE qualification requirements. Some officers also reported that they did not have first priority at firing ranges because other local or federal law enforcement agencies were using them. 42 protective force members, including 16 officers who are members of special response teams, reported that tactical training opportunities—where protective force officers move, shoot, and communicate as a unit—at their respective sites were very limited. A review of the standard DOE training curricula for Security Police Officer-IIs showed that these officers currently receive very little tactical training. According to DOE’s Protective Force Program Manual, protective force officers must have the capability to communicate information among themselves. The radios these officers use must be capable of two-way communications, provide intelligible voice communications, and be readily available in sufficient numbers to equip protective force personnel. In addition, a sufficient number of batteries must be available and maintained in a charged condition to support routine, emergency, and response operations. Protective force officers at all five of the sites we visited reported problems with their radio communications systems. Specifically, 66 of the 105 protective force officers reported that they did not always have dependable radio communications, with 23 officers identifying sporadic battery life, and 29 officers reporting poor reception at some locations on site as the two most significant problems. In addition, some of the protective force officers believed that radio communications were not sufficient to support their operations and could not be relied on to transfer information between officers if a terrorist attack occurred. Site security officials at two sites acknowledged that efforts were under way to improve radio communications equipment. In addition, some security officials said other forms of communications, such as telephones, cellular telephones, and pagers, were provided for protective forces to ensure that they could communicate effectively. DOE’s Protective Force Program Manual requires that Security Police Officer-IIs and -IIIs wear body armor or that body armor be stationed in a way that allows them to quickly put it on to respond to an attack without negatively impacting response times. At one site, we found that most Security Police Officer-IIs had not been issued protective body armor because the site had requested and received in July 2003 a waiver to deviate from the requirement to equip all Security Police Officer-IIs with body armor. The waiver was sought for a number of reasons, including the (1) increased potential for heat-related injuries while wearing body armor during warm weather, (2) increased equipment load that armor would place on protective force members, (3) costs of acquiring the necessary quantity of body armor and the subsequent replacement costs, and (4) associated risks of not providing all Security Police Officer-IIs with body armor could be mitigated by using cover provided at the site by natural and man-made barriers. According to a site security official, this waiver is currently being reviewed because of the increased threat contained in the 2004 DBT. Security Police Officer-IIIs serve on special response teams responsible for offensive operations, such as hostage rescue and the recapture and recovery of special nuclear material. Special response teams are often assigned unique equipment, including specially encrypted radios; body armor that provides increased levels of protection; special suits that enable officers to operate and fight in chemically contaminated environments; special vehicles, including armored vehicles; submachine guns; light machine guns; grenade launchers; and precision rifles, such as Remington 700 rifles and Barrett .50 caliber rifles. These response teams are also issued breaching tools to allow them to reenter facilities to which terrorists may have gained access. Each site with Category I special nuclear material must have a special response team capability available on a continuous basis. However, one ESE site does not have this capability and, instead, relies on another organization, through a formal memorandum of understanding, to provide a special response team. This arrangement, however, has not been comprehensively performance tested, as called for in the memorandum of understanding. Site officials state that they will soon conduct the first comprehensive performance test of this memorandum of understanding. DOE’s Protective Force Program Manual specifies that all Security Police Officer-II and -IIIs be provided, at a minimum, with protective masks that provide for nuclear, chemical, and biological protection. Other additional chemical protective gear and procedures are delegated to the sites. At the four sites with special response teams, we found that the teams all had special suits that allowed them to operate and fight in environments that might be chemically contaminated. For Security Police Officer-IIs, chemical protective equipment and expectations for fighting in chemically contaminated environments varied. For example, two sites provided additional protective equipment for their Security Police Officer-IIs and expected them to fight in such environments. Another site did not provide additional equipment, but expected its Security Police Officer-IIs to evacuate along with other site workers. Finally, the one site that did not have a special response team expected its Security Police Officer-IIs to fight in chemically contaminated environments. However, the site provided no additional protective gear for its officers other than standard-duty issue long-sleeved shirts and the required protective masks. DOE’s Protective Force Program Manual requires that protective force vehicles exhibit a degree of reliability commensurate with their intended functions and enhance the efficiency, speed, and safety of routine and emergency duties under all expected weather conditions. Vehicles must be maintained in serviceable condition, with preventive maintenance performed at intervals that meet or exceed the manufacturer recommendations. Nearly half (14 of 30) of the protective force officers we interviewed at two sites reported that patrol vehicles were old, in poor physical condition, and not suitable for pursuit and recovery missions. Some reported maintenance as a significant problem, with one officer observing that more vehicles were in the shop than on patrol. Some protective force officers also reported that door handles on patrol vehicles did not work, which made it difficult for them to enter and exit the vehicles. A site security official told us that they had never had problems with the physical condition or maintenance of patrol vehicles, but did note that they had experienced difficulties in acquiring new vehicles. We also found that ESE sites currently do not have the same level of vehicle protection as NNSA sites that also have Category I special nuclear material. Specifically, while not a DOE requirement, all NNSA sites with Category I special nuclear material currently operate armored vehicles. However, only one of the five ESE sites with Category I special nuclear material operated armored vehicles at the time of our review. One other ESE site was planning to purchase armored vehicles. To successfully defend against the much larger terrorist threat contained in the 2004 DBT by October 2008, DOE and ESE officials recognize that they need to take several prompt and coordinated actions. These include the transformation of current protective forces into an “elite force,” the development and deployment of new security technologies, the consolidation and elimination of special nuclear material, and organizational improvements within ESE’s security program. However, because these initiatives, particularly an elite force, are in early stages of development and will require significant commitment of resources and coordination across DOE and ESE, their completion by the October 2008 DBT implementation deadline is uncertain. DOE officials believe that the way its sites, including those sites managed by ESE, currently train their contractor-operated protective forces will not be adequate to defeat the terrorist threat contained in the 2004 DBT. This view is shared by most protective force officers (74 out of 105) and their contractor protective force managers who report that they are not at all confident in their current ability to defeat the new threats contained in the 2004 DBT. In response, DOE has proposed the development of an “elite force” that would be patterned after the U. S. military’s Special Forces. However, creating this elite force is a complex undertaking and will be a challenge to fully realize by the October 2008 implementation deadline. Even before the issuance of the 2004 DBT, DOE had become concerned about protective force preparedness because of intense demands placed on protective forces following the September 11, 2001, terrorist attacks. The need to increase security at DOE sites as rapidly as possible following the 2001 attacks meant that DOE protective forces worked extensive overtime. DOE’s Inspector General, DOE’s Office of Security and Safety Performance Assurance, and GAO reported on the potential for large amounts of protective force overtime to increase fatigue, reduce readiness, and reduce training opportunities for protective forces. In recognition of this situation, in September 2003, the Secretary of Energy directed DOE’s Office of Performance Assurance and Independent Assessment, now a part of the Office Security and Safety Performance Assurance, to conduct a special review to determine the effectiveness of the management of protective forces and protective force capabilities. This classified review, which was issued in June 2004 and covered five NNSA sites and one ESE site, found that the current organization and tactics of DOE protective forces need improvement to deal with possible terrorist threats. Historically, DOE protective forces had been more concerned with a broad range of industrial security and order-keeping functions than with preparation to conduct a defensive battle against a paramilitary attacker, as is described in the 2004 DBT. The June 2004 review recommended a shift to an aggressive military-like, small-unit, tactical defense posture, which included enhanced tactical training standards to allow protective forces to move, shoot, and communicate effectively as a unit in a combat environment. The review also recommended more frequent, realistic, and rigorous force-on-force performance testing and training for the department’s protective forces. Based on this review, the Secretary of Energy proposed transforming DOE’s protective force that safeguards special nuclear material into an “elite force” with training and capabilities similar to the military’s Special Forces units. Subsequently, in June 2004, the Deputy Secretary of Energy directed the formation of a Protective Forces Working Group to formally review missions, standards, and current protective force status as the basis for developing recommendations on policy, training, and equipment that, if enacted, could serve as the basis for creating an elite force. This working group consisted of representatives from DOE’s Office of Security and Safety Performance Assurance, NNSA, and ESE’s Office of Environmental Management. In August 2004, the working group recommended a set of near-term actions that could be used to elevate protective force capabilities. These included instituting more demanding medical and physical fitness standards, increasing tactical training, and reorganizing protective forces into tactically cohesive units. In October 2004, the working group also recommended considering federalizing DOE protective forces as a long-term option. In January 2005, the Deputy Secretary of Energy endorsed the report’s findings and directed that implementation actions begin. Most protective force officers we interviewed generally support some of the ideas embodied in the elite force concept. Specifically, most protective force officers (74 out of 105) at the ESE sites we visited reported that they are not at all confident in their current ability to defeat the new threats contained in the 2004 DBT. In particular, some protective force officers believed that they would be outgunned and overwhelmed by the terrorist force identified in the 2004 DBT. In addition, some feared they could be surprised by a large terrorist force because of the sites’ security strategy and the physical layout of their sites. Some sites are already responding to the elite force concept by increasing tactical training, and others plan to institute “training relief shifts,” which will increase the amount of time protective force officers have available for uninterrupted training. Some sites also have ambitious plans for constructing new facilities to enable increased tactical training. Nevertheless, despite broad support and some sites’ progress, DOE’s proposal for an elite force remains largely in the conceptual phase. DOE has developed a preliminary draft implementation plan that lays out high-level milestones and key activities, but this plan has not been formally approved by the Office of Security and Safety Performance Assurance. The draft implementation plan recognizes that DOE will have to undertake and complete a number of complex tasks in order to develop the elite force envisioned. For example, DOE will have to revise its existing protective forces policies to incorporate, among other things, the increased training standards that are needed to create an elite force. This may be a time-consuming effort. As we reported in April 2004, the DOE policy process emphasizes developing consensus through a laborious review and comment process by program offices. We found that this policy process contributed to the nearly 2 years it took the department to develop DOE’s first post-September 11, 2001, DBT. Likewise, DOE has been working on a streamlined overall security policy for nearly 2 years. Once this streamlined policy is formally issued, now scheduled for summer 2005, DOE’s draft implementation plans for an elite force call for the new policy to immediately undergo revision to incorporate elements of the elite force concept. DOE’s Office of Security has not yet identified a time frame for completing these actions. In addition, DOE officials believe that broader DOE policies will have to be revised. For example, DOE security officials, as well as contractor protective force managers, see some DOE health and safety policies and practices as an impediment because they do not allow the kind of realistic and physically demanding training that is required for an elite force. According to these officials, revising these policies will require broad, high-level support within DOE. Furthermore, some DOE protective force requirements, such as medical, physical fitness, and training standards are mandated by DOE regulations. Changing these regulations, according to a DOE security official, would require DOE to follow rule-making procedures. All these protective force policies and regulations, as well as broader DOE policies are contained in collective bargaining agreements between protective force unions and protective force contractors and in protective force contracts, which also will need to be modified to create the kind of elite force that DOE believes is necessary to defeat the 2004 DBT. Some site security officials recognize that they will have to carefully craft transition plans for currently employed protective force officers who may not be able to meet the new standards required for an elite force. Some of these officials have expressed concern about the ability of some protective force officers to meet more rigorous physical and training standards that are likely to be part of an elite force. DOE field security officials and contractor protective force managers likewise have expressed concern about finding ways for less capable protective force officers to move into different roles or retire from service with a sense of dignity. Because all the protective forces at the five ESE sites we visited operated, at the time, under separate contracts and separate collective bargaining agreements, there is no uniform benefit or retirement plan for protective forces, and these benefits, according to one contractor security official, differ considerably among sites. Some contractor protective force managers recognized that they needed such mechanisms as early retirement incentives and more attractive retirement packages to make the effective transition to an elite force. They believed, however, that they would not be able to provide these mechanisms, most of which are quite expensive, without DOE’s help. Officials from the one protective force contractor, which had a placement and income protection program for protective force officers who could no longer meet existing DOE requirements, said that payouts from the program have far exceeded contributions and that the program will have to be restructured in the near future. Given these complexities, DOE security officials recently told us that implementing all the measures associated with the elite force concept will take about 5 years to complete. With this time line, the development of the elite force will be under way by the new DBT’s implementation deadline of October 2008, but the full benefit of an elite force, according to DOE’s own preliminary plans, will not be realized until fiscal year 2010. DOE is seeking to improve the effectiveness and survivability of its protective forces through the development and deployment of new security technologies. The department believes technologies can reduce the risk to protective forces in case of an attack and provide additional response time to meet and defeat an attack. Many of the ESE sites we visited currently possess some advanced security technology. For example, all sites operate central alarm stations that often integrate hundreds of alarms and dozens of sensors, such as video cameras and infrared and microwave detection systems, as well as redundant communications systems. Some sites also have thermal imaging sensors, which can detect adversaries at long ranges and in all types of weather. Some of these sensors have data links that allow the information to be rapidly shared. One site deploys classified devices that can immobilize or delay the movement of an adversary. DOE officials believe that additional technology can further enhance site security. The Office of Security and Safety Performance Assurance is assisting sites in identifying and deploying existing technologies to enhance protection systems, principally through the following programs: Technology and Systems Development Program. DOE has funded this program for many years, although funding has been reduced in recent years. Specifically, DOE provided over $20 million for this program in fiscal year 2004. However, DOE only requested $14.5 million for this program in fiscal year 2006–about 1 percent of the entire DOE security program budget. Moreover, the program has had only limited success in developing technologies that can actually be deployed. The Director of DOE’s Office of Security and Safety Performance Assurance recently stated that DOE has not yet taken the formal steps necessary to coordinate investment in emerging security technologies to ensure they are deployed at DOE sites in a timely manner. Site Assistance Visit Program. Immediately after the issuance of the 2004 DBT, DOE’s Office of Security and Safety Performance Assurance embarked on site assistance visits—a targeted effort to encourage the use of technologies that could offset the more costly manpower-intensive approaches needed to meet the more demanding requirements of the DBT. These site assistance visits focus on new and emerging security technologies. Each site visit lasts approximately 2 weeks and consists of exercises and simulations designed to evaluate each site’s preliminary plans for meeting the new DBT and to demonstrate how technologies can assist in countering the 2004 DBT in a cost-effective manner. DOE conducted these visits between October 2004 and April 2005. Four of the five ESE sites we examined have received these visits. DOE’s Office of Security and Safety Performance Assurance completed the final report on the results of the site assistance visits in May 2005. DOE plans to use the results of these visits to help justify its fiscal year 2007 budget. Even before the site assistance visits, ESE sites were actively considering advanced security technologies. For example, at least two ESE sites are considering installing automatic weapons that can be operated from remote, secure locations—known as remotely operated weapons systems within DOE. A few ESE protective forces also supported this push toward technology, especially technology that allows more timely detection of adversaries. Specifically, 16 of the 105 protective force officers we interviewed said they needed enhanced detection technologies that would allow adversaries to be detected and engaged at much greater ranges than is currently possible at most sites. ESE’s current strategy for meeting the October 2008 deadline for compliance with the 2004 DBT relies heavily on the consolidation and elimination of special nuclear materials between and among other ESE sites. At all five of the ESE sites with Category I special nuclear material, material consolidation and elimination are important goals for the site and the responsible DOE program office and are inextricably tied to security plans. However, neither ESE nor DOE has developed a comprehensive, departmentwide plan to achieve the needed cooperation and agreement among the sites and program offices to consolidate special nuclear material, as we recommended in our April 2004 report. In the absence of such a comprehensive, coordinated plan, completing some of these significant activities by the October 2008 DBT implementation deadline is unlikely. In particular: Savannah River Site. Currently, special nuclear material is stored in three separate, widely dispersed areas at the Savannah River Site—an Office of Environmental Management (EM) site. In November 2004, EM directed the site to consolidate all its current and future storage of Category I special nuclear material into a single area by fiscal year 2007. This consolidation will free up over 100 protective force officers who currently guard facilities at the sites’ two other areas. It will also allow for a substantially increased protective force presence at the single remaining area and could save the site over $100 million in expected costs to implement measures to defend the site against the 2004 DBT. Hanford Site. Hanford, another EM site, had plans to transfer most of its special nuclear material to the Savannah River Site by the end of fiscal year 2006. However, a number of factors threaten to delay this transfer of material. These factors include (1) NNSA’s Office of Secure Transportation’s shipping and load restrictions on transporting special nuclear material across the United States, (2) the Savannah River Site’s inability to store some of Hanford’s special nuclear material in its present configuration, and (3) the Savannah River Site’s current lack of facilities to permanently dispose of Hanford’s special nuclear material. Faced with these challenges, EM decided in February 2005 to postpone shipping material from Hanford until these issues could be resolved. Hanford had begun planning for such a contingency, but the site will now have to expend additional funds of about $85 million annually to protect these materials against the 2004 DBT. Idaho National Engineering and Environmental Laboratory and Argonne National Laboratory-West. Managed by the Office of Nuclear Energy, Science and Technology, the Idaho National Engineering and Environmental Laboratory had removed—by NNSA’s Office of Secure Transportation—its currently known Category I special nuclear material from its single Category I storage facility in May 2005. Removal will allow a substantial number of its protective forces to transfer to the nearby Argonne National Laboratory-West site, which has a continuing Category I special nuclear material mission. These additional protective forces will be critical to helping the site meet the 2004 DBT. However, a recent DOE site assistance visit suggested that several other facilities at the Idaho National Engineering and Environmental Laboratory may have some previously unrecognized Category I special nuclear material. Site security officials report that they are trying to resolve these issues with DOE’s Office of Security and Safety Performance Assurance. If any of these other Idaho National Engineering and Environmental Laboratory facilities do have Category I special nuclear material, they will require additional protection, which could severely damage the current DBT implementation plans for both Idaho sites. In addition, because of its remote location, the robust design of some of its facilities, its large protective force, and extensive training facilities, the Idaho National Engineering and Environmental Laboratory is now being evaluated as a potential future consolidation location for NNSA Category I special nuclear material. Oak Ridge National Laboratory. Oak Ridge National Laboratory, an Office of Science Site, plans to eliminate its Category I special material. Current plans call for down-blending this material in place to less attractive forms and for extracting medically useful isotopes that may help treat certain forms of cancer. The Office of Nuclear Energy, Science and Technology is responsible for this down-blending program. However, the costs for this program have risen steeply, even without the additional security costs of the meeting the 2004 DBT. In addition, the Office of Nuclear Energy, Science and Technology and the Office of Science have not formally agreed on which program office will bear the brunt of the estimated $53 million annual security costs required to meet the implementation deadline for the 2004 DBT. If these issues can be resolved, down-blending operations are scheduled to begin in fiscal year 2009 and to be completed in fiscal year 2012. If down-blending operations do not take place, Oak Ridge National Laboratory will face high additional security costs—approaching an additional $43 million each year, according to preliminary site estimates—as long as the material remains on-site. ESE’s current organization is not well suited to meeting the challenges associated with implementing the 2004 DBT. First, ESE lacks a formally appointed senior security advisor or a centralized security organization. In contrast, NNSA has such a position. Specifically, Title 32 of the National Defense Authorization Act for Fiscal Year 2000, which created NNSA, established the position of Chief, Defense Nuclear Security, to serve as the primary security advisor to the NNSA Administrator. The Chief is responsible for the development and implementation of NNSA security programs, including the physical security for all NNSA facilities. Over the past several years, ESE has recognized the need for such a position and has sought to fill the security advisor role through the use of employees temporarily detailed from other organizations. For example, beginning in 2004, a detailee from the Office of Security and Safety Performance Assurance has served as the Acting Director for ESE Security. The current acting director was preceded by a visiting White House Fellow. However, the position of the Director for ESE Security has no programmatic authority or staff. This lack of authority limits the director’s ability to help facilitate ESE and DOE-wide cooperation on such issues as material down-blending at Oak Ridge National Laboratory and material consolidation at other ESE sites. Second, ESE does not have a consolidated headquarters security office. In April 2005, the recently confirmed ESE Under Secretary stated that ESE was composed of “institutional ‘stovepipes’” and that this structure has hampered strategic management within ESE. ESE has explored creating a consolidated headquarters security office, but each of the three program offices we examined continues to maintain its own headquarters security offices. These offices, however, are organized and staffed differently. For example, the Office of Environmental Management’s headquarters security office has more than 17 professional security personnel on staff. In contrast, the headquarters offices of Science and of Nuclear Energy, Science and Technology each have only one and two security professionals on staff, respectively. For the Office of Nuclear Energy, Science and Technology this situation is problematic because its security responsibilities are increasing with the consolidation of two of its sites into the Idaho National Laboratory and with the Oak Ridge National Laboratory’s down-blending program. Indeed, safeguards and security funding is a much larger percentage of the Office of Nuclear Energy, Science and Technology’s total budget—$75 million out of a total fiscal year 2006 budget request of $511 million, about 15 percent—than it is for either the Office of Science or the Office of Environmental Management. As a result, according to the EM Security Director and Acting Director, ESE security, the Environmental Management security office provides informal support to the other ESE programs offices, including the Offices of Nuclear Energy, Science and Technology and Science. Successfully defending against the increased terrorist threat contained in the 2004 DBT will require a significant coordinated effort by DOE, ESE, and the ESE sites that contain Category I special nuclear material. While ESE sites are not required to meet the requirements of the 2004 DBT until October 2008, we believe that ESE needs to take action to correct weaknesses with its current training and equipment practices. Addressing these issues will put ESE protective forces in a better position to defend their sites, in the short run, while DOE and ESE press ahead on the broader initiatives, such as the elite force concept and materials consolidation that they believe will be necessary to meet the requirements of the 2004 DBT. While we support DOE’s and ESE’s broader initiatives, we believe that these initiatives cannot be successfully implemented without a more strategic approach. Such an approach will need to include a comprehensive plan for all of the initiatives DOE and ESE are considering and will need to be supported by a sound ESE management structure that has sufficient authority to ensure coordination across all ESE program offices that have Category I special nuclear material. In order to ensure that DOE and ESE protective forces can meet the new terrorist threat contained in the 2004 DBT, we are making the following five recommendations to the Secretary of Energy: Develop a requirement for individual protective force officer participation in force-on-force exercises. Require that sites track protective force member participation in force-on-force exercises. Take immediate action to correct weaknesses in protective force equipment at ESE sites by providing the following where needed: body armor, special response team capabilities, and vehicles that provide enhanced protection for protective forces. Develop and implement a departmentwide, multiyear, fully resourced implementation plan for meeting the new 2004 DBT requirements that includes detailed plans for the creation of an elite force through the revision of existing DOE protective force policies and practices, the development and deployment of enhanced security technologies, the transportation and consolidation of special nuclear materials. Require the Under Secretary, ESE, to establish a security organization to oversee the development, implementation, and coordination of ESE, and broader DOE efforts, to meet the 2004 DBT. We provided DOE with a copy of this report for review and comment. DOE stated that it concurred with the report and accepted our recommendations. In that context, DOE provided an update on the actions it anticipated would address our recommendations. While we believe that most of DOE’s anticipated actions will be responsive to our recommendations, we are concerned about DOE’s response to our recommendation that it develop a departmentwide, multiyear, fully resourced implementation plan for meeting the 2004 DBT requirements. Specifically, in responding to this recommendation, DOE cited only individual efforts to address the development of an elite force, the deployment of enhanced security technologies, and the consolidation of special nuclear material, not the development of a comprehensive plan. While each of these efforts is important, as we demonstrated in our report, the success of these efforts requires close coordination across numerous DOE, ESE, as well as NNSA organizations. We continue to believe that DOE cannot be successful in meeting the requirements of the 2004 DBT by its deadline of October 2008 without an integrated effort that is built around a comprehensive plan. DOE also provided three additional technical changes that we have incorporated. DOE’s letter commenting on our draft report is presented in appendix II. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Energy, the Director of the Office of Management and Budget, and appropriate congressional committees. We also will make copies of this report 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 or need additional information, please contact me at (202) 512-3841 or aloisee@gao.gov. 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. To obtain an overall perspective on how protective forces are prepared to defend Department of Energy (DOE) sites, we reviewed relevant literature focusing on Special Nuclear Materials, DOE’s protective forces, and reports by DOE’s Inspector General, as well as previous GAO reports. We conducted multiple rounds of interviews with DOE headquarters officials and conducted document reviews. We also met with DOE and protective force officials at five sites under the oversight of DOE’s Office of the Under Secretary for Energy, Science and Environment: Oak Ridge National Laboratory, Idaho National Engineering and Environmental Laboratory, Argonne National Laboratory–West, the Savannah River Site, and the Hanford Site. To determine the extent to which protective forces at Office of the Under Secretary for Energy, Science and Environment sites are meeting DOE’s existing readiness requirements, we reviewed DOE policies to determine current requirements. We also reviewed pertinent literature about the factors that affect the readiness of military forces. We conducted structured interviews with 105 ESE protective force officers at the five ESE sites. We took several steps to ensure that we selected protective force officers independently and interviewed protective force officers with varying levels of experience. We interviewed a nonprobability sample of protective force officers from all five ESE sites. Even though we are not generalizing to the population as a whole, at each site we randomly selected the protective force officers to interview. Random selection protects against selection bias and helps assure that the officers we interviewed were independent of site management. Specifically, we obtained a complete roster of all protective force officers at each site, which included the name, position, area assignment, and length of service for each protective force officer and identified the dates and potential time slots for the interviews during our site visits. We submitted modified rosters to the security contractor with the potential interview time slots, and the contractor resubmitted this roster with the availability of each protective force officer. We then stratified protective force officers by position, rank, and length of service and assigned them random numbers from a random number table. We also assigned random numbers, in sequence from the random number table, to protective force officers at each site, eliminating random numbers to ensure that no random number was ever used twice. The random numbers assigned to protective force officers were placed in chronological order and officers were selected based on the lowest random number assigned, their availability during the prescribed time slots, position, area assignment, and length of service. Lastly, we informed the security contractor at each site of those protective force officers we wished to interview prior to our site visit. The structured interviews were administered by two-person teams to Security Police Officer-IIs and Security Police Officer-IIIs. We asked the officers questions designed to determine their readiness to defend the sites, including questions about their morale, training, and equipment. We also reviewed the training records and physical fitness qualifications of the 105 officers to determine if key elements of their training complied with existing DOE training requirements. In particular, we reviewed selected firearms and physical fitness qualifications to determine if these officers complied with existing DOE requirements and federal regulations. Finally, we reviewed the equipment ESE protective forces use to determine if it met current DOE requirements. For example, we reviewed the minimum standard duty equipment that was employed at each site. We also checked to ensure that most sites’ armorers were certified as required by DOE and, for most sites, we inspected armories, inspection records, as well as firearms inventory procedures. Finally, we reviewed the types of equipment that some sites are evaluating and/or planning to purchase. To determine what actions DOE and ESE will need to take to successfully defend against the new threat identified in the 2004 DBT by DOE’s implementation deadline of October 2008, we reviewed the 2004 DBT and associated guidance documents. We discussed the 2004 DBT with officials in DOE’s Office of Security and Safety Performance Assurance and with officials in ESE’s Offices of Environmental Management; Nuclear Energy, Science and Technology; and Science. Where available, we reviewed documents prepared by ESE and contractor officials on how they plan to comply with the 2004 DBT. We discussed DOE’s initiative to transform its current protective force into an elite force with DOE’s Office of Security and Safety Performance Assurance and security officials at all five of the ESE sites with Category I special nuclear material. We also discussed site assistance visits and their concentration on security technology with DOE security officials. Furthermore, we reviewed recent DOE congressional testimony on the role of security technology and reviewed the relevant portion of the fiscal year 2006 DOE budget submission. In addition, we discussed plans for special nuclear material consolidation with ESE program security officials and site security officials. Finally, we discussed ESE’s security organization with DOE’s Office of Security and Safety Performance Assurance, ESE’s Acting Security Director, and ESE program security offices. We also reviewed congressional testimony given by the Under Secretary of Energy at his recent confirmation hearing. In addition to the individual named above, Don Cowan, Joyce Evans, Doreen Feldman, Jonathan Gill, Preston Heard, James Noel, Joe Oliver, and Carol Hernstadt Shulman made key contributions to this report. | A successful terrorist attack on a Department of Energy (DOE) site containing nuclear weapons material could have devastating effects for the site and nearby communities. DOE's Office of the Under Secretary for Energy, Science and Environment (ESE), which is responsible for DOE operations in areas such as energy research, manages five sites that contain weapons-grade nuclear material. A heavily armed paramilitary force equipped with such items as automatic weapons protects ESE sites. GAO was asked to examine (1) the extent to which ESE protective forces are meeting DOE's existing readiness requirements and (2) the actions DOE and ESE will need to take to successfully defend against the terrorist threat identified in the October 2004 design basis threat (DBT) by DOE's implementation deadline of October 2008. Protective forces at the five ESE sites containing weapons-grade nuclear material generally meet existing key DOE readiness requirements. Specifically, GAO determined that ESE protective forces generally comply with DOE standards for firearms proficiency, physical fitness levels, and equipment standardization and that the five ESE sites had the required training programs, facilities, and equipment. However, GAO did find some weaknesses at ESE sites that could adversely affect the ability of ESE protective forces to defend their sites. For example, despite the importance of training exercises in which protective forces undergo simulated attacks by a group of mock terrorists (force-on-force exercises), DOE neither sets standards for individual protective force officers to participate in these exercises, nor does it require sites to track individual participation. In another example, GAO found that protective force officers at all five of the ESE sites reported problems with their radio communications systems. Specifically, according to 66 of the 105 protective force officers GAO interviewed, they did not always have dependable radio communications as required by the DOE Manual 473.2-2, Protective Force Program Manual. Security officials stated that improvements were under way. To successfully defend against the larger terrorist threat contained in the 2004 DBT by October 2008, DOE and ESE officials recognize that they will need to take several prompt and coordinated actions. These include transforming its current protective force into an "elite force"--modeled on U.S. Special Forces, developing and deploying new security technologies to reduce the risk to protective forces in case of an attack, consolidating and eliminating nuclear weapons material between and among ESE sites to reduce security costs, and creating a sound ESE management structure that has sufficient authority to ensure coordination across all ESE offices that have weapons-grade nuclear material. However, because these initiatives, particularly an elite force, are in early stages of development and will require significant commitment of resources and coordination across DOE and ESE, their completion by the 2008 October DBT implementation deadline is uncertain. |
The BIA and DOD school systems are unlike public school systems in a number of ways and are also distinct from each other. Information on the schools, the students and families they serve, the settings in which they operate, and other fundamental aspects of these systems helps put our findings into context. BIA schools serve less than 10 percent of all Indian students enrolled in elementary and secondary schools in this country. In school year 1999– 2000, the total enrollment was 47,080 students in the 171 schools funded by BIA. BIA schools are located in 23 states; however, over 70 percent of the schools are in four states—Arizona, New Mexico, North Dakota, and South Dakota (see fig. 1). The schools are located primarily in rural areas and small towns and serve Indian children living on or near reservations. Individual school enrollments range in size from 14 to over 1,000 students, but a little over half of the schools enroll fewer than 250 students; most are combined schools spanning both elementary and secondary grades. A unique feature of the BIA school system is that almost one-third of the schools have a residential component; that is, they board at least a portion of the students who attend the school. In total, about 17 percent of BIA students reside in school dormitories. Some students board because their homes are so far away or inaccessible that daily transportation is impractical. However, an increasing proportion of students reside in the dormitories for other reasons; for example, some students live in boarding schools to separate them from dysfunctional or severely impoverished home environments. Education programs and activities of BIA schools are administered by the BIA’s Office of Indian Education Programs (OIEP); however, in general, the organization of BIA schools is highly decentralized. Each school is governed by its own independent school board, which has authority over functions such as hiring personnel, adopting budgets, and setting policy. Another important aspect of the BIA school system is the agency’s support and encouragement of tribal control of school programs. In school year 1999–2000, 108 schools, or about two-thirds of all BIA-funded schools, were operated by tribes or tribal organizations under grants, contracts, or compacts with BIA; the remainder were operated by BIA. In fiscal year 2001, BIA received a total of $777.6 million to support the operations of its schools and address educational facility needs. This represented a substantial (30 percent) increase over fiscal year 2000 funding levels. Nearly all of the increase was for repair or replacement of school facilities; funding for school operations increased only moderately.Like many public schools, BIA schools also receive funding from Education programs, such as Title I and Safe and Drug Free Schools and Communities. Funds from these programs are provided to BIA and passed through to schools. Fiscal year 2000 funding from Education programs totaled $132 million. BIA schools also participate in the U.S. Department of Agriculture’s (USDA) child nutrition programs, such as the National School Lunch and Breakfast programs, which provide free or reduced- price meals for children living in families earning below certain income levels. DOD operates schools for the children of military and civilian DOD personnel overseas and on certain military bases in the United States. In total, DOD operated 224 elementary and secondary schools in school year 1999–2000, with an enrollment of almost 108,000 students. A little over two-thirds of DOD schools are located overseas, concentrated in several countries in Europe and in Japan, Korea, and Cuba (see figs. 2 and 3). About 74,280 students were enrolled in DOD overseas schools in school year 1999–2000. The domestic schools are located on military bases in seven states concentrated in the Southeast and in Guam and Puerto Rico (see fig. 4) and enrolled about 33,690 students in school year 1999–2000.Individual school enrollments range in size from 32 to over 1,300 in the two DOD systems, with the median school size being about 450 students. According to a DOD official, nearly all eligible children of military parents overseas attend DOD schools. However, most children of military parents in the U.S. attend public schools. DOD officials estimate that about 15 percent of school age military dependents in total attend DOD schools abroad and in the United States. Education programs and activities of DOD schools are managed and directed by the Department of Defense Education Activity (DODEA). The overseas and domestic schools are organized into 24 districts, each managed by a superintendent and other district staff, such as curriculum coordinators and maintenance supervisors. In fiscal year 2001, DOD schools received a total of $1.3 billion to support school operations and address facility needs. Overall, this represented level funding since fiscal year 2000, although funding for school operations and maintenance rose slightly while funding for school construction decreased. DOD schools are not authorized to receive grants from federal programs, including those administered by Education; however, DOD schools do participate in the USDA child nutrition programs. While the federal government has responsibility for both the BIA and DOD school systems, the two systems are very distinct from each other, particularly with respect to the types of students and families they serve. The proportion of students who have special needs is much higher in BIA schools than DOD schools. For example, according to agency records, about 1 in every 5 BIA students is enrolled in special education, compared with 1 in every 12 DOD students; and nearly 60 percent of BIA students have limited English proficiency compared with just 6 percent of DOD students. Students in the two systems also differ in terms of their economic need. Eligibility for the USDA’s free or reduced-price lunch programs is often used as an indicator of poverty. While data on the proportion of children eligible for free or reduced-price lunch were not complete for BIA schools, available data for 123 of the 171 schools showed that over 80 percent of students were eligible, compared with about one- third of students at DOD schools. Specific information on the education levels and employment status of parents of BIA and DOD students was not available, but other information suggests significant differences between the two. For example, unemployment on or near Indian reservations is very high—over 40 percent in 1999. In contrast, students attending DOD schools are generally military dependents and, by virtue of that fact, have at least one parent who is employed. With respect to education, about one-third of Indian adults do not have high school diplomas, according to Census Bureau data for 1990; in contrast, nearly all DOD active military personnel have completed high school. Moreover, a number of factors can affect parental involvement in BIA schools, including long distances between home and school, language barriers, and parents’ poor associations with schools due to past federal policies emphasizing the assimilation of Indian children. In comparison, military communities have a tradition of supporting military families, and this support extends to their schools. Parental involvement is highly emphasized in DOD schools, with some base commands providing release time to military personnel to volunteer in schools. At various times, the Congress has considered the question of whether there is a need for BIA and DOD schools in locations where public school systems are close by. Since 1794, when the first treaty providing for any form of Indian education was signed, the federal government has provided education services for Indian children, and has carried it out almost exclusively through the BIA. However, in the 20th century, the states began providing for Indian education and currently provide schooling for the majority of Indian elementary and secondary students. During the latter part of the 1970s, the Congress reviewed the need to construct certain BIA schools close to public schools to determine if BIA was properly ranking schools on its school construction list. Though Indian families can choose where to send their children to school, BIA’s policy at that time was to have children attend nearby public schools with adequate facilities instead of building new BIA schools to serve these students. However, in 1988, the Congress decided that proximity to a public school could not be the primary reason for rejecting a BIA school construction project. The need for DOD domestic schools also has been reviewed a number of times, specifically to determine whether transferring schools to nearby public school districts is feasible. DOD domestic schools were established to provide education to military children in communities where the local schools were deemed unable to provide a suitable education. After 1950, schools were added to the system to allow military children to attend integrated schools in locations where local schools remained segregated. Since that time, however, more and more schools have been transferred to public school districts, in part because of the integration of public schools and Education’s emphasis on state and local responsibility for the education of military children. Thus, while at one time there were about 100 installations with DOD-operated schools, now there are 14 located in the 50 states. According to a DOD official, most children of military parents in the U.S. attend public schools. The academic achievement of many BIA students falls far below that of public school students. As in most public schools, nearly all BIA teachers are certified and class sizes in BIA schools are smaller than national averages, even though officials report some difficulty recruiting staff. BIA students have greater access to computers and Internet connections than public school students generally, though a smaller proportion of BIA schools than public schools has technology support staff to maintain equipment and assist teachers in integrating technology into classrooms. BIA administrators report extensive facilities problems and agency records show a deferred maintenance and repair backlog approaching $1 billion. Estimated per-pupil expenditures vary widely among different types of BIA schools, such as boarding schools and day schools, and are higher than per-pupil expenditures at public schools. It is difficult to draw conclusions about differences in expenditure levels between BIA and public schools, in part because of cost factors that affect some BIA schools, such as higher proportions of students who have special needs, broader infrastructure responsibilities, longer distances to transport children, and the cost of residential programs in boarding schools. In school year 1999–2000, BIA students scored far below public school students on state assessments in North Dakota, South Dakota, and Arizona—three states with large numbers of BIA schools. As shown in table 1, the average national percentile rankings for BIA students on North Dakota’s statewide assessment, for all grades and subject areas tested, ranged from the 25th to the 33rd percentiles in school year 1999–2000. (By definition, the national average on the norm-referenced tests used in North Dakota and South Dakota is the 50th percentile.) The corresponding averages for public school students in North Dakota ranged between the 64th and 71st percentiles. Similarly, in South Dakota, the average national percentile rankings for BIA students on South Dakota’s statewide assessment were much lower than the averages for public school students in the state, both overall and for specific skill areas such as language arts, reading, and math. Finally, in Arizona, a smaller proportion of BIA students met state standards than public school students. In school year 1999–2000, in reading, writing, and math, at each grade level tested, the proportion of BIA students who met or exceeded the standards was far lower than the proportion of public school students. (See table 1.) For Arizona and North Dakota, data for public school students by ethnicity were available. These data indicate that Indian students in public schools in these two states score below state averages but higher than BIA students in those states. In addition to standardized testing, BIA schools assess students’ proficiency in language arts and math using a combination of other measures including “authentic assessment.” Authentic assessment involves evaluating student achievement based on a review of multiple items such as portfolios illustrating students’ work, grades, and work samples as well as teacher observations. Many school districts and states have been incorporating aspects of authentic assessment into their student assessment programs. Authentic assessment often requires students to demonstrate problem-solving skills and is thought to reflect real-world situations. Some researchers consider authentic assessment more appropriate for minority students than standardized testing because standardized tests have been criticized as being culturally biased. In particular, because of the diversity of languages and cultures among Indian students, some educators have found these authentic assessment methods more useful. These assessments are reported annually by all BIA- funded schools. Using authentic assessment approaches, about half of BIA students have been assessed as proficient or advanced, in both math and language arts, each year over the last 3 years. Other measures often used as indicators of students’ academic success include dropout rate, college admissions test scores, and the proportion of students planning to attend college. On these measures, BIA students perform less well than public school students. For example, in their annual reports, BIA high schools report dropout rates—the proportion of high school students who leave school and do not enroll in another school during the year—averaging about 10 percent. This is higher than the national average dropout rate (about 5 percent) and slightly higher than dropout rates for other ethnic minority groups. In addition, BIA students score significantly below national averages on college admission tests. As shown in table 2, BIA students who take the Scholastic Assessment Test (SAT) and the American College Test (ACT)—two widely used college entrance examinations—score below students nationally in both verbal/English and math assessments. They also score below students from low-income families on these tests. Finally, in our survey, BIA school officials estimated that about 28 percent of their graduates planned on enrolling in college after graduation, about evenly split between 4-year and 2-year colleges. Nationally, in 1999, a little less than two-thirds of high school graduates were enrolled in college the year after they completed high school—about 40 percent in 4-year colleges and 24 percent in 2-year colleges. For students from low-income families, the percentage who were enrolled in college the year after they graduated was around 50 percent. While the academic achievement of BIA students is low relative to students nationally, to some extent the performance of BIA students may be associated with conditions that are beyond a school system’s control. Higher student outcomes have been strongly associated with higher educational and income levels of parents. BIA students come from environments where family education levels are low and unemployment and poverty rates are high. For example, 1990 Census Bureau data show that one-third of Indians age 25 or older do not have high school diplomas compared with one-quarter of all adults nationally; and for Indians living on reservations or trust lands, the proportion of adults who are not high school graduates is over 45 percent. Indians living on or near reservations also experience high rates of unemployment. Data from BIA’s Indian Labor Force Report show that 43 percent of the potential labor force living on or near reservations remained unemployed in 1999. Poverty rates are also high among Indian families, with 27 percent having incomes below the poverty level, compared with 10 percent of all families. Other data suggest that the proportion of families with incomes below the poverty level is even higher for those living on reservations and trust lands. Finally, the issue of alcohol and substance abuse is significant for Indian communities; the death rate due to alcoholism is about 7 times higher for Indians than for all races. Parental substance abuse has been identified as an environmental risk factor associated with learning problems, learning disabilities, and developmental delays in children. In a previous Education survey, almost 60 percent of BIA teachers considered parental alcohol or drug abuse a serious problem in their schools, compared with about 13 percent of teachers in public schools with low Indian student enrollment. BIA officials noted that the agency has developed programs to begin to moderate the influences of economic and family conditions on students’ academic performance. These include early childhood and family literacy programs as well as a therapeutic residential model aimed at achieving positive changes in attitude, behavior, and the academic performance of students attending boarding schools. In addition, in its Annual Performance Plan, BIA has established several goals that address student academic performance. These goals concern student proficiency in language arts and math, student attendance, teacher proficiency in new assessments and technology, school accreditation, and number of degrees conferred on Indian students at tribally controlled community colleges and at BIA’s two post-secondary schools. According to the National Center for Education Statistics (NCES), one of the major elements that characterizes teacher quality is teacher preparation and qualifications. This refers to certification, education, and continuing learning. Results from our survey indicate that nearly all teachers in BIA schools were certified in school year 1999–2000. Typically, about 95 percent of teachers in BIA schools were fully certified in the subjects or grades they taught and another 3 percent had temporary or provisional certification. About 92 to 93 percent of public school teachers in general were fully certified in the subjects they taught. Teachers in BIA-operated schools were slightly more likely to be fully certified than teachers in tribally operated schools. In addition to certification, teachers are being encouraged to pursue advanced degrees in order to gain a more advanced understanding of their discipline. About one-fourth of teachers in BIA schools had advanced degrees, compared to about 46 percent of public school teachers generally. The proportion of teachers with advanced degrees in BIA-operated schools was about 33 percent, while in tribally operated schools it was about 21 percent. BIA teachers have access to various kinds of professional development and BIA schools support professional development in several ways. For example, 93 percent of the BIA schools that responded to our survey reported that the majority of their teachers received in-service training provided by the school during the 1999–2000 school year. Other types of training widely used included in-service training provided by the agency and workshops provided by professional associations, as shown in figure 5. BIA schools facilitate their teachers’ professional development in a variety of ways. The following supports were each reported by nine out of ten survey respondents: permitting time off to participate in training, setting days aside for training, paying travel or per diem for training, and paying tuition or fees. Such training and supports for professional development are comparable to the situation for public school teachers generally, nearly all of whom report having some professional development in the previous year with similar kinds of support from their schools. While nearly all teachers at BIA schools were certified, officials at some schools we visited, particularly tribally operated schools, recounted some difficulties recruiting and retaining qualified staff. At one tribally operated school in Washington, the chief school administrator said it was difficult to attract teachers because the school could not compete with compensation packages offered by nearby urban districts. The 2000–2001 school year was the first year the school was able to pay teachers at the state salary scale, but the school offered limited retirement benefits. As a result, the administrator said the school tended to attract beginning teachers or retired teachers who had pensions from their public school careers. Other officials noted that the remote locations of some schools hinder recruiting. Many BIA schools are located in settings with few amenities to attract teachers and other staff. For example, at one school we visited in Arizona, the closest town offering major shopping and banking services was 96 miles away, and the principal said the community’s isolation and lack of amenities contributed to teacher turnover. In many locations, basic housing is not even available for staff to purchase or rent, so BIA has constructed employee quarters for which staff pay rent. About one-third of all BIA schools and 45 percent of tribally operated schools had teacher turnover rates of 25 percent or higher in school year 1999–2000; the average turnover rate was 18 percent. Nationwide, about 87 percent of full-time public school teachers remain at the same school from one year to the next, implying a turnover rate of about 13 percent. A teacher’s ability to effect student learning may be influenced by the number of students in the classroom, and various studies have associated smaller class sizes with higher student achievement. Class sizes reported by BIA administrators are generally smaller than national averages, with tribally operated schools reporting smaller classes than BIA-operated schools. Nationally, in 1998 the average class size for general elementary classrooms was 23 students and in departmentalized settings (those in which a teacher’s main assignment is in one particular subject area, such as English or social studies) it was 24 students. The median number of students per classroom reported by BIA-operated schools was about 20 to 22 in grades K through 8 and about 17 in grades 9 through 12. Tribally operated schools had about 17 to 18 students per classroom in grades K through 6 and about 16 students per classroom in grades 7 through 12. Our survey did not ask specifically about multiple grades in a classroom. However, some BIA schools are very small and have fewer full-time teachers than grade levels taught in the school. For example, there are five BIA schools with 51 or fewer students in grades ranging from K to 6 and K to 12. Four of these five schools have fewer full-time teachers than the number of grades in the school, suggesting that multiple grades are being taught in some classrooms. BIA schools appear to be in step with schools around the country in making technology available as an integral tool for learning. Based on our survey results, BIA students have greater access to computers than public school students nationwide. BIA administrators reported having about 1 instructional computer for every 3.5 students overall, although access levels varied somewhat from school to school, ranging from 1 computer for every student to 1 computer for every 18 students. In comparison, the national average for public schools is 1 computer for every 5 students, as reported by NCES for 2000. A major goal set by Education is that schools have 1 modern multimedia computer for every 5 students. We do not know about the quality or capacity of the computers in BIA or public schools, but 46 percent of the computers in BIA schools were reported to be 3 years old or older. In some respects BIA schools provide their students with greater access to the Internet than public schools. According to a BIA official, all 171 BIA schools are connected to the Internet. Nationally, nearly all public schools now have Internet access. However, BIA school officials reported that 1 computer with Internet access was available for every 4.3 students, a ratio appreciably better than the 1 to 7 ratio for public schools nationwide. Some policymakers have stressed the importance of not only connecting every school to the Internet but eventually connecting every classroom. A little over 80 percent of BIA instructional rooms have at least one computer with a connection to the Internet. This number is also slightly above the national average for public schools. However, as with some public schools, some BIA schools still use the lowest-speed connections for their primary connection to the Internet, and thus cannot access complex computer applications and resources. Table 3 summarizes the information on students’ access to technology at BIA schools based on our survey and for public schools nationally. While computers and the Internet are generally available at BIA schools, a smaller proportion of the schools have paid (versus volunteer) technology support staff than public schools. In a survey conducted by Education, nearly all (95 percent) of public schools reported having some paid staff, either full- or part-time, to support advanced telecommunications (for example, networked computers and computer hardware and software) in their school in 1999. In our survey, we asked whether schools had (1) staff who provided technical support or performed maintenance on computers and (2) staff who assisted teachers in using computer software or the Internet to instruct students. The results indicated that more than one- quarter of BIA schools did not have paid technical support and about one- third did not have paid staff to help teachers use computers for instruction in 2000. Evidence suggests that technology support of this kind has a positive impact on teacher use of technology in the classroom. According to an NCES report, research in general shows that public school teachers view the lack of technology support for integrating telecommunications into the classroom and the lack of technical assistance in schools to be obstacles to their effective use of technology. Our survey results show that these areas of support are not available in many BIA schools. One reason why technology staff is more limited in BIA schools, according to one BIA official, is that the high turnover rate for technology coordinators is a problem throughout the BIA school system. He indicated that these technology coordinators often receive training for the work and then leave the schools for higher-paying positions. BIA school administrators reported that their computers are used regularly for learning activities. Although there is evidence to suggest that the effective use of technology in the classroom can improve student learning, the research on what types of classroom activities are best served by technology applications is not conclusive. Nonetheless, studies on the uses of technology in schools tend to distinguish more basic uses of computers—such as for drill and practice, which the research shows can be effective for learning—from more pedagogically complex uses of computers—such as using the Internet in small groups for class projects, where the research data are less extensive. In our survey, we asked school administrators to estimate the portion of their teachers who routinely engaged their students in the use of computers for certain activities. As shown in figure 6, many of the teachers at BIA schools regularly engage students in the use of computers for practice drills and for learning subject matter. Fewer BIA teachers are using them on a regular basis for student research or to develop student skills in problem solving. BIA schools appear to be making substantial investments in school technology. Administrators reported to us that in 1999–2000 they spent an average of $401 per student to support educational technology in their schools. In comparison, according to a national survey, public school districts planned to spend $113 per student on educational technology in the 2000–2001 school year. These expenditures covered all aspects of supporting educational technology, such as purchasing computer hardware and software, installing and upgrading local and wide area networks, paying for technical support and training for teachers, and paying for telecommunications access. Most of the BIA school administrators responding to our survey reported significant problems with the condition of their facilities. They noted problems with specific building features, such as roofs and plumbing, and with certain environmental conditions, such as indoor air quality. In addition, they indicated that work spaces for teachers and students, such as classrooms and libraries, were insufficient. The extent of the concerns they reported in the survey are reflected in BIA’s backlog of maintenance and repair needs. Among the backlog of such needs, which was recently verified by an independent engineering firm, is more than $960 million in needed repairs for school facilities and dormitories. A contributing factor to the facility needs of BIA schools is their isolation. Many schools are located in remote areas where, in addition to maintaining school buildings and grounds, facilities managers must also maintain other components of the infrastructure such as water and sewer systems, electric utilities, and fire stations—systems normally provided by local municipalities for most public schools. The Congress has recently increased funding used to address the backlog. However, budget allocations for the maintenance and repair of facilities have generally been less than amounts recommended by national guidelines. Compared to an earlier survey of administrators in public schools, significantly more BIA school administrators responding to our survey reported that the overall condition of their buildings and specific building features was inadequate. As shown in table 4, administrators at 65 percent of BIA schools reported that one or more of their school buildings was in less-than-adequate condition and 76 percent of boarding schools reported the same for their dormitory buildings. In comparison, in a 1999 Education survey on the condition of public school buildings,administrators at about one-quarter of public schools reported that one or more of their buildings was in less-than-adequate condition. Looking back to reported conditions in 1994, the conditions of both BIA and public schools appear to have generally improved. Administrators also reported that specific features of school buildings and dormitories, such as the plumbing system or roof, needed substantial repair or replacement. Overall, more than 70 percent of responding BIA schools reported that one or more of the features of school buildings was in less-than-adequate condition and 87 percent of boarding schools reported the same for dormitory buildings. In contrast, administrators at half of public schools reported that one or more of the features in their school buildings was inadequate. As shown in table 4, for many of the features listed, BIA administrators were at least twice as likely as public school administrators to report that their school buildings and dormitories had inadequate building features. Administrators responding to our survey also indicated that some environmental conditions were a problem in their schools. For example, over 40 percent reported unsatisfactory indoor air quality, acoustics or noise control, or physical security in their buildings. Administrators at over 70 percent of responding boarding schools reported the same for dormitory buildings. In comparison, these environmental conditions were a problem for 20 percent or less of public schools in 1999. During our site visits, school officials indicated various problems with their school buildings. For example, the principal of a school in Washington said that in one portable classroom building the roof and windows leaked, and in two buildings there was a continuous problem with mold in the walls, which was difficult to control due to the wet climate. She said that the mold was a health problem for children with certain allergies. In a South Dakota school, a teacher expressed concerns about aging asbestos floor tiles in her classroom that had to be partially removed due to cracking, leaving other tiles exposed. Asbestos floor tiles, which are present in more than 90 of BIA’s schools, can be a threat to the health of students and staff if the asbestos fibers are disturbed, released into the air, and inhaled. In addition to questions about the condition of buildings and aspects of their environment, our survey asked administrators about the sufficiency of work spaces for students and teachers, such as classrooms, libraries, labs, and eating areas. We also asked whether some of these work spaces were adequately equipped—for example, whether libraries had sufficient numbers of books or whether buildings were adequately wired to support technology needs. As shown in figure 7, many BIA school administrators responding to our survey reported that various work spaces and equipment were insufficient at their school. For example, administrators at 55 percent of responding schools reported that the number of classrooms was insufficient and over 60 percent reported the space in their libraries was a problem. Insufficient classroom space was noted by officials at some schools we visited. For example, at a large K–12 school in South Dakota, officials said that the number of students in the high school building exceeded capacity. According to school officials, the building was intended to house 250 students, but they currently had about 400 students enrolled. In an Arizona school, because there was no other space, the school held special education classes in an area previously used for storage and teachers used partitions to separate the different groups of students. A large proportion of BIA schools (60 percent) also reported that the capacity of the building’s telephone and electrical wiring systems to support computers, the Internet, and telephones was inadequate for their buildings. For BIA schools with insufficient telephone and electrical wiring, the age of the buildings may be a factor. Almost half of the buildings are more than 30 years old and almost 15 percent are between 50 and 100 years old. The principal of an Arizona school built in the 1930s said that most of the electrical wiring in the school is original and as new technology has been added, they have had frequent problems with system overloads. He said that this is likely to get worse as more new technology is added. Administrators’ concerns about the condition of their facilities are reflected in the BIA backlog of deferred maintenance and repairs. This backlog is a catalog of deficiencies—related to buildings, surrounding grounds, and other infrastructure—identified by architects, engineers, facilities managers, and safety officers over the years. The inventory describes in detail individual work items required in schools to meet national standards and codes such as the Uniform Building Code and National Fire Codes. The backlog contains a description of the work that needs to be done and the estimated cost for each item. The deficiencies may involve safety and health, access for persons with disabilities, or noncompliance with building codes. Recently, BIA’s backlog was validated by an independent engineering firm. According to BIA officials and representatives from the engineering firm, this process included on-site inspections of each BIA school building. Based on their inspections, the engineers validated current projects and their cost estimates, removed items that had already been addressed, and added new deficiencies they identified. As of February 2001, BIA’s backlog for educational facilities totaled $962 million—an increase of almost $270 million (in current dollars), or 39 percent, since October 1997. Table 5 shows estimated costs from BIA’s backlog to address deficiencies related to certain building features at BIA schools. BIA school administrators often indicated problems with these features in our survey. For example, the cost to address all deficiencies related to heating, ventilation, and air conditioning systems in schools totaled more than $63 million at the time of this review. Administrators at more than half of the schools responding to our survey indicated problems with these systems. One school we visited in Arizona did not have a central cooling system, so each classroom had an air conditioner or evaporative cooling unit. The principal said the units were quite old and so noisy that they disrupted the students’ learning environment. More than $127 million of the backlog total represents deficiencies related to the health and safety of students, and a significant portion of this ($44 million) relates to fire safety alone. For example, the backlog lists buildings at more than 100 schools that need to have their fire alarm systems replaced or upgraded because they are old, not working, or missing. At one school we visited, the facilities manager said that the fire alarm system on the school campus was no longer reliable, and that it was so old that buying replacement parts was becoming difficult. With respect to sprinkler systems, the BIA Chief of Safety and Risk Management said that it is BIA’s goal to have sprinkler systems and smoke detectors in all dormitories to ensure the safety of the residents. However, at the time of our review, the backlog showed that more than half of the 54 boarding schools’ dormitories needed sprinkler systems either to be installed or upgraded. None of the boarding schools we visited had sprinkler systems in student dormitories. In addition, a dormitory at one school was closed due, in part, to fire-related safety deficiencies, according to the school superintendent. A contributing factor to BIA school facility needs and the backlog is that BIA schools have to support a more extensive infrastructure than most public schools. Because many BIA schools are located in isolated areas, they maintain their own water and sewer systems, electric utilities, fire stations, and other important services that are generally provided to public schools by municipalities. Among the 171 BIA schools and 14 peripheral dormitories, 146 sites (79 percent) had responsibility for maintaining some kind of water infrastructure such as wells, water distribution lines, and/or water treatment facilities; 138 (75 percent) had responsibility for sewer infrastructure, such as sewage lagoons and sewage lines; and 52 schools (30 percent) operated and maintained fire trucks. BIA officials indicated that providing and maintaining this additional infrastructure was a considerable drain on resources. For example, at a K– 8 school we visited in Arizona, the facilities manager said that his staff must maintain a water system that includes five wells with distribution lines, pumps, pump houses, and water storage tanks; a sewer system that includes sewer lines, a lagoon, and a lift station; a fire station, fire truck, and hydrants; and a landfill. The facilities manager said the school has chronic problems with the sewer system, and an independent engineering firm has recommended that the sewer mains and service lines be replaced. For water and sewer systems alone, deficiencies in BIA’s backlog for educational facilities totaled almost $56 million. BIA’s infrastructure also includes dormitory facilities for boarding students and housing for staff and their families. In total, BIA schools support 157 dormitory buildings for students and 1,879 single-family quarters and 194 apartment buildings for employees. However, we did not include employee housing in the scope of our study because the rent paid by staff is meant to cover the upkeep of these facilities. Funding from BIA’s construction budget that is used largely to address the backlog was increased substantially by the Congress last year. This funding more than doubled from $40 million in fiscal year 2000 to $110 million in fiscal year 2001. BIA uses this funding to support a wide range of facility-related activities, including minor projects, such as the replacement of boiler systems, and major projects, such as the replacement of a natural gas line or the renovation of a school office building. In addition, the Congress provided even greater increases for replacement school construction the last 2 years. Funding rose from $17 million in fiscal year 1999 to $141 million in fiscal year 2001. This funding can reduce the backlog when new facilities are constructed to replace those that cannot accommodate current education programs or are beyond repair. While funding has increased during the last few years for certain facility- related line items in BIA’s budget, we attempted to look more closely at funding available specifically for maintenance and repair needs. Adequately funding maintenance and repair is important because deferral of these tasks can increase the backlog. One guideline set forth by the National Research Council (NRC) considers maintenance and repair budgets in terms of the current replacement value of buildings. The NRC has recommended that budget allocations for routine maintenance and repair be in the range of 2 to 4 percent of the current replacement value of buildings. Using NRC’s definitions, we extracted and combined pieces of BIA’s budget to identify funding available for the maintenance and repair of buildings and other infrastructure and determined that funding levels were below those recommended by the NRC. From 1997–2000, funding requested for and allocated to the maintenance and repair of BIA schools was between 1.5 percent and 1.8 percent—below the lower end of the recommended range of 2 to 4 percent. Funding increased in fiscal year 2001, resulting in maintenance and repair budget allocations providing about 2.5 percent of current replacement value that year. However, based on discussions with recognized experts in budgeting and facilities operations and maintenance, even with this increase, budget allocation levels over the past 5 years have been too low. These experts suggested that because of the extensive infrastructure beyond buildings that BIA must support, the isolation of the schools which dramatically increases maintenance and repair costs, and the age of BIA facilities, BIA schools likely require maintenance and repair funding in the range of 4 to 6 percent of current replacement value. Estimated per-pupil expenditures for BIA day schools were $9,647 in 1997– 98. In comparison, the national average per-pupil expenditure for public schools was $6,189 in 1997–98, the latest year for which national data were available at the time we did our work. It is important to note that per-pupil expenditures can range widely. Within the 50 states, per-pupil expenditures for public schools in 1997–98 ranged from $4,288 in Mississippi to $9,643 in New Jersey. Estimated per-pupil expenditures at BIA schools also varied widely depending upon the type of school. As shown in table 6, BIA boarding school expenditure estimates were almost $2,000 more per pupil than BIA day schools overall; the additional estimated expenditures for the boarding schools were likely due to their residential components. Among BIA day schools, estimated expenditures per pupil were higher for tribally operated schools than BIA-operated schools. One reason for the difference between estimated per-pupil expenditures for day schools operated by BIA and those by tribes is that tribally operated schools bear higher administrative costs—each school must provide its own accounting and other support services that otherwise would be provided by BIA for a comparable BIA-operated school. To support these additional operating expenses, BIA provides administrative cost grants to tribally operated schools, which averaged about $1,400 per student in 1997–98. In comparing BIA and public school per-pupil expenditures, it is difficult to draw meaningful conclusions because the many factors that distinguish BIA schools from public schools may add to their educational costs. Special-needs students generally require additional educational resources and, as mentioned previously, a high proportion of BIA students have special needs. For example, according to BIA records for the 2000–2001 school year, about 21 percent of BIA students are enrolled in special education compared with 13 percent of public school students, and 58 percent of BIA students have limited English proficiency, compared with 8 percent of public school students. Available data also indicate that a high proportion of BIA students are poor. The student populations of BIA schools in fact may be more similar to those of large city or rural public schools, where higher proportions of students tend to have special needs. Other characteristics of BIA schools may lead to increased expenditures. The isolation that results in additional infrastructure needs for BIA schools also results in higher costs in other areas, such as transportation. For example, the number of miles transported per student for BIA schools in school year 1999–2000 was about 296, while that of public schools was about 165 for school year 1998–1999. Many of the miles traveled by BIA students are on unimproved roads or roads in poor condition, which increases wear and tear on vehicles. BIA also provides long-distance transportation four times a year for many of the 8,000 students living in boarding schools. Because BIA schools are generally small and often far from each other, it can be difficult for them to achieve economies of scale. Many, for example, must have their own facility maintenance shops and garages; in contrast, public school districts generally have such facilities that serve several schools. DOD students’ academic achievement generally exceeds that of elementary and secondary students as measured by national standardized tests. DOD school administrators indicated that nearly all teachers in DOD schools are certified in the subjects or grades they teach, and the majority of teachers hold advanced degrees—this proportion is greater than the national average for public school teachers. Students’ access to computers reported by DOD school administrators is greater than that reported for public schools nationwide. In addition, the vast majority of DOD schools provide their teachers with technical and instructional assistance for using computers in the classroom. Many DOD school administrators reported some problems with their school facilities and some reported that work spaces for teachers and students were not adequate. However, overall the conditions of facilities reported by DOD schools and public schools in 1999 were not substantially different. The estimated per-pupil expenditure for DOD schools is higher than the national average, and the estimated per-pupil expenditure is higher for overseas schools than for domestic schools. On standardized achievement tests, DOD students on average score at or above national norms. DOD schools use the TerraNova Multiple Assessments to assess students in grades 3 through 11. In math and language arts, DOD students’ average national percentile rankings ranged from the 61st percentile to the 72nd percentile (see table 7). Overseas and domestic schools scored in a comparable range. By definition, the national average is the 50th percentile. At most grade levels, the rankings for overseas schools were a few points higher than those for domestic schools. For both boys and girls, and for various ethnic groups, DOD students were at or above national averages. On the National Assessment of Educational Progress (NAEP), another standardized test, DOD students scored at or above national benchmarks. On other measures that are often used as indicators of students’ academic achievement, such as college admissions tests and plans to attend college, DOD students generally perform as well as or better than public school students. A high proportion of DOD students take college admissions tests, scoring at or near national averages. (See table 8.) In addition, DOD school administrators reported that about three-quarters of DOD graduates plan to pursue higher education. Nationally, just under two-thirds of high school graduates are enrolled in college the year after they complete high school. DOD administrators responding to our survey also estimated that about 60 percent of their graduates planned to enter 4-year colleges and another 15 percent planned to enter 2-year colleges. Nationally, about 40 percent of high school graduates enroll in 4-year colleges the year after they graduate and about 24 percent enroll in 2-year colleges. The academic achievement of DOD students may be influenced by socioeconomic factors and a “common culture” engendered by military service. Education research has strongly associated student academic achievement with parental education, income levels, and family structure. In each of these areas, military families fare relatively well. For example, nearly all military enlistees are high school graduates and relatively high proportions of the parents of DOD students have attended or graduated from college. Moreover, while a considerable portion of children in DOD schools are eligible for free or reduced-price lunch programs (32 percent), this is less than the proportion in public schools (40 percent); in addition, military families receive benefits, such as tax-free housing allowances or free housing on base, that are not considered in eligibility determinations for the lunch programs. Finally, nearly 90 percent of military school-age children reside in two-parent families compared with 70 percent of children in public schools, although DOD families are affected by the absence of parents deployed away from home. In addition to these socioeconomic factors, DOD schools receive unique support from the military and its culture. Military commands support the schools in their jurisdictions and encourage their staffs to do so as well— for instance, by making parent-teacher conferences a duty or fostering volunteer work in the schools. Staff at DOD schools are sensitive to the unique circumstances of military families, such as the deployment of military parents away from home and frequent family moves to new duty stations. According to a recent study, military children move through an average of six school districts between kindergarten and the completion of high school. Therefore, DOD is developing standardized curricula in its schools that are intended to help overcome some problems associated with high student mobility. Administrators responding to our survey indicated that virtually all teachers in DOD schools are certified in the subjects or grades they teach, both in domestic and overseas schools. About two-thirds of teachers in DOD schools have advanced degrees compared to about 46 percent of public school teachers generally. Again, this proportion was about the same for both domestic and overseas schools. DOD teachers have access to various kinds of professional development, and DOD schools support professional development in several ways. For example, 95 percent of the DOD schools that responded to our survey reported that the majority of their teachers received in-service training provided by the school during the 1999–2000 school year. Other types of training are shown in figure 8. DOD schools facilitate their teachers’ professional development in several ways. Nearly all DOD schools reported allowing time off to participate in training and setting days aside for training. In addition, nearly nine out of ten schools reported paying travel or per diem for training; about half reported paying tuition or fees. These types of training and supports for professional development are comparable to those for public school teachers generally, nearly all of whom reported having some professional development with similar kinds of support from their schools. DOD officials related few problems attracting teachers to domestic schools but noted that recruiting was somewhat more difficult in certain overseas locations, particularly in parts of Asia. To ease recruiting, DOD often pays moving expenses for teachers it hires in the U.S. to work in overseas schools. DOD provides transportation for the employees and their family members, and ships their household goods to and from the overseas area. Applicants recruited in the U.S. for overseas posts also receive housing allowances to cover rent and utility costs. Class sizes reported by DOD administrators are close to national averages with no consistent pattern between domestic and overseas schools. Nationally, in 1998, the average class size was 23 students for general elementary classrooms and 24 students for teachers in departmentalized settings. The median number of students per classroom reported by DOD schools was in the low 20s in grades K through 8 and in the high teens in grades 9 through 12, as shown in table 9. Beginning in school year 1999–2000, DOD obtained additional funding to reduce class sizes in grades 1 through 3 in order to enhance learning opportunities and improve the quality of instruction. The target is a pupil- teacher ratio of 18 to 1. Reduced class sizes were to be implemented in 18 overseas schools and 25 domestic schools, with all DOD schools phased in over the next 6 years. Based on the responses of DOD school officials to our survey, DOD students appear to have greater access to computers, including computers connected to the Internet, than do public school students nationwide. These administrators reported having about 1 instructional computer for every 3.7 students. This ratio is slightly better than the national average reported by NCES for 2000. (See table 10.) We do not know about the quality or capacity of computers in DOD schools, but a significant portion of these computers (59 percent) are 3 years old or older. Administrators at DOD schools reported that students had 1 computer connected to the Internet available for every 4.8 students. This ratio also is better than the ratio for public schools nationwide (1 computer for every 7 students). In addition, DOD administrators reported that almost 90 percent of instructional rooms in their schools have at least one computer with a connection to the Internet. This figure exceeds the national average in 2000 by more than 10 percentage points. DOD schools also appear to have greater staff support for technology than public schools nationwide. Almost all DOD school administrators reported that in 2000 they had paid (versus volunteer) staff that maintained technology and provided technical assistance. In addition, 98 percent of DOD schools have paid staff to support teachers in using technology for instruction. In a survey conducted by Education in 1999, 95 percent of public schools reported having some paid staff to support advanced telecommunications in their school. A school technology administrator at one Army base told us that each school on the base has a technologist available to instruct teachers on how to use technology in the classroom, and that, as a result, teachers were integrating the technology into the curriculum on a daily basis. At one school in this district, first graders were learning how to create and deliver PowerPoint presentations. As previously noted, though research suggests that effective use of technology in the classroom can improve student learning, research is inconclusive concerning what types of classroom activities are best served by technology. In responding to our questions concerning teachers’ use of computers in the classroom, about half of DOD school administrators reported that the majority of their teachers regularly engage students in the use of computers to learn subject matter, conduct research, and learn computer applications. Fewer DOD administrators reported that a majority of their teachers are routinely using computers to develop student problem-solving or data-analysis skills or for drill and practice purposes. (See fig. 9.) DOD schools appear to be making significant investments in educational technology. According to agency records and estimates, the DOD school system obligated about $356 per student for educational technology in fiscal year 2000 for domestic and overseas schools. By comparison, according to a national survey, public school districts planned to spend $113 per student on educational technology in the 2000–2001 school year. Many DOD school administrators responding to our survey reported problems with their school facilities but, for the most part, their responses were not substantially different from those reported nationally by public school administrators in 1999. As shown in table 11, 32 percent of the school administrators reported that they had one or more buildings in less than adequate condition; in 1999, 24 percent of public school administrators responding to a national survey reported that they had one or more buildings in less than adequate condition. Looking at specific building features, such as roofs and plumbing, administrators at about half of both DOD and public schools reported having at least one inadequate feature. For many features, about the same proportion of DOD and public schools reported problems. For some features, including electric power, electrical lighting, and safety features, fewer DOD schools reported problems than public schools. When asked about the condition of certain environmental factors in DOD schools, such as indoor air quality, again about the same proportion of administrators at DOD schools as public schools reported unsatisfactory conditions. About 20 percent or less of administrators at DOD and public schools reported that indoor air quality, acoustics or noise control, or physical security were inadequate in their buildings. Some DOD schools reported that various work spaces and equipment for students and teachers were insufficient at their schools: 29 percent of schools reported that the number of classrooms was insufficient; about the same proportion reported inadequate library space (see fig. 10). The principal of a 40-year-old school we visited that had not been renovated said that the lack of space for storage was a major problem. In addition, 40 percent of DOD schools reported that the telephone and electrical wiring in their facilities was inadequate. The problems with inadequate telephone and electrical wiring may be due to the age of DOD education facilities. About 60 percent of the DOD school buildings are 30 to 70 years of age, and as the level of technology introduced into the schools has increased, so have the demands on the telephone and electrical systems. DOD estimates that about $529 million is needed to improve its educational facilities, as of May 2001. This estimate comes from the 5-Year Facilities Plan for DOD schools. This plan lists projects for repair and improvement identified by school engineers and principals. Each year, each DOD school principal and a DOD school district facilities engineer inspect the school facilities and grounds to validate existing projects on the plan, identify new projects, coordinate routine maintenance, identify construction projects, and discuss prioritization. Headquarters-level facilities officials prioritize the projects for DOD schools systemwide and determine which projects will be funded based on the availability of funds. Included on this list are repair and maintenance requirements that cost more than $25,000 for domestic schools and $10,000 for overseas schools. Projects below these levels are funded centrally out of school or district operations and maintenance budgets, according to the DOD’s chief of school facilities. DOD school superintendents/principals and facilities managers at the schools we visited indicated that they were generally able to meet the repair and maintenance needs of their facilities with these funds. Table 12 shows DOD’s estimated costs to address deficiencies related to certain building features at DOD schools. DOD school administrators often indicated problems with these features in our survey. For example, the cost to address all deficiencies related to heating, ventilation, and air conditioning systems in schools totaled more than $44 million at the time of this review. Administrators at almost 30 percent of schools responding to our survey indicated problems with these systems. During our site visits to seven DOD schools in Alabama and Georgia, the condition of the heating, ventilation, and cooling systems was the most common complaint about school facilities. Funding to address projects in the 5-year plan comes primarily from repair and maintenance and minor construction allocations from the operation and maintenance budget for DOD schools, according to a DOD official. These allocations have decreased from about $71 million in fiscal year 1998 to $40 million in fiscal year 2000. According to agency officials, these decreases were implemented in part to help pay for escalating payroll costs at DOD domestic schools. In addition to allocations from the operation and maintenance budget, funding from the construction budget for DOD schools is used for projects in the 5-year plan. The construction budget has fluctuated over the last several years. In fiscal year 1999, the construction budget for DOD schools totaled $44 million; in fiscal year 2000, this amount rose to $82 million; and in fiscal year 2001, it decreased to $36 million. Estimated per-pupil expenditures for DOD domestic and overseas schools were above the national average for 1997–98 (see table 13), and DOD schools’ estimated expenditures per pupil vary depending on their locations. Schools located overseas tend to have substantially higher estimated per-pupil expenditures ($10,097) than DOD domestic schools ($7,725). Much of this difference, according to DOD data, reflects the added costs of having teachers and other school-related staff overseas.These costs include such things as benefits paid to employees in connection with moves to overseas locations and allowances to compensate for substantially higher living costs outside the United States. We provided officials at DOD, Education, and the Department of the Interior (Interior), which oversees BIA, an opportunity to comment on a draft of this report. In its written comments, DOD concurred with the content of the report and had no technical comments. DOD’s letter is printed in appendix II. Education found the report to be helpful and informative and provided technical comments which we incorporated into the report when data were available. Interior provided written comments and agreed with many aspects of our report. However, the agency pointed out that BIA’s students and schools are very different from those in the public school system and stated that in some cases GAO had made inappropriate comparisons between BIA schools and the public school system. Interior stressed this most with respect to measures we used to consider the academic performance of BIA students and our calculation of expenditures per pupil. However, we believe that we have provided a framework for our analysis that shows a sensitivity to these issues and that our analysis is a fair and balanced representation of the achievement of and expenditures for BIA students. We discuss Interior’s comments in appendix III following the agency’s printed letter. Interior also provided technical corrections which we incorporated where appropriate. As agreed with your offices, unless you publicly release its contents earlier, we will make 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 Honorable Gale A. Norton, Secretary of the Interior; Neal McCaleb, Assistant Secretary of Indian Affairs, Department of the Interior; the Honorable Donald H. Rumsfeld, Secretary of Defense; John M. Molino, Deputy Assistant Secretary of Defense for Military Community and Family Policy; the Honorable Roderick R. Paige, Secretary of Education; appropriate congressional committees; and other interested parties. Please call me at (202) 512–7215 if you or your staff have any questions about this report. Key contacts and staff acknowledgments for this report are listed in appendix IV. This appendix discusses in more detail the scope and methodology for examining the following aspects of Bureau of Indian Affairs (BIA) and Department of Defense (DOD) school systems: (1) student achievement, (2) teacher staffing, (3) access to educational technology, (4) condition of school facilities, and (5) expenditure levels. The scope of our review included BIA day schools and boarding schools, and DOD schools located both in the United States and overseas. To the extent we could, we excluded from our analyses BIA peripheral dormitories, which house Indian students on reservations who attend nearby public schools and generally do not have academic programs. Our focus was the 1999–2000 school year, and most of the data we collected relate to that year. A major source of information for this review was a mail survey of administrators at all BIA and DOD schools. We pretested a draft questionnaire at eight schools and revised it based on their comments. In November 2000, we mailed the final questionnaire to all 171 BIA schools and 224 DOD schools. We did follow-up mailings in January and March 2001 and accepted returns through early May 2001, yielding response rates of 81 percent for BIA schools and 92 percent for DOD schools. We did not independently verify the accuracy of the information provided in the questionnaire responses. In addition to information collected through the survey, we obtained budget, facilities, and other data from BIA and DOD, and testing data from state departments of education and college testing organizations. We obtained and reviewed supporting documentation for some budget and expenditure data but otherwise did not verify this information. In the course of this review, we interviewed various staff at BIA’s Office of Indian Education Programs and DOD’s Department of Defense Education Activity who are responsible for education programs, budgets, technology, and facilities. As shown below, we also conducted site visits to nine BIA schools located in South Dakota, Arizona, Minnesota, and Washington and seven DOD schools located in the United States at three military installations—Maxwell Air Force Base in Alabama and Fort Benning and Robins Air Force Base in Georgia. At these schools, we toured the school facilities and met with a variety of officials, including principals, superintendents, education specialists, and facilities management staff. The BIA schools we visited were Greasewood Springs Community School, Ariz., Hopi Day School, Ariz., Muckleshoot Tribal School, Wash., Chief Leschi School, Wash., Flandreau Indian Boarding School, S. Dak., Pine Ridge School, S. Dak., Loneman Day School, S. Dak., Fond du Lac Ojibwe School, Minn., and Nay-Ah-Shing School, Minn. The DOD schools we visited were Maxwell AFB Elementary School, Maxwell AFB, Ala., Dexter Elementary School, Fort Benning, Ga., Faith Middle School, Fort Benning, Ga., Loyd Elementary School, Fort Benning, Ga., White Elementary School, Fort Benning, Ga., Linwood Elementary School, Robins AFB, Ga., and Robins Elementary School, Robins AFB, Ga. We obtained data on public schools from readily available sources, typically from Department of Education (Education) studies. We conducted our work between June 2000 and July 2001 in accordance with generally accepted government auditing standards. To provide an indication of BIA and DOD students’ academic achievement, we reviewed their performance on standardized tests and state assessments. We also obtained data on their performance on college entrance examinations, namely the Scholastic Assessment Test (SAT) and the American College Test (ACT). In addition, our survey asked administrators to report on the post-high-school plans of graduating seniors. For BIA schools, we attempted to collect data on BIA students’ performance on state assessments from four states that account for more than 70 percent of all BIA schools—Arizona, New Mexico, North Dakota, and South Dakota. We were able to obtain data for all BIA schools in North Dakota and South Dakota and for 19 of 50 BIA schools in Arizona that participated in Arizona’s state assessment program. No data were available for BIA schools in New Mexico, which has about one-quarter of all BIA students. In total, about 36 percent of BIA students attend the schools to which our data relate. All data obtained were for school year 1999–2000. From the North Dakota Department of Public Instruction, we obtained data on students’ performance on the statewide assessment. North Dakota uses the TerraNova Basic Multiple Assessments to assess students in grade 4 and the TerraNova Complete Battery Plus to assess students in grades 6, 8, and 10. The state provided data on statewide averages for students’ performance on the test, a breakdown of these scores by student ethnicity, and the scores for all BIA schools. We focused on students’ total scores on the test and reported the range of scores across all grades. In South Dakota, schools use the Stanford Achievement Test to assess students in grades 2, 4, 8, and 11. From South Dakota’s Department of Education, we obtained the average scores for students statewide, and the scores for all BIA schools on the complete battery and for specific skill areas such as language arts, reading, and math. We reported specifically on the range of scores on the complete battery across all grades. Arizona uses an assessment test customized for its standards, called the Arizona Instrument to Measure Standards (AIMS), in grades 3, 5, 8, 10, and 11. AIMS classifies students into four categories in relation to the standards: Falls Far Below, Approaches, Meets, or Exceeds. The Arizona Department of Education provided us with statewide averages for students’ performance on the AIMS, including a breakdown of statewide scores by ethnicity, and the scores for participating BIA schools. We reported the range for the proportion of children who met or exceeded the state standards, across all grades and across all subjects (reading, writing, and math). We requested data on the performance of BIA students on the SAT and ACT from the respective college testing organizations. With BIA’s approval, the testing organizations provided us data on the scores for BIA students who graduated in 1999 or 2000. It should be noted that a small number of BIA graduates (fewer than 70) take the SAT. Far more BIA students (about 800) take the ACT because BIA schools are located in areas of the country where the ACT is the predominant college admissions test. BIA also provided the annual reports for virtually all BIA-funded schools, which include data on the proficiency of students as assessed by schools. These assessments are based on multiple measures, which in addition to students’ performance on standardized tests can include measures such as portfolios illustrating students’ work, grades, teacher observations, and work samples. DOD students in both overseas and domestic schools are assessed using the TerraNova Multiple Assessments in grades 3 through 11. We obtained data from DOD on students’ performance for school year 1999–2000 and focused on students’ scores in language arts and math. We reported the range of scores for students in all grades, across both language arts and math, and across students in both overseas and domestic schools. We also obtained data from DOD on students’ performance on the National Assessment of Educational Progress (NAEP). The NAEP is a nationally administered test offered in different subject areas, such as reading, math, science, and writing, in different years. We examined DOD data on students’ performance on the NAEP in math (1996), reading (1998), and writing (1998). We reviewed overall averages for DOD students in both overseas and domestic schools and compared these scores with national averages. Finally, we obtained SAT and ACT results from DOD for students graduating during the 1999–2000 school year. Nearly all information about BIA and DOD teacher qualifications and training was obtained through GAO’s survey. Some information on teacher turnover rates and staff tenure was obtained from agency records. To determine class sizes, we asked administrators on the survey to report the average number of students in a classroom for grades K–3, 4–6, 7–8, and 9–12. Nearly all information on BIA and DOD students’ access to technology in schools, technology staffing levels, and how technology is used in the classroom was obtained through the survey. We calculated student-to- computer ratios systemwide for BIA and DOD schools by dividing the total number of computers reported by responding schools by the total number of students at the schools. For individual schools in the BIA and DOD systems, student-to-computer ratios varied somewhat from the ratio for the systems overall. With respect to technology spending, DODEA provided us with estimates of how much the agency spent to support educational technology programs in its schools for the 1999–2000 school year. BIA schools provided this information to us through the survey. We gathered information on the condition of BIA and DOD school buildings primarily through the survey. We asked school administrators to report on the physical condition of buildings and on specific building features, such as roofs and plumbing. We also asked about whether certain environmental conditions were satisfactory, such as indoor air quality and acoustics or noise control, and whether working facilities for teachers and students, such as classrooms, libraries, and computer labs, were sufficient. Many of the questionnaire items were based on those used in two previous surveys: a 1999 Education survey on the condition of school buildings, which was conducted on a nationally representative sample of public schools; and a 1994 GAO survey on the condition of school buildings, conducted on a nationally representative sample of public schools and all BIA schools. We asked administrators to report separately on the condition of school buildings and on the condition of dormitory buildings. As a further indication of the condition of schools, we reviewed BIA and DOD agency data on needed maintenance and repairs at school facilities. In reviewing BIA’s backlog of deferred maintenance and repairs, we first excluded data for buildings not related to schools, such as administrative buildings, employee quarters, and buildings supporting law enforcement services. We then looked at estimated costs to address certain types of deficiencies according to categories used by BIA—for example, those related to student and staff safety; environmental needs, such as asbestos and radon testing; and energy-related needs. Finally, we asked BIA officials to conduct searches on the backlog database for deficiencies related to certain items asked about on our survey—for example, roofs; plumbing; fire safety; handicapped access requirements; sewer and water infrastructure; asbestos; heating, ventilation, and air conditioning; and playground surfaces and equipment—and then totaled the estimated costs for these deficiencies. We also obtained the 5-Year Facilities Plan for DOD schools, which includes a total for the estimated amount needed to address all identified items. It should be noted that the 5-year plan does not include repair projects costing under $25,000 for domestic schools and $10,000 for overseas schools. We reviewed the 5-year plan data for specific building deficiencies that were noted more often as problems by DOD schools in our survey: roofs; heating, ventilation, and air conditioning; and playground surfaces and equipment. To assess maintenance and repair funding levels for BIA schools, we measured funding against guidelines set by the National Research Council (NRC). The NRC has recommended that budget allocations for maintenance and repair be between 2 and 4 percent of current replacement value. We first determined the current replacement value of BIA schools by multiplying the square footage of the schools by the cost to construct a new school per square foot. We obtained BIA’s total education facility square footage for maintained buildings for 1997–2001. (These data included 14 peripheral dormitories and two colleges, which account for about 11 percent of BIA’s total education facility square footage.) We then obtained data on the average cost per square foot of a new school for each year from 1997 through 2000, from annual education construction reports published by American School and Universities. (The average cost per square foot of a new school was not yet available for 2001, so we used the average amount per square foot reported for 2000 for this year.) Then, for each year from 1997 to 2001, we multiplied BIA’s educational facility square footage by the average cost per square foot to construct a school that year. To identify BIA budget allocation categories that met the NRC’s definition of maintenance and repair, we reviewed BIA documents describing the categories and discussed these with experts. Once we identified the appropriate categories, we obtained the amounts BIA requested and allocated for these categories for fiscal years 1997–2001. Then for each year, we determined the percentage that the requested and allocated amounts represented of the current replacement value and compared these with NRC guidelines. To calculate estimated per pupil expenditures for DOD and BIA schools that would be comparable to public school figures, we followed guidelines for identifying expenditures set forth by the National Center for Education Statistics (NCES) in its National Public Financial Education Survey. The results of this survey are used to develop the national per-pupil figure. National per-pupil expenditure figures reflect current expenditures from federal, state, local and private sources, at the district level for pre- kindergarten through grade 12. Current expenditures include salaries, benefits, purchased services, and supplies for the following functions: instruction; support services; noninstructional services, such as food services; and direct program support, such as state contributions to employee retirement funds. Long-term expenditures such as capital outlay, debt service, facilities acquisition and construction services, and property expenditures (for example, for equipment and vehicles) are excluded from current expenditures by NCES and, in most cases, by our evaluation. At the time we did our work, the latest school year for which national public school per-pupil expenditures were available was 1997–98. Data needed to precisely compute per-pupil expenditures for both BIA and DOD schools were not available. Therefore, our calculations are estimates based on BIA and DOD agency data and federal expenditure information from tribal audit reports submitted under the Single Audit Act. Because BIA and DOD data were generally not available by categories specified by NCES, we used agency or tribal expenditure or obligation data for programs or budget line items which included these categories. Using this approach we were able to include expenditures for salaries, benefits, purchased services, and supplies for the categories included in the national per-pupil expenditure: instruction, support services, and noninstructional services. Direct program support generally did not apply. Similarly, we were generally able to exclude expenditures for capital outlay, debt service, and facilities acquisition and construction services by excluding budget line items that contain these expenditures. In some cases, we were not able to extract specific expenditures or obligations relating to property expenditures within selected programs; however, these amounts were likely to be relatively small. For BIA schools, we developed estimated per-pupil calculations for (1) BIA-operated day schools, (2) tribally operated day schools, (3) day schools overall, and (4) boarding schools. For BIA-operated schools, we obtained expenditure information from the Department of the Interior’s (Interior) financial system based on codes indicating programs that support kindergarten through grade 12. We were not able to identify expenditures for administrative services provided by Interior for BIA- operated schools, such as payroll and procurement. We used fiscal year 1998 data. A fiscal year reasonably approximates the period July 1, 1997, and ending June 30, 1998, used by NCES. For tribally operated schools, we relied primarily on federal expenditure information from audit reports submitted under the Single Audit Act. These reports were generally for the period July 1, 1997, through June 30, 1998. We were able to obtain expenditure information for 54 of the 98 schools that were tribally operated that year. We could not obtain expenditure information for the remaining 44 schools because, in some cases, the school expenditure information in the audit report was included with other expenditure information for tribal or other organizations and could not be readily extracted, or because related audit reports were not available. For both BIA-operated and tribally operated schools, we considered expenditures from federal funding sources only, which, according to BIA officials, represent by far the greatest source of funding for BIA schools. This included expenditure data for Education programs, such as Title I; and the Department of Agriculture’s (USDA) child nutrition programs, such as the National School Lunch and Breakfast programs. The per-pupil expenditure figures for public schools nationally consider funding from all sources. Most funding for public schools comes from state, intermediate, and local sources. In order to determine overall estimated per-pupil expenditures for day and boarding schools, we weighted the calculated estimated per-pupil expenditures for BIA-operated and tribally operated schools of both types, according to the number of students attending each type of school. We used student enrollment figures from BIA internal reports for each school type. In order to calculate DOD overseas and domestic estimated per-pupil expenditures, we used obligations from DOD internal financial reports for fiscal year 1998 as a proxy for expenditures, since DOD does not maintain expenditure information in the detail necessary for this type of analysis. We also used fiscal year 1998 data since, similar to other federal agencies, DOD tracks obligations by fiscal year and not for other periods. For student enrollment figures, we relied on data from DOD internal reports for domestic and overseas schools. We also obtained information for the value of USDA’s child nutrition programs, such as the National School Lunch and Breakfast programs, for fiscal year 1998, which we included in the estimated expenditure per pupil calculation. 1. We stated that BIA’s funding for school operations and facilities needs increased 30 percent from fiscal years 2000 to 2001. Interior suggested that GAO differentiate the actual amount of the increase between the Operation of Indian Programs and Construction appropriation accounts, initially stating that each account had increased by 25 percent. Based on our calculations, we added information to the report specifying that funding for Operation of Indian Programs increased by about 5 percent and funding for Construction increased 121 percent between fiscal years 2000 and 2001. This supports our statement that nearly all the increase was for the repair and replacement of school facilities while funding for school operations received only a modest increase. 2. Interior commented that our report should acknowledge that the Department of Education (Education) funding that BIA schools receive is available to all public schools across the country. Interior specifically noted that public schools that educate Indian children on or near Indian reservations receive Impact Aid Funds from Education. We added text to the report indicating that like BIA schools, many public schools also receive funding from Education. 3. Interior noted that in an agreement with Education, BIA serves as a state education agency and is authorized to receive flow through funds from Education. We have added this information in the report. 4. Interior suggested that we provide some examples to further highlight differences between BIA and DOD schools. Interior stated that the DOD school system has no schools with small enrollments or combinations of grades like those in the BIA school system. The DOD school system does have several schools with enrollments under 100 students and schools that span both elementary and secondary grades, but we agree that these types of schools are less prevalent in DOD’s school system. Interior also said that it would have been helpful for GAO to provide an example of how BIA schools are less able to take advantage of economies of scale and that this would help explain the school system’s per- pupil expenditure. In our report section on per pupil expenditures, we describe a situation that illustrates how difficult it can be for BIA schools to achieve economies of scale. Finally, Interior stated that the report could comment on how the physical conditions found in BIA schools could affect student outcomes. Thus, we added a note to the report stating that though some studies conclude that school facility conditions—such as inadequate ventilation or faulty heating systems—can affect student learning, the research is inconclusive overall. 5. Regarding the performance of BIA students on state assessments, Interior argued that state standardized tests may be culturally biased and may be a less reliable measure for Indian students than other minorities. In the report we acknowledged that standardized tests have been criticized as being culturally biased, and we therefore provided information on authentic assessments of BIA students. However, we are not aware of any research that shows standardized tests are less reliable for Indian students than other minority students. 6. Interior said GAO should have compared BIA student achievement with public schools serving large numbers of Indian students in rural areas. We agree that these would be worthwhile analyses. However, the additional audit work and data required to perform these analyses did not allow us to include them in this report. 7. Interior noted BIA’s efforts to address differences in student achievement through programs designed to moderate the effects of poor economic and family conditions on student achievement. The agency also noted that BIA had established long term goals that address student performance. We have added information to the report to acknowledge BIA’s efforts in these areas. 8. Interior questioned our comparison of BIA students’ plans to attend college and performance on college entrance examinations with those of students nationally. The agency argued that the economies of rural areas, where most BIA schools are located, do not offer jobs that require post-secondary education, and for this and other reasons, less cultural emphasis is placed on BIA students to perform well on tests like the SAT and to attend college. The agency stated that BIA students generally expect to go to tribal colleges that do not require college entrance examinations, such as the SAT. We believe that these measures are appropriate given that one of the Office of Indian Education Program’s goals is to increase post-secondary enrollment rates. Also, a significant number of BIA students take the SAT and ACT, perhaps to enter colleges that require these examinations. 9. Interior also said that we should have compared BIA students’ plans to attend college and their performance on college entrance examinations with students from other rural regions of the U.S. or students in public schools on Indian reservations. Some data are available for students living in rural areas but these are not specifically focused on Indian students. For example, data from 1993-94 show that on average 54 percent of 12th graders living in small towns or rural areas applied to college, compared with BIA school administrators’ estimates that 28 percent of graduating seniors planned to enroll in college. With regard to the SAT, for students graduating in 2000, rural students received an average total score of 992 on the verbal and math sections of the SAT, compared with 1,019 for students nationally, and 765 for BIA students. 10. Interior stated that teacher turnover correlates with reduced student achievement, but did not provide support for this statement. We were not able to identify any studies establishing a link between teacher turnover and student achievement. 11. Interior noted that in fiscal year 2000, BIA conducted a census of personal computers in BIA schools and concluded that the school system had a ratio of 1 computer for every 3.3 students. BIA added, however, that 30 percent of these computers are for administrative usage and that almost half are reaching or have surpassed their life cycle usefulness. Our survey asked school administrators about computers used specifically for instructional purposes. Using these data, we determined that the school system had a ratio of 1 computer for instructional purposes for every 3.5 students. 12. Interior said that we had failed to address the fact that state legislatures have appropriated funds for school technology and that these funds are not included in district funding appropriations and therefore are not included in calculations of expenditures per pupil by NCES. We contacted NCES and were told that state funding for educational technology should be included in the data that states report to NCES for expenditure per pupil calculations. Thus, based on this information, we did not modify our report. Interior also noted that the Office of Indian Education Programs had to rely on private partnerships and grants to provide enough resources to place technical capabilities in all its schools. (It should be noted that these additional resources were not identified during our review and therefore were not included in our expenditure per pupil calculation for BIA schools.) In addition, Interior stated that our report was unclear about the resources DOD uses to support technology in its schools. In our report we provided an estimate for the amount of money the DOD school systems obligated per student for educational technology in fiscal year 2000, which was less than the amount BIA schools spent per student based on our survey results. This funding comes from DOD appropriations. 13. With respect to housing for teachers and staff, Interior said that we had assumed that rents collected from teachers living in employee housing covered the cost of maintaining this housing and had not realized that schools end up covering these costs out of their facilities maintenance funds. Interior argued that school maintenance funding diverted for teacher housing should not have been included in our calculation of expenditures per pupil. Interior also stated that staff in DOD schools live in government provided quarters expense free. Early in our review, BIA officials informed us that rents paid by teachers and staff did not cover the full cost of maintaining employee housing. However, when requested, BIA was unable to identify expenditures made by schools for such purposes. More importantly, Interior noted in its comments that providing housing is necessary for maintaining a qualified teaching staff. Because of this, we believe that expenditures to maintain employee housing are part of the cost of providing instruction for these schools. An NCES official agreed and stated that expenditures from school facilities maintenance funds used to maintain employee housing should be included in the calculation of expenditures per pupil. For the same reason, we included DOD schools’ expenditures for housing allowances provided to overseas staff in our calculation of expenditures per pupil. We have also added a footnote stating that a small number of staff in DOD schools overseas live in government-provided quarters; most receive housing allowances intended to cover the cost of housing in the areas where they choose to live. 14. Interior commented that our report failed to address the adequacy of funding for facilities operations. We were not able to identify a widely used benchmark to assess the sufficiency of BIA’s facilities operations funding. We were only able to compare BIA’s obligations for both facilities operations and maintenance with similar expenditures for public schools. We found that BIA’s obligations per square foot of building space were higher than the national median for public schools. However, it was difficult to draw conclusions from these calculations as they do not consider the additional infrastructure BIA schools operate and maintain. Also, this analysis does not examine the adequacy of BIA’s funding for operations and maintenance, it merely compares the amounts used by BIA and public schools for these purposes. Further, we were aware at the time we conducted our work that BIA had contracted with a private engineering firm to assess the adequacy of BIA’s facilities operations and maintenance funding. This work may provide a clearer picture of BIA’s needs. This report is expected to be completed in Fall 2001. 15. Interior commented that the cost of operating facilities could be reduced if school replacement construction funding covered the cost of demolishing and removing old structures. Currently, BIA provides for the security of these idle structures out of operations funding until a decision is made on their disposal. This issue may be worthy of attention, but BIA’s own budget formula for determining operations and maintenance needs suggests that this is not a major expense. 16. Interior noted that BIA, DOD, and public schools define and account for maintenance funds and expenditures differently, and these differences make “a straight across the board comparison” difficult. We determined that it would be challenging to complete such an analysis within the timeframe of this review. Thus, we did not attempt to compare maintenance budgets or expenditures among these school systems. Rather, we analyzed BIA’s and DOD’s maintenance and repair backlogs and provided information on the amount of funding allocated to address them and school construction. 17. Interior commented that our estimates of expenditures per pupil were not adjusted to reflect differences between students in day schools and in residential schools. We did calculate separate per-pupil expenditures for day schools and residential schools and did not combine them. Interior also stated that we did not adjust our per-pupil expenditure estimates for students with special education needs or for the costs of small schools in sparsely populated areas. The agency recommended that we use an alternative approach for calculating expenditures per pupil that takes into account differences in student and school needs. Interior pointed to funding allocation systems used by some states where students are weighted differently based on the additional education resources they may require. For example, a student requiring special education services may be counted as 1.5 students in determining state aid. Interior argued that we should have used a weighted count of its students to calculate expenditures per pupil, since a high proportion have special needs. Such a calculation may be useful, but comparisons with public schools would not be possible since NCES does not calculate the national expenditure per pupil using a weighted student count. 18. Interior stated that we should have compared BIA expenditures per pupil with that of school districts with similar student populations. Interior suggested several school districts with similar student populations in South Dakota and New Mexico that could be used for comparison with BIA’s per-pupil expenditure. We obtained the per- pupil expenditures for these districts from NCES and found they ranged from $4,979 to $8,706 in 1997-98, all below BIA’s estimated expenditure per pupil of $9,647. 19. Interior recommended that we should not have included administrative cost grants for tribally operated schools in our expenditure per pupil calculation. The agency argued that these grants are for the purpose of administering the schools and carrying out support functions that are not part of the basic academic instruction, such as fiscal and personnel activities. According to an NCES official, these expenditures should be included as they fall into the category of general administration expenditures, which is included in the national per pupil expenditure calculation. In addition to the individuals named above, Mary E. Abdella, Beverly G. Burke, Julianne Hartman Cutts, Eric M. Eliasen, Kopp F. Michelotti, Nancy R. Purvine, Joel I. Grossman, Elsie M. Picyk, Stanley G. Stenersen, and James P. Wright made key contributions to this report. | Unlike public schools, the schools run by the Bureau of Indian Affairs (BIA) and the Department of Defense (DOD) depend almost entirely on federal funds. Although the two school systems are similar in that regard, their histories and settings are very different. The performance of many BIA students on standardized tests and other academic measures is far below that of public school students. BIA students also score considerably below the national average on college admission tests. Nearly all BIA teachers are fully certified for the subjects or grade levels they teach, although BIA officials said that some schools have great difficulty recruiting and retaining qualified staff. BIA schools report that they have greater access to computers and the Internet than do public schools, but the technical support available to maintain the computers and help teachers use technology in the classroom is more limited. Many school administrators reported problems with school facilities. Estimated per-pupil expenditures at BIA schools varied widely by school type, such as day or boarding school, but are generally higher than for public schools nationally. The academic performance of DOD students generally exceeds that of elementary and secondary students nationwide. On college admission tests, DOD students perform at or near the national average. Nearly all DOD teachers are fully certified for the subjects or grade levels they teach, and about two-thirds have advanced degrees. Access to computers and the Internet is better than at public schools, and nearly all DOD administrators said that technical support is available in their schools. Many DOD administrators reported problems with their school facilities, but the overall condition of their buildings did not differ greatly from that reported by public schools in 1999. Estimated per-pupil expenditures at DOD schools overseas were higher than those for U.S. schools, mainly because of the costs involved in moving and housing teachers and staff overseas. |
According to experts, a nuclear EMP is the burst of electromagnetic radiation resulting from the detonation of a nuclear device, which can disrupt or destroy electronic equipment. Nonnuclear EMP weapons can also be designed to intentionally disrupt electronics, but these generally have short range and are not a threat to multiple assets. The threat focused on primarily by the EMP Commission, and specifically addressed in this report, is the high-altitude EMP (HEMP). A HEMP event is caused by the detonation of a nuclear device above the atmosphere, from about 40 to 400 kilometers (approximately 25 to 250 miles) above the earth’s surface. A HEMP attack is not intended to cause direct physical impacts at the earth’s surface, such as injury or damage directly from heat, blast, or radiation, but instead creates an intense electromagnetic pulse that can disrupt computers and damage electronics and insulators, and could cause significant damage to critical electrical infrastructure, such as transformers. The components of EMP—commonly identified as E1, E2, and E3—can cause disruption and damage to electronic systems and electrical infrastructure. For example, the E1 component, or fast pulse, primarily disrupts or damages electronic-based control systems, sensors, computers, and similar devices, but may also adversely affect long-line electrical systems; the E2 component, similar to lightning, has the similar ability to impair or destroy control features that are not protected from lightning; and the E3 component is a subsequent, slower-rising, longer- duration pulse that creates disruptive currents in transmission lines, which causes grid instability and increases heat in transformers. If the E3 pulse is high enough and long enough it can result in grid collapse and potentially damage transformers. In addition to manmade EMPs, naturally occurring solar weather events of sufficient intensity can also cause electromagnetic impacts similar to the E3 pulse that can adversely affect components of the commercial electric grid, as well as other infrastructure such as satellites and undersea cables. The resulting impact of solar weather is commonly referred to as a geomagnetic disturbance (GMD). In 1989, a GMD caused wide-scale impacts on the Hydro-Quebec power system in Canada which caused this regional electric grid to collapse within 92 seconds and left 6 million customers without power for up to 9 hours. See appendix I for additional information on GMD events. See table 1 for an overview of electromagnetic threats and their primary effects. As noted in Presidential Policy Directive 21 (PPD-21), the energy and communications sectors are uniquely critical due to the enabling functions they provide to other critical infrastructure sectors. The U.S. electric power delivery system is a highly complex network of substations and electric lines that transport electricity from generators to residential, commercial, and industrial consumers. The U.S. electric grid has three main components: generation (creation of electricity), transmission (long haul transport of electricity), and distribution (shorter distances connecting the electricity to the consumer/end user). In November 2015, FERC reported that there are over 24,000 substations nationwide, connected by over 430,000 miles of transmission lines. Given the interdependency among infrastructure sectors, an EMP or major GMD event that disrupts the electric grid could also result in potential cascading impacts on fuel distribution, transportation systems, food and water supplies, and communications and equipment for emergency services, as well as other communication systems that utilize the civilian electrical infrastructure. PPD-21 also recognizes that DHS has numerous responsibilities to protect critical infrastructure, including such things as analyzing threats to, vulnerabilities of, and potential consequences from all hazards on critical infrastructure. Within DHS, NPPD is responsible for working with public and industry infrastructure partners, and leads the coordinated national effort to mitigate risk to the nation’s infrastructure through the development and implementation of the infrastructure protection program. NPPD has two principal offices with responsibilities to facilitate protection of critical infrastructure that could be at risk from EMP and GMD events—the Office of Infrastructure Protection (IP) and the Office of Cybersecurity and Communications (CS&C). In addition, FEMA and S&T have roles related to addressing potential impacts to the electric grid, which could include EMP and GMD threats. The offices of Cyber and Infrastructure Analysis and I&A also help support related departmental activities. DOE also has a significant role as the sector-specific agency for the energy sector, which includes critical infrastructure and key resources related to electricity. For example, DOE is responsible for developing an Energy Sector-Specific Plan—in collaboration with other stakeholders, including DHS and energy sector owners and operators—that applies the NIPP risk management model to critical infrastructure and key resources within the sector. Within DOE, the Office of Electricity Delivery and Energy Reliability leads national efforts to increase the security and reliability of the energy infrastructure and facilitate recovery from disruptions to the energy supply. Legislation enacted in December 2015 further authorizes the Secretary of Energy, upon submission by the president of a written directive or determination identifying an electrical grid emergency, to issue orders for emergency measures necessary to protect or restore the reliability of critical electric infrastructure or of defense critical infrastructure during such an emergency and establishes the Secretary of Energy as the lead sector-specific agency for cybersecurity for the energy sector. DOE national laboratories also provide research support and technical expertise to federal and industry stakeholders regarding EMP and GMD impacts. Other principal federal agencies working to address the threat of EMP and GMD include DOD and FERC, as well as NOAA, the U.S. Geological Survey (USGS), and the National Aeronautics and Space Administration (NASA). Electrical infrastructure is primarily operated by private industry, which owns approximately 85 percent of the nation’s critical electrical infrastructure. Industry entities are represented, in part, through membership in industry associations such as the American Public Power Association, Edison Electric Institute, and National Rural Electric Cooperative Association. The North American Electric Reliability Corporation (NERC) also has authority to develop reliability standards to address the protection and improvement of the reliability and security of the electrical infrastructure. DHS, DOE and FERC have taken various actions to address electromagnetic risks to the electric grid, which generally fall under four categories: (1) standards, guidelines, tools and demonstration projects; (2) research reports; (3) strategy development and planning; and (4) training and outreach. Because federal agencies generally do not own electric grid infrastructure, federal actions to address GMD risks are more indirect through such things as developing standards and guidelines, and conducting research that could benefit electric grid owners and operators. Federal agencies have also been involved in strategy development and planning, as well as training and outreach efforts, as a means of preparing federal officials and others to respond to both EMP and GMD events, and enhancing knowledge about electromagnetic risks. For example, DHS S&T led the design and development of a prototype transformer that can be more easily transported to another location to help restore electric power in a timelier manner. DHS has also participated in various training and outreach events to enhance understanding of an EMP and GMD event. DOE’s primary efforts include supporting research to enhance the understanding of the potential impacts to the electric grid from electromagnetic events. Overall, DHS and DOE have led most of the federal actions addressing protection and mitigation efforts. They were also the key participants, with the White House Office of Science and Technology Policy (OSTP) and NOAA, in developing the National Space Weather Strategy and Action Plan issued in October 2015 along with support from a variety of federal departments and agencies. Table 2 below summarizes the key actions taken by federal agencies—most of which were conducted since 2012—that help to address electromagnetic risks. More detailed information on these individual activities is also included in appendix II. The actions recommended by the EMP Commission generally align with existing authorities and responsibilities of DHS and DOE relating to the protection of critical infrastructure, such as identifying key assets and analyzing risks, and as discussed above, DHS and DOE have taken actions to address some risks to the electric grid from electromagnetic events. Although DHS and DOE did not report that any of their actions were taken in response to the commission report, actions taken by both agencies have aligned with some of the recommendations. Specifically, the EMP Commission made seven recommendations related to the electric grid, most of which were directed to DHS and DOE. Of these seven recommendations, some of the actions that DHS and DOE took aligned with four of them. The seven EMP Commission recommendations related to the electric grid include the following: 1. conducting research to better understand infrastructure systems and 2. expanding activities to address the vulnerability of control systems, 3. identifying clear authority and responsibility to respond to an EMP 4. engaging federal and industry entities to determine liabilities and 5. establishing monitoring efforts and defining testing standards and 6. providing capabilities to help protect the electric grid from an EMP attack and recover as rapidly and effectively as possible, and 7. utilizing industry and governmental institutions to assure cost effective outcomes. DHS and DOE efforts to protect the electrical grid aligned with the first three recommendations noted above: conducting research to better understand the interdependencies of critical infrastructures, addressing the vulnerability of control systems to an EMP attack; and identifying responsibilities for responding to an EMP attack. They also aligned with the seventh recommendation, which includes 15 subparts, on utilizing industry and other governmental institutions to assure the most cost- effective outcomes. For example, with respect to the recommendation on conducting research to better understand interdependencies of critical infrastructures, DHS’s Sector Resilience Report: Electric Power Delivery includes some assessment of how various critical infrastructures— including the energy, communications, and transportation sectors, among others—are interdependent in maintaining operations. With regard to the last multipart recommendation identified above, DHS and DOE took some actions that aligned with 5 of the 15 subparts of this recommendation. Some of the sub-parts include such efforts as developing national and regional restoration plans and assuring the availability of critical communication channels, among other efforts. For example, DHS and DOE have actions underway to develop a Power Outage Incident Annex plan, which, according to DHS officials, is intended to provide incident-specific information regarding how the federal government plans to respond to and recover from a loss of power resulting from deliberate acts of terrorism or natural disasters, including an EMP or GMD event. In addition, a DHS entity developed EMP protection guidelines to help federal agencies and industry identify options for safeguarding critical communication equipment and control elements, such as Supervisory Control and Data Acquisition (SCADA) systems, from an EMP attack. For more detailed information regarding how identified federal actions align with these seven EMP Commission recommendations, see appendix III. DHS has not clearly identified internal roles and responsibilities for addressing electromagnetic risks to the electric grid or communicated these to external federal and industry partners. While multiple DHS components and offices, including NPPD, FEMA, and S&T, have each conducted independent activities addressing electromagnetic risks to the electric grid, none have been tasked with lead responsibility for coordinating related activities within the department or with federal and industry stakeholders. As a result, we experienced ongoing challenges in identifying applicable DHS personnel and related departmental actions. For example, NPPD officials had difficulty identifying their specific roles and activities addressing electromagnetic risks to the electric grid, including efforts to collect or synthesize available risk information to provide input into department-wide risk assessments, such as the Homeland Security National Risk Characterization (HSNRC). An official within NPPD/CS&C subsequently provided information to us regarding applicable activities conducted as part of his role leading efforts to help safeguard communications and information/control system capabilities in the event of EMP-related attacks or disasters. However, this official was initially identified to us by a non-DHS stakeholder and several other DHS entities that we interviewed regarding related efforts to address electromagnetic events lacked awareness of these activities. Further, DHS officials did not identify any DHS representatives or offices as having broader designated responsibility for performing key oversight or coordination roles regarding electromagnetic risks within DHS’s overall infrastructure protection efforts, including activities intended to help address risks to the electrical grid. Furthermore, industry representatives and other federal officials told us it is not clear who within DHS is responsible for addressing electromagnetic risks. One major industry association reported that although senior DHS officials participated in some collaborative bodies, such as the Electricity Subsector Coordinating Council, association representatives were unable to identify applicable DHS representatives at a working level because there was generally limited engagement with industry on these issues. In contrast, industry representatives stated that other key agencies, including DOE and FERC, have recognized offices and points of contact that were knowledgeable about electromagnetic issues of concern to the industry. Some industry officials also commented that having clarity about the DHS contacts was critical because DHS may be best positioned to serve as a liaison between them and DOD, which generally does not interact directly with industry on these issues. DOE officials also indicated that they did not know whom at DHS they should contact with regard to requesting related information, such as specific DHS research reports related to electromagnetic risks. The Energy Sector-Specific Plan, which is guided by the NIPP, highlights the importance of identifying clear roles and responsibilities in achieving goals and objectives in security programs and emergency response planning. According to the Energy Sector-Specific Plan, stakeholders should clearly understand their respective roles and responsibilities, and plan to integrate their independently executed roles to achieve a common set of infrastructure protection outcomes. The 2008 EMP Commission report also recommended that DHS make clear its authority and responsibilities, as well as delineate the functioning interfaces with other governmental institutions, regarding EMP response efforts. Standards for Internal Control in the Federal Government also cite this principle, stating the importance of ensuring that authority and responsibility are clearly assigned throughout the organization. According to officials within the DHS Office of Policy, addressing EMP risks has generally been a lower priority compared to other risks due to a combination of differing opinions on the likelihood of these events and their expectation that other federal agencies will be involved in responding to an electromagnetic event. For example, DHS officials noted that the nature of an EMP attack would constitute an “act of war” that would generally be included within DOD’s mission. According to a senior DHS official, in the case of an EMP attack, it is likely that DOD would serve in the principal role of identifying our adversaries and taking applicable defensive or retaliatory actions; however, DHS and DOE are designated in the NIPP as the key federal entities responsible for efforts to protect the electric grid and recover from such an attack. DHS acknowledged this responsibility through its inclusion of EMP as a risk event in the 2015 update of the Strategic National Risk Assessment (SNRA), noting that damage from a deliberate attack on the grid could cause cascading impacts through other infrastructure systems, leading to economic disruption and the potential loss of life. The growing recognition of GMD as a significant risk event requiring the collaborative efforts of multiple federal agencies and industry stakeholders, to both prepare for and respond to, underscores the concerns that industry and other officials have raised about DHS’s roles and responsibilities being clearly designated. In recent years, there has been a growing consensus among federal agencies, industry representatives, and independent researchers that a major GMD event could have significant impacts on the nation’s electric grid and is probable enough to warrant federal action. For example, the recent National Space Weather Strategy and Action Plan, issued by the White House in October 2015, and ongoing development of the FERC GMD reliability standard further exemplify the growing recognition of GMD as a significant risk event that requires the collective expertise of multiple federal agencies, as well as applicable industry partners. Designating internal roles and responsibilities within DHS regarding electromagnetic risks and communicating these to federal and industry partners could provide additional awareness of related activities and help ensure more effective and coordinated engagement with other federal agencies and industry stakeholders. The lack of clarity regarding DHS activities to address electromagnetic risks also increases the risk of potential duplication, overlap, or fragmentation within the department or across federal agencies. Officials from the DHS Office of Policy agreed that enhanced internal coordination among DHS entities could be beneficial and noted that there are actions currently underway to establish a Cyber, Infrastructure, and Resiliency group within the Office of Policy that could potentially facilitate further coordination efforts. DHS and DOE have not taken actions to identify key electrical infrastructure assets as required given their respective critical infrastructure responsibilities under the NIPP. Specifically, as the two primary federal entities responsible for addressing key risk management objectives outlined in the NIPP related to the energy sector, DHS and DOE have important roles in determining the extent to which critical infrastructure assets are adequately identified and all applicable information is included in related analyses. For example, the NIPP explicitly states that to manage critical infrastructure risk effectively, partners must identify the assets, systems, and networks that are essential to their continued operation, considering associated dependencies and interdependencies of other infrastructure sectors. Further underscoring the importance of identifying critical electrical infrastructure assets, a DOE-sponsored November 2015 report developed by the Idaho National Laboratory also emphasizes the need to identify the grid facilities most critical to restoration and recovery to prioritize those assets which should be protected from EMP effects, citing that it is not feasible or cost-effective to protect all infrastructure assets across the electricity sector. The 2008 EMP Commission report also specifically recommended that DHS and DOE prioritize nodes that are critical for the rapid recovery of other key sectors that rely upon electricity to function, including those assets that must remain in service or be restored within hours of an EMP attack. Notwithstanding these responsibilities, DHS and DOE did not report any actions taken to identify critical electrical infrastructure as part of risk management efforts for the energy sector. In response to our July 2015 testimony citing limited DHS activities to identify applicable electrical infrastructure assets, DHS stated that it was aware of a study that FERC had conducted that identified critical electrical substations and cited potential duplication as the reason for why DHS did not conduct any additional related efforts. The study, which FERC staff conducted in 2013, utilized network modeling to identify critical substations that FERC deemed significant enough to produce wide area outages across the U.S. power grid. According to FERC, the analysis was conducted, in part, to engage with owners and operators of those facilities to encourage the use of cyber and physical security best practices. While the FERC study provided data that could help inform further analysis of critical electrical infrastructure assets, FERC officials did not indicate their analysis was intended to address specific critical infrastructure responsibilities laid out in the NIPP. Moreover, while FERC’s study remains a positive step toward identifying select critical electrical infrastructure assets and addressing the EMP Commission’s recommendations, it did not solicit participation from other federal agencies, including DHS and DOE. Given the significant critical infrastructure responsibilities and expertise of these agencies, this lack of participation may have diminished the potential robustness of the study. For example, DOE officials stated that the FERC study did not include an analysis of “blackstart” capability, which DOE officials believe may be another important element that should be considered when analyzing the criticality of electrical generation facilities. Blackstart capability indicates that a facility can resume operations without reliance on external power sources—a capability that is important in the aftermath of an electrical grid shutdown. As the designated sector-specific agency, DOE has valuable expertise that could be useful based on their broad understanding of the bulk-power system, load factors, and specific asset characteristics that may be important to consider when determining the key elements of criticality that should be evaluated. In addition, DHS has specific expertise related to infrastructure dependencies that may be helpful to identify potential cascading impacts to other assets or systems resulting from electrical power outages that should be considered. Both DHS and DOE acknowledged that further collaborative efforts to assess critical electrical infrastructure could be beneficial; however, as of November 2015, neither DHS nor DOE have reported on any efforts to review the 2013 FERC study or collaborate further to jointly determine the key elements of criticality that they believe should be considered when evaluating the vast array of infrastructure assets constituting the U.S electric grid. The extensive size and scope of the electric power system necessitates collaboration among partners to ensure all individual expertise is effectively leveraged. For example, a senior FERC official testified in July 2015 that determining which of the substations nationwide are the most critical depends on the outcome one is pursuing. The official noted that if grid stability and continuity is the desired outcome, then a relatively small set of substations (in the hundreds) could be considered critical; however, if preserving power supply to specific DOD or nuclear power station is the desired outcome, then an additional collection of substations would need to be included. The NIPP also notes that critical infrastructure partners may view criticality differently, based on their unique situations, operating models, and associated risks. Leveraging additional DHS and DOE expertise could help to ensure that all key elements of criticality are reflected in the results of FERC’s study. Our work on federal agency collaboration supports this approach as well, noting that it is important to ensure that all of the relevant participants have been included in the collaborative effort. Reviewing FERC’s analysis and collaboratively determining the extent to which further assessment of critical electrical infrastructure may be needed would provide DHS and DOE an opportunity to contribute their unique knowledge and expertise, as well as better ensure that NIPP responsibilities are adequately addressed and all applicable elements of criticality are being considered. Although DHS components have independently conducted some efforts to assess electromagnetic risks as identified above, the department has not fully leveraged available risk information or conducted a comprehensive analysis of these risks. Within the DHS Office of Policy, there is recognition that “space weather” and “power grid failure” are significant risk events, which DHS officials have determined pose great risk to the security of the nation. However, these officials were unable to provide detailed information about the specific risk inputs—namely threat, vulnerability, and consequence information—that were used to assess how electromagnetic events compared to other risk events, or how they were used to inform DHS’s applicable risk-management priorities. Further, officials within NPPD were unable to identify any specific actions taken or plans to systematically collect or analyze risk information regarding electromagnetic impacts to the electric grid as part of department-wide risk assessment efforts. According to experts, with respect to threat, there is a distinction between GMD and EMP regarding the ability to assess the probability of occurrence. In the case of GMD, space weather researchers currently estimate a 6 to 12 percent chance that a Carrington class storm—a solar storm comparable in size to the largest on record—is likely to hit the earth in the next 10 years. The potential threat was recently illustrated in July 2012, when a Carrington class solar storm missed the earth by approximately 1 week, as the storm occurred on the far side of the sun facing away from the earth. In contrast, assessing the threat of an EMP attack remains more difficult given that analysts have to also account for human factors that can increase the level of uncertainty. Specifically, within the 2011 SNRA, DHS notes that incomplete knowledge of adversary capabilities and intent are sources of uncertainty regarding the frequency of some risks. Although DHS components identified multiple efforts to support the collection of information regarding the threat of GMD, DHS identified a more limited range of efforts to collect threat information regarding potential EMP attacks. I&A officials indicated that while there is no dedicated Center of Excellence within the Intelligence Community on EMP, there is subject-matter expertise available from analysts in related mission areas, such as chemical, biological, radiological, and nuclear issues. CS&C representatives further noted that a group of analysts in that office routinely monitor classified intelligence sources for EMP- related threat information, such as those available through the Joint Worldwide Intelligence Communications System. However, some additional opportunities may exist to leverage EMP threat information through I&A or direct collaboration with DOD, DOE, or other intelligence sources. For example, classified analytical products are available that address specific components of threat, such as assessment of EMP- related missile technologies, which could serve as an important input regarding adversary capabilities as part of DHS’s overall assessment of electromagnetic threats. Although I&A officials have direct access to these materials, neither I&A nor NPPD officials identified efforts to specifically leverage this information as part of any department-wide risk- assessment efforts. However, I&A officials noted that they remain well- positioned to pursue additional collection and analysis of EMP-related information through the Intelligence Community, if tasked to do so by NPPD. Acquiring more comprehensive information on potential EMP threats may be helpful because, as one EMP expert stated in recent testimony, there are misconceptions regarding the nature and impact of potential EMP attacks, which may have a negative effect on the ability of stakeholders to determine reasonable steps needed to protect critical infrastructure and mitigate potential impacts. One industry association further noted that the lack of threat information regarding EMP attacks makes it more difficult for their members to justify to their management, shareholders, or regulators the need for investments in EMP protective measures. DHS components have also conducted some research efforts to better understand the impacts to electrical infrastructure from EMP or GMD events; however, opportunities exist to leverage additional information through existing DHS programs and enhanced collaboration with federal partners. While the NPPD Office of Infrastructure Protection (IP) conducts various assessments to identify vulnerabilities, interdependencies, and potential cascading impacts across different sectors of the nation’s critical infrastructure, these have generally not been utilized to obtain specific information about vulnerabilities or consequences related to EMP or GMD events. Examples include the following: Infrastructure Survey Tool (IST). Through this program, IP administers survey questions to asset owners across all critical infrastructure sectors about key dependencies on utilities, including the supply of electric power. However, DHS officials did not identify any efforts to utilize this information to develop any specific consequence assessments associated with potential cascading impacts of a widespread power grid failure, which could be caused by an electromagnetic event. According to DHS, over 300 IST’s have been conducted at electrical substations since 2009 but, as of November 2015, the survey does not include any questions to capture the extent to which any specific protective equipment or mitigation measures may have been employed to address electromagnetic vulnerabilities. Regional Resiliency Assessment Program (RRAP). DHS identified three RRAP projects—of the 56 conducted since 2009—in which an EMP or GMD risk was considered, among other risk events. DHS used summary information it obtained from these assessments (and other IP site visits) to inform products such as the June 2014 Sector Resiliency Report: Electric Power Delivery. However, NPPD did not identify any efforts to utilize RRAP findings to develop more rigorous vulnerability or consequence analyses. For example, RRAP findings could help inform more detailed modeling of sector interdependencies, as called for by the EMP Commission, or serve as input to the identification of critical electrical infrastructure assets that could be impacted by electromagnetic events. Further, our review of a resiliency assessment from one of the three applicable RRAP projects indicated that although an EMP or solar storm was used as one of several threat scenarios that could disrupt the infrastructure assets of focus, there was limited discussion about specific asset vulnerabilities to such an event or identification of any additional information needed to inform future analysis. Defense Critical Infrastructure Program. This DOD program is conducted to assess infrastructure and other key military assets in the United States using a range of threat scenarios including EMP events. Among other functions, these assessments identify critical assets and identify vulnerabilities, including dependence on the commercial electric grid. Such information could assist DHS in efforts to identify critical substations supporting DOD facilities and further inform risk- assessment activities. Although DOD officials indicated some collaboration with DHS Protective Security Advisors when RRAP projects are conducted in areas with applicable defense assets or installations, they reported that DHS and DOD had not coordinated to review the results of DOD’s assessments under the Defense Critical Infrastructure Program. Collecting and utilizing risk information obtained through the above programs could help DHS to better understand the specific consequences across different sectors that may result from long-term electrical power outages, and may contribute to efforts to identify critical electrical infrastructure and asset protection priorities. For example, further collection of information on sector interdependencies could help DHS to assess the potential economic consequences associated with long-term power outages. Assessment of direct and indirect economic consequences is currently limited but could be useful to help determine relative risk rankings and provide information to help assess the cost- effectiveness of various mitigation strategies. Further, a more comprehensive assessment of vulnerability and consequences may help inform broader DHS risk assessment efforts, including the HSNRC. These vulnerability and consequence inputs are key components to help ensure that the HSNRC can be effectively utilized to identify the relative rankings of various risk events, including other threats to the electrical grid, such as physical or cyberattack. According to officials within the DHS Office of Policy, the original HSNRC process conducted in 2012-2013 included estimates of broad consequences for 40 individual risk events. However, officials noted that certain categories, such as loss of life, were primary factors in designating selected risk events as priorities for further analysis. These officials also reported that given limited information about the specific consequences likely to result from an EMP event, DHS instead utilized proxy consequence information from an analytical study of a major regional earthquake that would be expected to cause damage to a wide range of critical infrastructure including electrical power operations. However, this postulated event—which included an estimate of approximately 86,000 injuries and fatalities across the 8-state study region—is unlikely to be on par with an EMP attack that, according to experts, could include the extended disruption of electric power and cascading impacts to other critical infrastructure across much of the United States. According to the NIPP, to assess risk effectively, critical infrastructure partners—including owners and operators, sector councils, and government agencies—need timely, reliable, and actionable information regarding threats, vulnerabilities, and consequences. Under the NIPP, DHS’s responsibilities include establishing and maintaining a comprehensive, multitiered, and dynamic information-sharing network designed to provide timely and actionable threat information, assessments, and warnings to public- and private-sector partners. In addition, the Quadrennial Energy Review specifically notes the importance of applicable threat information, stating that incomplete or ambiguous threat information may lead to inconsistency in physical security among grid owners, inefficient spending of limited resources at facilities, or deployment of security measures against the wrong threat. The Quadrennial Energy Review also states that, in regard to critical high- voltage transformers, current programs to address vulnerability may not be adequate to address the security and reliability concerns associated with simultaneous failures of multiple high-voltage transformers. Moreover, according to subject-matter experts, the impact to the electric grid from electromagnetic threats may vary substantially by location, network and operating characteristics, and other factors. For example, key reports on GMD indicate that high-voltage transformers located at higher latitudes in the United States are likely subject to increased potential for adverse impacts from GMD events than those at lower latitudes. However, this is not the case with EMP, which may have impacts equal to or greater than GMD in any latitude of the United States. Additionally, an EMP would subject infrastructure assets to a combination of E1, E2, and E3 effects compared to GMD which only produces impacts similar to the E3 effect. Federal and industry researchers have also noted that given these distinct effects and the different types of mitigation efforts necessary to protect against them, more comprehensive risk information may be necessary to evaluate their unique impacts to the electric grid. The electric grid remains vulnerable to other potential threats, such as physical and cyberattacks, which each present unique vulnerabilities to assess. Better collection of threat, vulnerability, and consequence information through existing DHS programs and strengthened collaboration with federal partners could help DHS better assess the relative risk ranking of electromagnetic events versus other risks and help determine potential protection priorities to address identified vulnerabilities. Key federal agencies, including DHS and DOE, as well as industry partners have not established a fully coordinated approach to identifying and implementing risk management activities to address EMP risks. According to the NIPP Risk Management Framework, such activities include identifying and prioritizing research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. The publication of the National Space Weather Action Plan in October 2015 identified many key federal activities in these areas regarding the GMD risk; however, no similar efforts have been proposed regarding EMP risks to the electric grid. There are several areas of EMP research highlighted in previous studies where coordinated federal involvement could help address identified gaps and further inform risk assessment efforts. For example, a recent effort funded by DOE—and conducted by Idaho National Laboratory (INL)— identified the need for updated research and analysis regarding the likely impacts of the E1, or early time pulse, of an EMP event. According to the report, most information sources on the impact of EMP E1 to electric power grids are decades old, include only observational information, and do not account for modern grid technologies and electronic control systems. For example, the report states that assessing the effectiveness of routinely recognized protective actions such as shielding equipment in faraday cages remains difficult given the limited experimentation data available, outside of DOD. As a result, the report notes that the electric power industry may not have sufficient information regarding EMP effects to design adequate protections. Overall, the report concludes that there are more unknowns than knowns regarding EMP effects and mitigation, and recommends that the government collect additional data on E1 threats, their impact to the electric grid, and potential mitigation measures. A 2013 white paper developed by a leading research organization for the electric industry also reported a lack of widespread and coordinated research and development efforts to protect and mitigate effects of EMP attacks against the commercial electric grid. Among the specific actions identified is a recommendation for stakeholders to define key characteristics of an EMP event—such as potential altitudes of detonation—for further study of corresponding impacts. According to this paper, and representatives from an individual utility we interviewed, the lack of more specific parameters for determining potential EMP effects makes it difficult to develop applicable protective guidelines and equipment design specifications. However, FERC officials noted that additional work is being done outside of the United States to further develop applicable standards and implement equipment designed to mitigate the effects of or protect against EMP risks. Further research and development efforts on EMP effects could also include evaluation of the impacts of additional devices intended to disrupt or destroy electrical infrastructure or control systems, such as intentional electromagnetic interference. Updated information on the specific electromagnetic effects of EMP events or intentional electromagnetic interference weapons could help ensure that protective and mitigation efforts are designed to be effective for multiple threat scenarios. Similarly, any proposed mitigation strategies resulting from efforts to address GMD, including the National Space Weather Action Plan, could also consider how effective these strategies might be against a potential EMP attack so that fully informed investment decisions can be made. For example, as one EMP expert noted in recent congressional testimony, if designing protective equipment to withstand specified levels of E3 effects from an EMP attack, there may be collateral benefits for providing protection against GMD effects; however, the reverse may not be true. That is, protecting against identified benchmark levels of GMD may not prove sufficient to protect against EMP E3 impacts. Another potential area for additional federal collaboration involves further research and evaluation of protective equipment intended to help mitigate the impacts of an EMP event. Such research, also identified in the 2008 EMP Commission report, may include further evaluation of EMP hardening or shielding strategies, as well as specific testing of commercial products intended to protect or mitigate the effects of EMP attacks on key infrastructure assets, such as transformers. Government and industry stakeholders cite potential adverse operational impacts that may result from the use of such devices as a reason for not retrofitting existing assets. According to one major electrical industry association, EMP impacts on the electric grid are not fully understood and many EMP mitigation techniques involve significant investment and remain unproven. Further evaluation of the effectiveness of these types of products may help to inform government and industry cost-benefit analyses and provide more sound estimates on the potential costs associated with implementation of various protective measures across the electric grid. A lead researcher within DOE stressed that sound science is required to help inform any federal efforts to establish standards and protective guidelines intended to address the potential impacts of EMP. DOE officials further stated that assessing the cost-effectiveness of select EMP or GMD protective measures could also help state public utility commissions determine whether the cost of such measures can be included in base utility rates. In addition to bringing additional information and expertise to the table, enhanced engagement by key federal agencies could present opportunities for stakeholders to jointly fund and develop collaborative research projects. Among a few potential examples identified by government and industry stakeholders would be additional research and testing conducted at DOE National Laboratories or even possible pilot projects performed at government-operated utilities. The NIPP calls for the implementation of risk-management activities, which includes research and development to reduce vulnerabilities that have proven difficult or expensive to address. Additionally, the Energy Sector-Specific Plan states that energy-sector partners such as DHS and DOE are to pursue a focused, coordinated management approach that aligns current activities to research and development goals and milestones, initiates specific projects to address critical gaps, and provides a mechanism for collaboration, project management, and oversight. This approach aims to develop clearly defined activities, projects, and initiatives with time-based deliverables that are tied to priority research and development requirements. Given the limited experimental data regarding EMP effects on the electric grid, additional collaboration among government agencies and industry regarding EMP- related research and development could help fill existing information gaps and help better understand EMP effects on the electrical grid. DHS officials and industry representatives noted that some discussion of EMP, including areas for additional research, has been conducted within forums such as the Electricity Subsector Coordinating Council, but that it has not surfaced as a key priority. In addition, DHS officials stated that an EMP attack generally remains a lower risk priority compared to other risk events with higher probability such as natural disasters or cyberattacks. However, as discussed previously, it is not clear that DHS has assessed all available risk inputs regarding EMP events to develop fully informed relative risk rankings. Officials also noted that efforts to comply with Office of Management and Budget Circular A-11—which calls for executive-branch departments to adopt an enterprise risk- management approach—contributes to decisions regarding which operational risks to address given limited resources. Officials stated that, as a result, operational risks, such as counterterrorism and counterdrug efforts, remain higher priorities for the department than EMP and solar weather events, because these events represent a better opportunity for DHS to maximize its return on investment. DOE officials also noted resource limitations and competing priorities as the key driver for not pursuing additional risk management activities specifically related to EMP events. However, DOE officials concurred that there is potential for enhanced collaboration with other federal agencies and industry stakeholders regarding identification of future research needs and priorities related to EMP. Even if an EMP attack is not determined to be among the highest resource priorities for DHS and DOE relative to other risk events, there are opportunities for enhanced collaboration among federal agencies and industry stakeholders to address identified gaps and help ensure that limited resources are more effectively coordinated and prioritized. Better identification and implementation of key risk-management activities, including collaborative identification and support of research and development priorities, may help close some of the gaps identified regarding EMP events and provide the groundwork necessary for a more robust research-based evaluation of additional protection and mitigation options. Given the foundational importance of electrical power to support other critical infrastructure sectors such as communications and transportation, not securing the electric grid from electromagnetic events could result in the loss of electrical services essential to maintaining our national economy and security. Recognizing this possibility, federal agencies have taken a range of actions since 2008—when the EMP Commission report was issued—to provide guidance, conduct research, develop strategies and plans, and participate in training, among other things, to address electromagnetic risks to the electric grid. Although DHS’s and DOE’s actions were not taken directly in response to the EMP Commission’s recommendations, they do align with their respective critical infrastructure protection responsibilities in law and policy, including under the NIPP. However, DHS could take additional actions to help address risks to the electric grid. Designating roles and responsibilities within DHS regarding electromagnetic risks could help ensure enhanced awareness of related activities within the department and improve coordination with other federal agencies and industry stakeholders. Once clear roles and responsibilities are established and communicated, DHS and other federal agencies will be better positioned to leverage their respective expertise to inform future actions. One area in particular, where this collective expertise could be more fully leveraged is in determining the nation’s critical electric infrastructure assets. Although FERC conducted a related analysis, it was completed without collaboration and input from DHS and DOE entities, and as a result opportunities may have been missed to leverage their unique knowledge and expertise. Additional collaboration to review FERC’s analysis and determine whether further assessment is needed could help ensure that all applicable elements of criticality are being considered. While DHS recognizes that both space weather and power grid failure are risk events that can affect the nation’s security, there are additional opportunities for DHS to collect key risk inputs, such as further collaboration with DOD to obtain applicable EMP threat, vulnerability, and consequence information. Additional data collection could also inform DHS’s broader risk-assessment efforts to better determine the relative risk ranking of electromagnetic threats compared to other potential risks— a key factor in ensuring that protection and resource allocation priorities are appropriately considered and resourced. Lastly, given the potentially significant impacts that an EMP attack would have on the electric grid and the potential cost of additional protective measures to mitigate against electromagnetic impacts, federal entities could better coordinate to identify and implement key EMP risk management activities. Such activities, including collaborative identification and support of research and development priorities, may help close some of the gaps identified regarding EMP events and provide the groundwork necessary for a more robust research-based evaluation of additional protective efforts. To enhance accountability for key risk-management activities and facilitate coordination with federal and industry stakeholders regarding electromagnetic risks, we recommend that the Secretary of Homeland Security designate roles and responsibilities within the department for addressing electromagnetic risks and communicate these to federal and industry partners. To more fully leverage critical infrastructure expertise and address responsibilities to identify critical electrical infrastructure assets as called for in the NIPP, we recommend that the Secretary of Homeland Security and the Secretary of Energy direct responsible officials to review FERC’s electrical infrastructure analysis and collaborate to determine whether further assessment is needed to adequately identify critical electric infrastructure assets, potentially to include additional elements of criticality that might be considered. To enhance federal efforts to assess electromagnetic risks and help determine protection priorities, we also recommend that the Secretary of Homeland Security direct the Under Secretary for NPPD and the Assistant Secretary for the IP to work with other federal and industry partners to collect and analyze key inputs on threat, vulnerability, and consequence related to electromagnetic risks—potentially to include collecting additional information from DOD sources and leveraging existing assessment programs such as the IST, RRAP, and DCIP. To facilitate federal and industry efforts to coordinate risk-management activities to address an EMP attack, we recommend that the Secretary of Homeland Security and the Secretary of Energy direct responsible officials to engage with federal partners and industry stakeholders to identify and implement key EMP research and development priorities, including opportunities for further testing and evaluation of potential EMP protection and mitigation options. We provided a draft of this report to DHS, DOE, DOD, NOAA, and FERC for their review and comment. DHS and DOE provided written comments, which are reproduced in appendices IV and V. In their comments, DHS and DOE concurred with each of the recommendations made to their respective departments and described actions underway or planned to address them, including applicable timeframes for completion. If fully implemented, these actions should address the intent of the recommendations and better position DHS and DOE to further support federal and industry efforts to help protect the U.S. electric grid from electromagnetic events. For example, in regards to designating applicable roles and responsibilities within the department, DHS noted that the Cyber, Infrastructure, and Resilience Policy Office within the DHS Office of Policy is currently developing its portfolio to further support electromagnetic risks. Specific actions identified to be completed by December 2016 include coordination across the department to identify and document applicable roles and responsibilities regarding electromagnetic issues to ensure full mission coverage while minimizing potential overlap or redundancy. In regards to engagement with industry stakeholders to identify and implement key research and development priorities, DHS and DOE each identified actions to convene applicable stakeholders to jointly determine mitigation options and conduct further testing and evaluation. DOE also identified that the department is working with EPRI to develop an EMP Strategy that lays out applicable goals and objectives. According to DOE, the EMP Strategy is scheduled for completion by August 31, 2016, and is to be followed by a more detailed action plan identifying R&D priorities and specific opportunities to test and evaluate EMP mitigation and protection measures. DHS, DOE, NOAA, and FERC also provided technical comments, which we incorporated as appropriate. DOD did not provide comments on this 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 Secretaries of Commerce, Defense, Energy, and Homeland Security, and the Chairman of the Federal Energy Regulatory Commission. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (404) 679-1875 or curriec@gao.gov. 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. According to research reports developed by subject-matter experts that we reviewed, geomagnetic disturbances (GMD) occur when the sun ejects charged particles that interact with and cause changes in the earth’s magnetic fields. These charged particles typically reach the earth within 18 to 96 hours and can cause currents to enter the power system through long conductors, such as transmission lines. These currents can disrupt the normal operation of the power system and, in some cases, damage equipment such as transformers. Specific characteristics of the U.S. electric grid also make it potentially more vulnerable to GMD impacts. For example, the grid is located in northern latitudes, which is closer to the aurora of a geomagnetic storm, and near oceans which are filled with conductive salt water. The Space Weather Prediction Center operated by the National Oceanic and Atmospheric Administration (NOAA) conducts continuous monitoring of solar activity and provides applicable watches, warnings, and alerts to stakeholders, including the electric power industry. If staff forecast that a coronal mass ejection is earth-bound, NOAA issues a watch that provides a 1 to 4 day notice that a geomagnetic storm is expected. Once the Deep Space Climate Observatory (DSCOVR) satellite—located 1 million miles from the earth—measures and provides data about the characteristics of the storm, forecasters can provide alerts between 15 to 60 minutes in advance of the storm hitting the Earth. These alerts may also include an index figure that describes the strength of the impending storm according to specific thresholds. Since 1859, scientists have observed GMD impacts on the earth. The following table describes notable GMD events and their respective impacts on electrical grid assets. Since 2008, the Department of Homeland Security (DHS), the Department of Energy (DOE), and the Federal Energy Regulatory Commission (FERC) have taken an array of actions aimed at addressing electromagnetic risks to the electric grid. Because federal agencies do not own electrical grid infrastructure, their actions to address geomagnetic disturbance (GMD) threats are more indirect through such things as developing standards and guidelines and utilizing tools and demonstration projects. Specifically, federal agencies have taken steps to develop standards and guidelines. For example, the North American Electric Reliability Corporation (NERC) has begun the process of developing GMD reliability standards for FERC to review, and DHS has developed electromagnetic pulse (EMP) protection guidelines to safeguard critical assets and facilities. Below is a summary of these efforts and other actions taken by DHS, DOE, and FERC since 2013. Collectively, these actions are intended to protect critical infrastructure from both EMP and GMD events. GMD Reliability Standards Rulemaking Process. In May 2013, FERC directed a two-phase approach for NERC to develop reliability standards that address the impact of GMD on reliable operation of the bulk-power system. For the first phase, NERC developed and FERC approved a reliability standard that requires responsible entities to develop and implement operational procedures to mitigate the effects of GMD on the bulk-power system. The second phase, which is ongoing, is intended to provide more comprehensive protections by requiring responsible entities to protect their facilities against a benchmark GMD event. On January 21, 2015, NERC submitted to FERC a proposed second stage reliability standard that included a definition of a benchmark GMD event against which industry would have to assess and mitigate vulnerabilities. On May 14, 2015, FERC issued a Notice of Proposed Rulemaking seeking comments on NERC’s proposal to approve, as well as its proposed modifications to the reliability standard, and other issues. Public comments on the Notice were due near the end of July 2015, and FERC extended the comment date two additional times in response to developments in the record. As of January 2016, FERC had not issued a final rule. EMP Protection Guidelines. In November 2014, DHS developed guidelines to help federal agencies and industry identify options to protect critical equipment, facilities, and communication and data centers from various forms of EMP attacks, including High-Altitude EMP (HEMP), ground burst Source Region EMP, solar geomagnetic disturbances, and other Intentional Electromagnetic Interference, such as from radio frequency weapons. These guidelines include four levels of protection that are based on using specific devices, such as EMP-capable surge arresters on power cords to mitigate EMP vulnerabilities. Solar Storm Mitigation. In 2014, DHS led an effort to develop a forecasting tool that will enable more localized and precise geomagnetic induced current (GIC) forecast levels. In coordination with the National Aeronautics and Space Administration (NASA) and National Oceanic and Atmospheric Administration (NOAA), among others, DHS intends to provide utility owners and operators with timely and accurate GIC forecast information, allowing them to make key operational decisions, such as shutting down, reducing power, or rerouting power to minimize the impact of a GIC event. DHS expects to complete this joint effort in fiscal year 2016. Installation of Magnetometers. In 2014, DOE funded an initiative to gather additional data on GIC and magnetic fields to help scientists validate models and develop more accurate estimations and modeling. As of October 2015, DOE reported plans to add 12 magnetometers to supplement the existing 6 that United States Geological Survey (USGS) has deployed nationwide. Two of those 12 will be fully funded by industry while 10 will be funded through a cost- share program between DOE and industry. These magnetometers are intended to provide owners and operators with real-time data on the expected currents that may impact their transformers. DOE officials added that this is a less costly alternative to deploying more monitors on transformers to measure actual currents during a GMD. Recovery Transformer (RecX). In 2012, DHS Science & Technology (S&T), with support from DOE and electricity sector representatives as part of the sector specific plan, partnered with industry to develop three prototype single-phase, extra-high-voltage transformers that could significantly reduce the time to transport, install, and energize a transformer to reduce recovery time from power outages associated with transformer failures from several months to less than 1 week. S&T, along with industry partners, piloted the RecX prototype for 2.5 years. DHS reported that RecX proved to be successful in an operational environment and could potentially reduce the impact of power outages. Resilient Electric Grid (REG). In 2007, S&T partnered with industry to develop a fault current limiting high temperature superconducting cable that allows power substations to interconnect and share power in an internet-like fashion enabling multiple paths for power to flow while mitigating the risk of cascading fault currents. The cable system enables re-architecting urban area distribution grids to allow power to be rerouted in emergencies and will facilitate rapid and resilient recovery for grid outages. A prototype cable will be deployed in the grid in New York for a pilot demonstration. S&T is also evaluating a commercial scale deployment of the technology in downtown Chicago. Key federal agencies, specifically DHS and DOE, have developed research reports to better understand the potential impacts of electromagnetic threats. Since 2007, DHS and DOE have developed or commissioned 17 key research reports addressing both EMP and GMD events. Some of the DHS-commissioned reports, authored by external industry experts, focused primarily on analyzing the impacts of EMP threats, including HEMP and Source Region EMP, while others assessed the potential impact of GMD events, including solar superstorms. Specifically, one DHS-commissioned report identified three main approaches to lessen the impact of a severe geomagnetic storm. That report concluded that thorough research, testing, and cost analysis will be required to determine the best approach. Three of DHS’s additional research reports are highlighted below. Electromagnetic Pulse Impacts on Extra High Voltage Power Transformers. This 2010 report analyzed the potential impact of an EMP on extra high voltage transformers—focusing primarily on transformer equipment designs and identifying specific mitigation efforts such as blocking devices that minimize the impact of GIC on the electric grid. The report concluded that the similarity of EMP effects, regardless of source, indicates that solar weather provide a useful basis for transformer impact analysis and that selective installation of blocking devices would minimize the impacts of GIC on transformers, among other findings. Impacts of Severe Space Weather on the Electric Grid. This 2011 report assessed the impacts of space weather on the electric grid, seeking to understand how previous solar storms have affected some electric grids, and what cost-effective mitigation efforts are available to protect the electric grid, among other topics. Some of the key findings and recommendations include the need for a rigorous risk assessment to determine how plausible a worst-case scenario may be and additional research to better understand how transformers may be impacted by electromagnetic risks. This report also recommended the potential installation of blocking devices to minimize the impacts of GIC. Sector Resilience Report: Electric Power Delivery. This 2014 report summarizes an analysis of key electric power dependencies and interdependencies, such as communications, transportation, and other lifeline infrastructure systems. The report included an assessment of, and best practices for, improving infrastructure resilience such as: modeling to identify potential vulnerabilities, conducting a cost-benefit analysis of alternative, technology-based options, and installing protective measures and hardening at-risk equipment, among others. Federal agencies have also sponsored research studies and identified risk information regarding electromagnetic risks. Below is a summary of key studies identified that address possible EMP mitigation and protective measures, the procurement and supply environment of large power transformers, susceptibility of transformers to GMD events, and the potential impact of a GMD event. Six Technical Reports Addressing EMP Impacts on the U.S. Power Grid. In January 2010, the Oak Ridge National Laboratory (ORNL) developed six technical reports—authored by external industry experts—for DOE, DHS, and FERC, that examined the EMP threats and their potential impacts, and analyzed potential solutions for preventing and mitigating their effects. Some of the reports key findings and recommendations include efforts to develop, test, and deploy mitigation technologies to automatically protect the power grid from costly damage, and to improve reporting and monitoring of GMD and power grid events. Idaho National Laboratory Study on EMP. In November 2015, DOE’s Idaho National Laboratory released a study to identify and describe possible EMP mitigation and protection measures, to examine the measures’ cost effectiveness, and to provide some potential strategies and solutions to reduce the effects of EMP on the commercial bulk electric grid. The report also discusses protection strategies for the electric grid and identifies future actions to be taken by both government and industry to enhance the security of the energy infrastructure. Large Power Transformer Study. In April 2014, DOE updated its 2012 report on Large Power Transformers and the U.S. Electric Grid that assessed the procurement and supply environment of large power transformers. In this research report, DOE examined the characteristics and procurement of large power transformers, and the availability of global and domestic suppliers, and assessed the potential risks facing these transformers, among others. The DOE report also updates the prior 2012 study and discusses new government and industry efforts to augment risk management options for critical infrastructure, including power transformers. Oak Ridge National Laboratory Study on the Susceptibility of Transformers to GMD. In November 2015, DOE officials reported initiating a study by ORNL to quantify the risks associated with GMD on electric power system reliability. The study plans to identify power lines and their associated transformers within the eastern section of the power grid and to determine those that are most susceptible to the effects of GMD. DOE officials expect the study to be completed in July 2016. Pacific Northwest National Laboratory Study on Geomagnetic Storms and Long-Term Impact on Power Systems. In December 2011, DOE’s Pacific Northwest National Laboratory conducted a study to determine the potential impact of a severe GIC event on the western U.S.-Canada power grid, referred to as the Western Interconnection. The study results indicated that the Western Interconnection was not substantially at risk to GIC because of the relatively small number of transmission lines that did not include series capacitors. The report recommended that the electric power industry consider the adoption of new protective relaying approaches that will prevent GIC events from damaging transformers. Since 2008, key federal agencies have taken actions to develop strategic plans to address the impact of GMD events to the electric grid. Specifically, DHS and DOE have developed key planning efforts that identify specific goals and outline key activities addressing electromagnetic risks. Below is a summary of DHS’s efforts. National Space Weather Strategy and Action Plan. In October 2015, the White House Office of Science and Technology Policy (OSTP), DHS, and NOAA, in collaboration with DOE and other key federal agencies, issued the National Space Weather Strategy and Action Plan. As a co-chair of the Space Weather Operations, Research and Mitigation Task Force, DHS was jointly responsible for developing a strategy to achieve several goals, including efforts to establish benchmarks for space weather events, enhance response and recovery capabilities, improve protection and mitigation efforts, and improve assessment, modeling, and prediction of impacts on critical infrastructure, among other goals. The strategy identifies goals and establishes the principles that will guide these efforts in both the near and long term, while the Action Plan identifies specific activities, outcomes, and timelines that the federal government will pursue accordingly. Power Outage Incident Annex. In 2014, FEMA, in coordination with DOE, began developing a Power Outage Incident Annex to provide incident-specific information in support of the National Response and National Disaster Recovery Frameworks. Although not specific to addressing electromagnetic events, such as EMP and solar weather, according to FEMA officials, the incident annex will describe the process and organizational constructs that the federal government will utilize to respond to and recover from loss of power resulting from deliberate acts of terrorism or natural disasters. Among other tasks, the incident annex is designed to identify key federal government capabilities and resources, prioritize core capabilities, and outline response and recovery resource requirements. FEMA officials reported that the incident annex is scheduled to be completed by mid- 2016. Below is a summary of DOE’s strategy development and planning efforts. National Transformer Strategy. In 2015, DOE developed a draft national strategy to reduce the risk to grid reliability posed by the loss of critical large power transformers. As drafted, the National Strategy for Reducing Risk from the Loss of Large Power Transformer focuses on protecting the bulk electric system—a system of 9,000 electric generating units connected across over 200,000 miles of high-voltage transmission lines—and ensuring the nation’s supply of electricity remains resilient. To achieve these efforts, the draft national strategy focuses on three areas: (1) understanding and mitigating current and future risks to transformers, (2) enhancing protection of transformers, and (3) ensuring transformer replacement equipment is available. The draft national strategy also calls upon federal government entities, to partner with electricity operators, equipment manufacturers, and state and local authorities to develop risk assessments and modeling tools to guide their efforts and prioritize activities. As of December 2015, DOE officials reported that the strategy is undergoing ongoing review. Quadrennial Energy Review. In April 2015, the White House Quadrennial Energy Review Task Force, with support from DOE and other federal agencies, issued its first installment of the Quadrennial Energy Review, which addresses infrastructure for energy transmission, storage, and distribution. A key chapter of this report focuses on a broad range of challenges and how the electric grid is vulnerable, specifically transformers, to a range of potential risks, including solar storms and EMP events. The report acknowledges that the federal government can fill gaps in creating data sets, tools, and assessments that provide a more complete and robust analytical approach towards measuring resilience needs and investments. Furthermore, the report recommends that DOE, in collaboration with DHS and others, develop common analytical frameworks, tools, and data to assess the resilience of energy infrastructures and to mitigate the risks associated with the loss of transformers. Key federal agencies, such as DHS, DOE, and FERC, have also developed training and outreach efforts that could help address the potential impact of power outages caused by electromagnetic threats, such as a GMD event. Specifically, since 2012, DHS has reported participating in several briefings before conferences and training workshops that addressed electromagnetic threats, including EMP and solar weather events. Several of the briefings summarized the findings identified by previously issued DHS-commissioned research reports. For example, DHS gave presentations on multiple occasions about the potential impacts of an EMP event, including likely impacts on regional communication systems within major U.S. cities. DHS officials reported that as a result of these briefings, DHS has subsequently developed EMP protection guidelines to help federal agencies identify options for safeguarding critical equipment, facilities, and communication centers. These guidelines include four levels of protection that are based on using specific devices, such as EMP-capable surge arresters on power cords to mitigate EMP vulnerabilities. Below is a summary of DHS’s additional training and outreach efforts. GridEx II. In November 2013, DHS and DOE, along with the Federal Bureau of Investigation, and other relevant government agencies, participated in an industry-wide exercise assessing the readiness of the electric industry to respond to a physical or cyberattack on the bulk-power system. The key goals of GridEx II were to review existing command, control, and communication plans and tools, incorporate lessons learned from a previous exercise, and to identify potential improvements in cyber and physical security plans and programs. Upon completing the exercises, participants identified key lessons learned, which included the need for enhanced information sharing, and clarification of roles and responsibilities during a physical or cyberattack. Secure Grid. In October 2011, DHS, along with multiple federal agencies and industry representatives, participated in a 2-day security exercise to assess the federal government’s response to an extreme solar weather event. The exercise entailed a crisis simulation with the goal of exploring how private and government agencies would respond to a solar storm causing widespread power outages and damage to the electric grid, how they might cooperate during such a crisis, and to explore what steps could be taken to mitigate such severe events. Two of the key findings, among others, cite the need to develop a national strategy to determine the costs of hardening the electric grid against space weather events, and the need to conduct a comprehensive study to assess the cascading effects of a widespread and long-term shutdown of the electric grid caused by a space weather event. Below is a summary of DOE and FERC’s training and outreach efforts. Space Weather Workshops. In 2015, DOE conducted multiple training workshops addressing space weather issues and its potential impact on the electric grid. For example, in February 2015, DOE cosponsored a North Atlantic Space Weather workshop with the White House and international representatives from the United Kingdom, the Republic of Ireland, and Canada. DOE officials reported that the primary focus on the workshop was discussing the potential impact of space weather on power grids. In March 2015, DOE also co-sponsored a workshop with its Canadian counterpart, Natural Resources Canada. Similarly, in April and June 2015, DOE participated in training workshops with the Idaho National Laboratory and Electric Power Research Institute and discussed the potential impact that space weather and EMP events may have on the electric grid. GMD Technical Conference. On April 30, 2012, FERC held a technical conference to discuss issues related to the reliability of the bulk-power system as affected by GMD events and to explore the risks and impacts from GIC to transformers and other equipment on the bulk-power system, as well as options for addressing or mitigating the risks and impacts. Participants included members from federal agencies, industry stakeholders, and academia. Panelists agreed that a collective effort is needed to protect the electric grid and that a national standard would be beneficial to assure effective and consistent protection. FERC officials we interviewed familiar with the technical conference stated that many participants agreed that there could be a cascading series of effects of a GMD event and there is a need to address this risk to help prevent a grid collapse. On March 1, 2016, FERC convened a second technical conference on GMD to discuss issues related to the proposed Reliability Standard for Transmission System Planned Performance for Geomagnetic Disturbance Events. Chris Currie, (404) 679-1875 or CurrieC@gao.gov. In addition to the individual named above, Dawn Hoff (Assistant Director) and Ryan Lambert (Analyst-in-charge) managed this assignment. Chuck Bausell, Kendall Childers, Katherine Davis, Josh Diosomito, Leah English, Tom Lombardi, John Rastler, and Steven Putansu made key contributions to this report. | Electromagnetic risks caused by a man-made EMP or a naturally occurring solar weather event could have a significant impact on the nation's electric grid as well as other infrastructure sectors that depend on electricity, such as communications. These risks could lead to power outages over broad geographic areas for extended durations. GAO was asked to review federal efforts to address electromagnetic risks to the electric grid. This report examines (1) the extent to which key federal agencies have taken action to address electromagnetic risks and how these actions align with the 2008 EMP Commission report recommendations, and (2) what additional opportunities exist to enhance federal efforts to address electromagnetic risks to the electric grid. GAO reviewed the EMP Commission report and federal program documents, and interviewed DHS, DOE, and FERC officials and relevant stakeholders who provided insights on key actions taken. Key federal agencies have taken various actions to address electromagnetic risks to the electric grid, and some actions align with the recommendations made in 2008 by the Commission to Assess the Threat to the United States from Electromagnetic Pulse Attack (EMP Commission). Since 2008, the Department of Homeland Security (DHS), the Department of Energy (DOE), and the Federal Energy Regulatory Commission (FERC) have taken actions such as establishing industry standards and federal guidelines, and completing EMP-related research reports. GAO found that their actions aligned with some of the EMP Commission recommendations related to the electric grid. For example, DHS developed EMP protection guidelines to help federal agencies and industry identify options for safeguarding critical communication equipment and control systems from an EMP attack. Further, agency actions and EMP Commission recommendations generally align with DHS and DOE critical infrastructure responsibilities, such as assessing risks and identifying key assets. Additional opportunities exist to enhance federal efforts to address electromagnetic risks to the electric grid. Specifically, DHS has not identified internal roles and responsibilities for addressing electromagnetic risks, which has led to limited awareness of related activities within the department and reduced opportunity for coordination with external partners. Doing so could provide additional awareness of related activities and help ensure more effective collaboration with other federal agencies and industry stakeholders. Moreover, although DHS components have independently conducted some efforts to assess electromagnetic risks, DHS has not fully leveraged opportunities to collect key risk inputs—namely threat, vulnerability, and consequence information—to inform comprehensive risk assessments of electromagnetic events. Within DHS, there is recognition that space weather and power grid failure are significant risk events, which DHS officials have determined pose great risk to the security of the nation. Better collection of risk inputs, including additional leveraging of information available from stakeholders, could help to further inform DHS assessment of these risks. DHS and DOE also did not report taking any actions to identify critical electrical infrastructure assets, as called for in the National Infrastructure Protection Plan. Although FERC conducted a related effort in 2013, DHS and DOE were not involved and have unique knowledge and expertise that could be utilized to better ensure that key assets are adequately identified and all applicable elements of criticality are considered. Finally, DHS and DOE, in conjunction with industry, have not established a coordinated approach to identifying and implementing key risk management activities to address EMP risks. Such activities include identifying and prioritizing key research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. Enhanced coordination to determine key research priorities could help address some identified research gaps and may help alleviate concerns voiced by industry regarding the costs and potential adverse consequences on grid reliability that may be caused by implementation of such equipment. GAO recommends that DHS identify internal roles to address electromagnetic risks, and collect additional risk inputs to further inform assessment efforts; that DHS and DOE collaborate to ensure critical electrical infrastructure assets are identified; and engage with industry stakeholders to identify and prioritize risk-management activities, such as research and development efforts, to address EMP risks to the grid. DHS and DOE concurred with our recommendations and identified planned actions to address the recommendations. |
The VWP was established as a pilot program, with two participating countries, in November 1986 and became a permanent program in October 2000. The program allows eligible nationals from the 38 VWP countries to travel to the United States for 90 days or less for business or pleasure without a visa and requires that VWP countries extend reciprocal privileges to U.S. citizens. Additionally, the VWP makes it possible for State to allocate more resources to visa-issuing posts in countries with higher-risk applicant pools. In fiscal year 2013, there were nearly 20 million traveler admissions to the United States under the VWP, with admissions from each of the 38 countries ranging from about 700 to more than 4 million (see fig. 1). In August 2008, responding to a requirement in the Implementing Recommendations of the 9/11 Commission Act of 2007, DHS’s U.S. Customs and Border Protection (CBP) introduced the Electronic System for Travel Authorization (ESTA). In 2009, CBP began requiring all travelers arriving by air or sea under the VWP to, among other things, submit an application through ESTA before departure. VWP travelers are also required to possess a passport containing an electronic chip (e- passport) issued by the VWP country. Before a traveler can depart for the United States under the VWP, CBP vets the traveler’s ESTA application against several databases. These databases include, among others, the Federal Bureau of Investigation’s (FBI) Terrorist Screening Database—the U.S. government’s consolidated watch list of known or suspected terrorists—and the International Criminal Police Organization’s (INTERPOL) Stolen and Lost Travel Documents database. If CBP approves an ESTA application, the VWP traveler is authorized to depart for the United States. If CBP denies an ESTA application, CBP refers the traveler to the U.S. embassy or consulate to complete the standard visa application process. This process includes submitting an application and being interviewed, fingerprinted, and vetted against the FBI’s Terrorist Screening Database and INTERPOL’s Stolen and Lost Travel Documents database, among others, before travel to the United States. At U.S. ports of entry, CBP interviews, fingerprints, and photographs VWP travelers arriving by air or sea with an approved ESTA as well as travelers with a U.S. visa and vets the fingerprints against biometrics databases. In November 2014, DHS revised the ESTA application to address concerns that foreign terrorist fighters might exploit the VWP to enter the United States. The revised application requires additional passport data, contact information, information about connections to U.S. persons, and any other names or aliases. According to DHS documents, DHS determined that these revisions would improve its ability to vet prospective VWP travelers and to more accurately and effectively identify those who pose a security risk to U.S. interests. DHS also rephrased questions in the ESTA application to make them easier for the general public to understand. In response to the Implementing Recommendations of the 9/11 Commission Act of 2007, DHS worked with interagency partners to develop several requirements to help prevent terrorists from using the VWP to travel to the United States, according to DHS officials. To continue participating in the program, each VWP country must, among other things, accept repatriation of any citizens, former citizens, and nationals ordered removed from the United States within 3 weeks of the final order of removal. In addition, since before the 2007 act, VWP countries have been required to extend reciprocal visa-free travel to U.S. citizens and issue machine-readable passports. Further, the U.S. government requires each country to enter into a 1. Lost and Stolen Passport (LASP) agreement to report information about the theft or loss of passports, 2. Homeland Security Presidential Directive 6 (HSPD-6) arrangement to share watch list information about known or suspected terrorists, and 3. Preventing and Combating Serious Crime (PCSC) agreement to establish frameworks for enhanced law enforcement cooperation, including sharing of criminal history information. As of December 2015, all VWP countries are also required by law to, among other things, fully implement their agreements to share information on whether their citizens and nationals traveling to the United States represent a threat to the security or welfare of the United States or its citizens. Under existing law, a number of factors can result in a VWP country’s termination or suspension from the program. DHS is required to terminate a country’s VWP designation if the country (1) experiences an emergency that the DHS Secretary, in consultation with the Secretary of State, determines to be a threat to the law enforcement or security interests of the United States, including interests in enforcing U.S. immigration laws; (2) does not report the theft or loss of passports, as jointly determined by DHS and State; or (3) does not share required passenger information. In addition, DHS may place on probationary status or, in certain circumstances, terminate the designation of any VWP country if, following certain criteria, more than 2 percent of the country’s nationals who applied for admission as nonimmigrant visitors to the United States during the previous fiscal year were denied admission, withdrew their application for admission, or were admitted as nonimmigrant visitors and violated the terms of admission. In consultation with State, DHS also may for any reason—including national security—rescind any waiver or designation previously granted at any time or may refrain from waiving the visa requirement for nationals of any country that may otherwise qualify for designation. In addition, DHS may terminate a VWP country’s designation if, in consultation with State, DHS determines through its biennial evaluation that a country’s participation is inconsistent with the law enforcement and security interests of the United States, including U.S. interests in enforcing immigration laws and securing criminal extraditions. Further, in consultation with State, DHS may suspend a VWP country’s designation if the Director of National Intelligence informs the Secretary of Homeland Security of any current and credible threat of an imminent danger to the United States or its citizens that originates from a VWP country. Under U.S. law, DHS is required to periodically evaluate VWP countries and report its findings to Congress. In particular, DHS, in consultation with State, must perform the following at least once every 2 years: Evaluate the effect of each VWP country’s continued participation in the program on U.S. law enforcement and national security interests (including immigration enforcement interests). Determine, based on the evaluation conducted, whether each VWP country’s participation in the program should be continued or terminated. Submit a written report to appropriate congressional committees, including the Secretary’s determination with an explanation of any effects of each VWP country’s continued participation in the program on U.S. law enforcement and security interests. Submit a written report to Congress regarding the implementation of the electronic system for travel authorization. Within DHS, the Visa Waiver Program Office (VWPO) is responsible for overseeing and monitoring VWP countries’ adherence to the program’s statutory and policy requirements. VWPO’s responsibilities include evaluating the effects of VWP countries’ participation in the program, preparing the Secretary of Homeland Security’s determinations to continue or terminate VWP countries’ participation, and submitting the written reports to Congress. According to VWPO officials, the office also monitors VWP country security, law enforcement, and immigration enforcement issues outside the formal review periods to identify issues that could negatively affect U.S. interests. In addition, the DHS Office of Intelligence and Analysis produces an independent intelligence review of each VWP country, examining threats associated with the country’s participation in the VWP, the country’s counterterrorism capabilities, and the country’s information sharing with the United States about terrorist threats, according to officials from that office. All 38 countries participating in the VWP have entered into the three types of required information-sharing agreements, or their equivalents, with the United States, but not all countries are sharing information through two of the agreements. According to DHS, all VWP countries are reporting losses or thefts of passports through LASP agreements, although DHS previously placed two countries on provisional status partly because of a lack of timely reporting. However, as of December 2015, about a third of VWP countries were not sharing identity information about known or suspected terrorists through HSPD-6 arrangements. Also, about a third of VWP countries had not yet shared criminal history information through PCSC agreements. Although U.S. agencies receive law enforcement and national security information from VWP countries through other means, such as multilateral entities, the U.S. government identified the information-sharing agreements as critical for protecting the United States from nationals of VWP countries who might present a threat. While U.S. law before December 2015 required VWP countries to enter into, but not to implement, the agreements, DHS announced in August 2015 that it had developed a new requirement that countries implement them by sharing information. However, contrary to standard program management practices, DHS has not specified time frames for working with VWP countries to institute this and other new VWP security requirements. All 38 VWP countries have entered into LASP agreements with the United States and, according to DHS officials, are reporting lost or stolen passports through the agreements. Before December 2015, U.S. law required that VWP countries enter into an agreement with the United States to report, or to make available to the U.S. government through INTERPOL or other means designated by the Secretary of Homeland Security, information about the theft or loss of passports within a strict time limit and in a manner specified in the agreement. Since December 2015, U.S. law has required that countries agree to report on lost and stolen passports not later than 24 hours after becoming aware of the theft or loss. Of the 38 countries, 35 agreed to report lost or stolen travel documents exclusively through INTERPOL and in accordance with INTERPOL standards. According to DHS officials, 2 of the remaining countries agreed to report through the Regional Movement Alert System, an alternative mechanism for reporting LASP information that provides a direct query capability between national document-issuing authorities and border control systems; the third country agreed to report through another means. According to VWPO officials, VWPO considers all VWP countries to be in compliance with the requirement to report lost and stolen passports. VWPO officials noted that VWPO bases its compliance determinations in part on data from INTERPOL’s Stolen and Lost Travel Documents database that are available to VWPO and other U.S. agencies. DHS and State use information about lost and stolen passports to vet travelers to the United States. DHS’s CBP uses information obtained through the LASP agreements to vet foreign travelers attempting to enter the United States, which, according to CBP and DOJ documents, may help counter the threat of foreign terrorist fighters. CBP and State use this information to vet travelers’ ESTA applications and visa applications before travel, and CBP uses it to vet foreign passports of all travelers before boarding and at U.S. ports of entry. According to testimony by the DHS Deputy Assistant Secretary for International Affairs, CBP has denied over 165,000 ESTA applications since 2008 on the basis of LASP information, potentially preventing criminals or terrorists from using stolen passports to illegally enter the United States. In 2013, U.S. agencies— primarily DHS—queried INTERPOL’s Stolen and Lost Travel Documents database over 238 million times. All VWP countries have entered into HSPD-6 or equivalent arrangements to exchange information with the United States about known or suspected terrorists, but not all countries are sharing information through these arrangements. U.S. law requires that each VWP country enter into an agreement with the United States to share information regarding whether the country’s citizens and nationals traveling to the United States represent a threat to the security or welfare of the United States or its citizens. Since December 2015, U.S. law has also required that VWP countries fully implement these agreements. State’s Bureau of Counterterrorism and the FBI’s Terrorist Screening Center (TSC) negotiate HSPD-6 arrangements between the U.S. government and VWP countries. Under the arrangements, VWP countries share information directly with the TSC, which then integrates the information into the U.S. terrorist watch list. As of December 2015, most VWP countries were exchanging information about known or suspected terrorists with the TSC through HSPD-6 arrangements, but about a third of VWP countries were not exchanging information directly with the TSC. The TSC reported in December 2015 that the number of known or suspected terrorist identities that each VWP country had shared with the TSC through HSPD-6 arrangements ranged from zero to over 1,000. For example, one country that entered into a HSPD-6 arrangement in 2012 had not shared information through the arrangement as of December 2015. According to DHS officials, some countries share information about known or suspected terrorists with U.S. agencies through alternative arrangements rather than sharing directly with the TSC. Information provided through the HSPD-6 arrangements has enhanced U.S. traveler-screening capabilities and improved U.S. agencies’ ability to prevent known and suspected terrorists from traveling to the United States. According to FBI documents, from 2008 through 2015, the TSC received information about approximately 9,000 known or suspected terrorists, including approximately 3,500 who were previously unidentified, through HSPD-6 arrangements with VWP countries. The FBI integrates into the Terrorist Screening Database the information that VWP countries provide to the TSC, and U.S. agencies reported using the database to vet travelers attempting to enter the United States. CBP vets ESTA applications against the Terrorist Screening Database to identify any potential known or suspected terrorists attempting to use the VWP to travel to the United States. According to the DHS Deputy Assistant Secretary for International Affairs, since 2008, CBP has denied over 4,300 ESTA applications for national security concerns as a result of vetting against the Terrorist Screening Database and other terrorism- related databases. In addition, at ports-of-entry, CBP vets every international traveler attempting to enter the United States against the database, according to DHS documents. State also uses the Terrorist Screening Database to vet visa applicants. As of February 2014, all 38 VWP countries had entered into PCSC agreements, or their equivalents, with the United States regarding the exchange of information about criminals who pose a risk to U.S. interests, but not all VWP countries had shared information through the agreements. U.S. law requires that VWP countries enter into an agreement with the United States to share information regarding whether citizens and nationals of that country traveling to the United States represent a threat to the security or welfare of the United States or its citizens. Since December 2015, U.S. law has also required that VWP countries fully implement these agreements. In some cases, countries entered into the agreements several years after the requirement to enter into agreements was established in 2008. According to DHS officials, the existing domestic political environments of individual VWP countries may have delayed some countries’ entry into the agreements. As of September 2015, about two-thirds of VWP countries had shared information about criminals with U.S. agencies through PCSC or equivalent agreements, using interim, manual query mechanisms—either electronic file transfer systems or compact disc exchanges. The remaining VWP countries had not shared such information through the agreements. For example, one country that entered into a PCSC agreement in 2008 had not shared information through the agreement as of September 2015. PCSC agreements are intended to automate and expedite the sharing of information about individuals suspected or convicted of committing serious crimes, according to DHS officials. PCSC agreements allow for the exchange of biometric data, such as fingerprints, and biographic data of suspected criminals while protecting individual privacy. According to DHS, by authorizing both the United States and a VWP country to conduct automated queries of the other’s criminal fingerprint databases, PCSC agreements establish a framework for enhanced law enforcement cooperation. Both DOJ and DHS reported using interim exchange mechanisms established through PCSC agreements to aid in law enforcement investigations. Likewise, many VWP countries had used interim exchange mechanisms to query U.S. law enforcement databases. As of January 2016, U.S. agencies and VWP countries had not fully established virtual private networks to allow for automated querying of criminal databases as authorized by PCSC agreements. However, the FBI reported working with several VWP countries to establish these networks. In addition to receiving information through the three agreements required for participation in VWP, U.S. agencies may receive information related to national security and law enforcement through other means, such as multilateral entities. For example, since 2013, INTERPOL has issued 670 notices seeking arrest and extradition of suspected foreign terrorist fighters to all 190 of its members, and individual members had issued an additional 2,100 alerts. The United States also works with an international coalition—which includes at least 30 VWP countries—to counter threats posed by ISIS, such as the threat of foreign terrorist fighters’ entering this country. The coalition has a working group focused on disrupting the recruitment, travel, and sustainment of foreign terrorist fighters. While VWP countries may use other means to share information that is useful to U.S. agencies responsible for law enforcement and national security, the U.S. government identified the three information-sharing agreements as critical for protecting the United States from nationals of VWP countries who might present a threat. As we reported in 2011, DHS officials told us that formal agreements—in contrast to the sharing of information on an informal, case-by-case basis—expand the pool of information to which the United States has systematic access and generally expedite information sharing by laying out specific terms that can be referenced easily in requests for data. DHS officials observed that timely access to information is especially important for CBP officials at ports of entry. In August 2015, the Secretary of Homeland Security announced that DHS and other agencies were developing additional requirements for VWP participation, including a requirement to implement HSPD-6 and PCSC agreements by sharing information. Previously, in accordance with U.S. law, DHS required VWP countries to enter into the arrangements and agreements but did not require the countries to implement them in order to participate in the program. According to testimony by the Secretary, DHS developed the new VWP requirements in order to detect and prevent travel by foreign terrorist fighters. However, contrary to standard program management practices, DHS did not establish time frames for instituting the new requirements. In October 2015, DHS officials confirmed that the department had not established time frames for DHS’s consultations with each country or for instituting the new requirements. Standard practices in program and project management call for, among other things, developing a plan to execute specific projects needed to obtain defined results within a specified time frame. Time frames for working with VWP countries to institute the requirement to implement the HSPD-6 arrangements and PCSC agreements could help DHS ensure that countries meet all legal criteria for participating in the VWP—including the December 2015 law requiring them to fully implement their agreements—and could help DHS protect against threats to the United States or its citizens. Our analysis of a nongeneralizable sample of 12 internal VWPO evaluation reports on VWP countries found that VWPO assessed the effect of the countries’ participation in the program on U.S. law enforcement and security interests, including immigration enforcement, as required by federal law. However, almost one-quarter of DHS’s most recent reports to Congress regarding whether VWP countries should continue to participate in the program were submitted, or remained outstanding, 5 or more months after the dates when DHS had determined that, under U.S. law, they were due. As a result, Congress may lack timely information that it needs to conduct oversight of the VWP. The internal VWPO evaluation reports for 12 countries that we reviewed showed that, for each of these countries, VWPO assessed the effect of the country’s participation in the program on U.S. law enforcement and security interests, including immigration enforcement, as required by U.S. law. The law states, among other things, that DHS, in consultation with State, must periodically evaluate the effect of each VWP country’s continued participation in the program on U.S. law enforcement and security interests, including immigration enforcement interests. VWPO standard operating procedures lay out steps for conducting, and for reporting internally on, VWPO’s evaluations of VWP countries, which it uses to prepare the required DHS reports to Congress. For the 12 countries, VWPO completed 10 internal evaluation reports after a site visit to the relevant VWP country and completed 2 reports on the basis of desk-based, administrative reviews. In the 12 reports, the required sections on law enforcement interests and security interests, including immigration enforcement interests, had been updated from previous evaluations of the VWP country. The reports showed that VWPO consulted broadly with relevant U.S. agency officials, both in Washington, D.C., and at overseas posts and also consulted with relevant foreign VWP country officials to gather information about law enforcement interests, security interests, and immigration enforcement interests. Moreover, according to U.S. officials and VWP country officials whom we spoke with overseas, VWPO’s site visits, including questionnaires sent to countries beforehand, were generally thorough and complete and addressed the topic of foreign terrorist fighters. Our review showed that almost a quarter of DHS’s most recent reports to Congress about VWP countries were submitted 5 or more months after the dates when, according to DHS, they were due under U.S. law. U.S. law requires DHS to submit a written report to Congress for each VWP country not less than once every 2 years. Each report must provide DHS’s determination of whether the country’s participation in the program should be continued or terminated as well as an explanation of any effects of the country’s continued participation on U.S. law enforcement and security interests, including immigration enforcement interests. Because of DHS’s inconsistency in submitting the reports within the required statutory time frame, Congress may lack access to timely information needed for its oversight of the VWP. DHS’s timeliness in reporting to Congress about VWP countries has improved since 2011, when we found that the department had not completed half of its recent VWP congressional reports in a timely manner and that many of the reports were more than a year past due. Nonetheless, our current analysis shows that as of October 31, 2015, 28 of DHS’s 38 most recent congressional reports on VWP countries had been submitted, or remained outstanding, 1 or more months after the due dates. Nine of those reports were 5 or more months past due, including 2 that were past due by more than a year (see fig. 2). Since its establishment in 1986, the VWP has evolved to address U.S. national security and law enforcement interests while allowing travelers from VWP countries to contribute significantly to the U.S. economy. Most recently, the Visa Waiver Program Improvement and Terrorist Travel Prevention Act of 2015 included changes to the program—including requiring VWP countries to fully implement their agreements—that may help prevent foreign terrorist fighters from attempting to exploit it to travel to this country. U.S. agencies have used information that some VWP countries have shared under the required agreements or their equivalents to mitigate this and other threats to U.S. interests. However, because many VWP countries have not yet provided information through the agreements—possibly including information about known or suspected terrorists—agencies’ access to this critical information may be limited. Time frames for instituting the new requirement that VWP countries fully implement the information-sharing agreements could help strengthen DHS’s ability to protect against threats to the security of the United States and its citizens. The VWPO internal reports that we reviewed showed that DHS has evaluated the effect of VWP countries’ participation in the program on U.S. security and law enforcement interests, as required by law. DHS has also improved the timeliness of its required reports to Congress about the effects of VWP countries’ participation in the program on U.S. interests and its determinations of countries’ eligibility to continue in the program. Nonetheless, DHS’s inconsistency in submitting its congressional reports by the statutory deadlines may have limited Congress’s access to information needed for conducting oversight of the VWP and identifying any modifications to the program necessary to protect U.S. law enforcement and national security interests. To strengthen DHS’s ability to fulfill legislative requirements for the VWP and protect the security of the United States and its citizens, we are making the following two recommendations to the Secretary of Homeland Security: Specify time frames for working with VWP countries to institute the additional VWP security requirements, including the requirement that the countries fully implement agreements to share information about known or suspected terrorists through the countries’ HSPD-6 arrangements and PCSC agreements with the United States. Take steps to improve DHS’s timeliness in reporting to Congress, within the statutory time frame, the department’s determination of whether each VWP country should continue participating in the program and any effects of the country’s participation on U.S. law enforcement and security interests. We provided a draft of the classified report to DHS, DOJ, and State for their review and comment. DHS and DOJ provided technical comments, which we incorporated as appropriate. DHS also provided written comments, which are reproduced in appendix II. In its written comments, DHS concurred with both of our recommendations. In addition, DHS noted that it had begun taking steps to address our first recommendation and was planning actions to address our second recommendation. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Homeland Security, the Secretary of State, and the Attorney General of the United States. 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 concerning this report, please contact Michael J. Courts at (202) 512-8980 or courtsm@gao.gov. 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 whether Visa Waiver Program (VWP) countries have entered into the required Lost and Stolen Passport (LASP) agreements, Homeland Security Presidential Directive 6 (HSPD-6) arrangements, and Preventing and Combating Serious Crime (PCSC) agreements, we analyzed data provided by the Department of Homeland Security (DHS) and interviewed officials from DHS and the Department of State (State) in Washington, D.C. We also reviewed supporting documentation from DHS and State, such as diplomatic notes, letters of intent, and memorandums of understanding, that indicate whether countries entered into the agreements. To identify the information-sharing requirements, we reviewed relevant U.S. law and DHS policy. In addition, to better understand what each agreement entailed and to learn of any associated challenges, we interviewed officials from the agencies that are responsible for negotiating each agreement. We determined that the information we obtained was sufficiently reliable for our purposes. To determine the extent to which VWP countries have implemented LASP agreements, HSPD-6 arrangements, and PCSC agreements, or their equivalents, we analyzed data from DHS and the Department of Justice (DOJ) showing the status of, and information sharing through, the signed agreements and arrangements. We also visited four VWP countries: Belgium, Greece, France, and Spain. We selected these countries from among the 38 VWP countries on the basis of numerous factors—in particular, high estimated total and per capita numbers of foreign fighters and concerns about border security and counterterrorism capacity. In these four countries, we interviewed U.S. and VWP country officials responsible for implementing the agreements and arrangements to understand challenges associated with the countries’ sharing information with the United States. LASP agreements. To examine VWP countries’ sharing of information about lost and stolen passports, we reviewed data provided by DHS and INTERPOL for calendar years 2014 and 2015. We also discussed with DHS officials their level of engagement with VWP countries regarding the timeliness of their information sharing under the LASP agreement. Although we discussed the DHS and INTERPOL data with DHS and DOJ officials, we did not interview officials of all VWP countries that report through INTERPOL. DOJ officials described their uses and checks of the data they received. We determined that the DHS and INTERPOL data were sufficiently reliable for placing the reporting countries in broad categories that indicate the relative frequency with which they report to INTERPOL but were not sufficiently reliable for determining the countries’ compliance with the VWP requirement to report lost and stolen passports. We did not independently verify the legal status of each VWP country’s LASP agreement. HSPD-6 arrangements. To examine VWP countries’ information sharing through HSPD-6 arrangements, we reviewed information that we received from the Federal Bureau of Investigation (FBI) about VWP countries’ provision of information through these arrangements or their equivalents. When we encountered anomalies in the information we received, we discussed and resolved them with agency officials. We discussed the data with DOJ officials but did not interview officials of all VWP countries that report to the Terrorist Screening Center. DOJ officials described their uses and checks of the data they received but stated that they did not formally study the accuracy of the underlying data. We determined that the FBI data we received were sufficiently reliable for placing the reporting countries in broad categories that indicate the relative volume and frequency of their reporting of information to the Terrorist Screening Center through HSPD-6 arrangements or their equivalents. We did not independently verify the legal status of each VWP country’s HSPD-6 arrangement. PCSC agreements. To examine VWP countries’ information sharing through PCSC agreements, as well as the mechanisms that VWP countries have established for sharing information through the agreements, we reviewed information and data that DHS and DOJ provided. We discussed the data with DOJ officials but did not interview VWP country officials regarding the data. DOJ officials described their uses and checks of the data they received but stated that they did not formally study the data’s accuracy. We determined that the data were sufficiently reliable to place countries into broad categories that indicate the relative frequency with which they shared information. We did not independently verify the legal status of each VWP country’s PCSC agreement. In addition, to determine the extent to which U.S. agencies have been able to use the shared information to address U.S. law enforcement and security interests, we reviewed U.S. agency data and documents reporting the agencies’ use of information shared through the agreements. We also discussed the value and utility of information obtained through the agreements with U.S. law enforcement and counterterrorism officials in the United States and in the countries where we conducted our fieldwork. We determined that the information and data provided were sufficiently reliable for the purposes of this report. To determine the extent to which DHS has evaluated VWP countries’ effect on U.S. security and law enforcement interests, including immigration enforcement, we selected and analyzed a nongeneralizable sample of 12 internal DHS reports evaluating VWP countries. We selected these reports on the basis of a number of factors chosen to identify countries where concerns might exist regarding foreign terrorist fighters traveling to the United States—for example, high estimated numbers of foreign terrorist fighters; border security and counterterrorism capacity concerns; a high number of ESTA denials; number of travelers to the United States, including the percentage that traveled under the VWP; relative population size (e.g., large or small); date of entry into the VWP (i.e., pre-2000, 2001-2010, 2010-the present); geographic variation (e.g., Western Europe, Eastern Europe, the Asia Pacific region); and status of VWP information-sharing agreements as characterized by U.S. agencies (i.e., whether agreements had been signed, were ratified, and were in force and whether sharing had occurred). We used a data collection instrument developed in consultation with a methodological expert to analyze the nongeneralizable sample of 12 internal DHS reports. We also reviewed relevant U.S. agency documents and guidance, such as VWPO’s January 2015 “Visa Waiver Program Continuing Designation Country Reviews Standard Operating Procedures.” In addition, we interviewed U.S. agency and VWP country officials regarding the processes for conducting the evaluations and communicating results of the evaluations to VWP countries. To determine the extent to which DHS has submitted required reports about VWP countries to Congress, we collected and analyzed information from DHS that documented the due dates and actual delivery dates to Congress for DHS’s most recent VWP congressional reports. To assess DHS’s timeliness in submitting the required reports to Congress since 2011, when we last reviewed the VWP, we compared the results of our current analysis with our 2011 findings on DHS’s timeliness in submitting the reports. In addition, we interviewed VWPO officials regarding the process they use to prepare the reports and submit them to Congress. We determined that the information we obtained was sufficiently reliable for our purposes. We conducted this performance audit from October 2014 to January 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. . Michael J. Courts, (202) 512-8980 or courtsm@gao.gov. In addition to the contact named above, Hynek Kalkus (Assistant Director), Ian Ferguson, Brandon Hunt, Reid Lowe, and Christal Ann Simanski made key contributions to this report. Ashley Alley, Kathryn Bernet, Jose Cardenas, Martin De Alteriis, and Ozzy Trevino also provided assistance. | The Visa Waiver Program allows nationals from the 38 VWP countries to travel to the United States for tourism or business for up to 90 days without a visa. To help prevent terrorists and others who present a threat from travelling to the United States, DHS requires VWP countries to, among other things, enter into information-sharing agreements with the United States. In addition, U.S. law requires DHS to evaluate, at least once every 2 years, the effect of each VWP country's participation on U.S. law enforcement, security, and immigration enforcement interests; determine whether the country should continue in the program; and report on its determination to Congress. GAO was asked to review the VWP. In this report, GAO examines the extent to which VWP countries have implemented the required agreements. GAO also examines the extent to which DHS evaluated VWP countries and reported to Congress as required. GAO reviewed documents related to the VWP, including a sample of DHS reports. In addition, GAO interviewed U.S. officials in Washington, D.C., and U.S. and foreign officials in four VWP countries selected on the basis of factors such as high estimated numbers of foreign terrorist fighters. This is a public version of a classified report GAO issued in January 2016. All 38 countries participating in the Visa Waiver Program (VWP) have entered into required agreements, or their equivalents, to (1) report lost and stolen passports, (2) share identity information about known or suspected terrorists, and (3) share criminal history information. However, not all countries have shared information through the agreements. The Department of Homeland Security (DHS) reported that all VWP countries have reported passport information through the first agreement, but more than a third of VWP countries are not sharing terrorist identity information through the second agreement and more than a third of the countries have not yet shared criminal history information through the third agreement. While VWP countries may share information through other means, U.S. agency officials told GAO that information sharing through the agreements is essential for national security. In August 2015, DHS decided to require VWP countries to implement agreements to share terrorist identity and criminal history information; previously, VWP countries were required to enter into, but not to implement, these agreements. However, contrary to standard program management practices, DHS did not establish time frames for instituting the amended requirements. In December 2015, Congress passed a law requiring that VWP countries fully implement information-sharing agreements in order to participate in the program. Time frames for working with VWP countries to implement their agreements could help DHS enforce U.S. legal requirements and could strengthen DHS's ability to protect the United States and its citizens. GAO's analysis of a nongeneralizeable sample of 12 internal DHS reports, each evaluating one VWP country, found the reports assessed the effects of the countries' participation on U.S. law enforcement, security, and immigration enforcement interests, as required by U.S. law. Since 2011, when GAO last reviewed the VWP, DHS has improved its timeliness in reporting to Congress at least once every 2 years its determinations of whether countries should continue in the program. Nonetheless, as of October 31, 2015, GAO found that about a quarter of DHS's most recent VWP congressional reports were submitted, or remained outstanding, 5 or more months past the statutory deadlines (see figure). As a result, Congress may lack timely information needed to conduct oversight of the VWP and assess whether further modifications are necessary to prevent terrorists from exploiting the program. DHS should (1) specify time frames for working with VWP countries on the requirement to implement information-sharing agreements and (2) take steps to improve its timeliness in reporting to Congress on whether VWP countries should continue in the program. DHS concurred with the recommendations. |
According to IOM, the bombing of the Al-Askari Mosque in Samara in February 2006 triggered sectarian violence that increased the number of displaced Iraqis. Although military operations, crime, and general insecurity remained factors, sectarian violence became the primary driver for population displacement. As displayed in figure 1, many Iraqis fled their country and immigrated to neighboring countries, particularly to Syria and Jordan. According to UNHCR, the 1951 UN Convention Relating to the Status of Refugees and its 1967 Protocol provide the foundation for modern refugee protection. According to the Convention, a refugee is someone who, “owing to a well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group, or political opinion, is outside the country of his nationality, and is unable or, owing to such fear, is unwilling to avail himself of the protection of that country.…” The 1951 Convention does not apply to persons who have committed crimes against peace, war crimes, or crimes against humanity. UNHCR recognizes and registers as refugees both those persons who fall within the 1951 Convention criteria and those falling within the extended definition of persons fleeing generalized armed conflict or civil unrest. Registration allows UNHCR to identify Iraqis in need of protection, offer them assistance, and screen them for possible resettlement. According to the UN, of the countries hosting Iraqi refugees in the Middle East, only Turkey, Egypt, and Iran are parties to the 1951 Convention. Syria and Jordan, the two countries hosting the largest number of Iraqi refugees, have not signed the 1951 Convention. As a result, according to the UN, although the refugees have been able to access public services, they have not been able to obtain legal employment and may face deportation if they do not comply with visa requirements, which have become more restrictive over the years. According to UNHCR, the identification, registration, intervention in detention and deportation, and monitoring of access to asylum are important UNHCR functions for refugees. UNHCR coordinates the provision and delivery of shelter, food, water, sanitation, and medical care to refugees throughout the world. UNHCR is also mandated to find solutions to the plight of refugees. According to UNHCR, three solutions are available: First, voluntary repatriation is the preferred solution for the majority of refugees. Most refugees prefer to return home as soon as circumstances permit (generally when a conflict has ended and a degree of stability has been restored). UNHCR promotes, supports, and facilitates voluntary repatriation as the best solution for displaced people, provided it is safe and reintegration is viable. Second, UNHCR may help refugees integrate and settle in the “asylum,” or host, country where they reside as refugees. Some refugees cannot or are unwilling to return because they would face persecution. According to UNHCR, relatively few countries allow refugees to settle. Third, UNHCR may assist refugees in permanently resettling in third countries. According to UNHCR, only a small number of nations take part in UNHCR resettlement programs worldwide and accept annual quotas of refugees. According to State, historically, less than 1 percent of registered refugees are resettled in third countries. Within the U.S. government, the Department of State’s Bureau of Population, Refugees, and Migration (PRM) has primary responsibility for formulating U.S. foreign policy on population issues, protection and assistance to refugees and conflict victims, and international migration. It also administers U.S. refugee assistance and admission programs. In this capacity, PRM has the lead role within the department in responding to complex humanitarian emergencies around the world and in working to resolve protracted refugee situations. According to State, to protect and assist Iraqi refugees, PRM works closely with regional bureaus, U.S. embassies, and U.S. missions to provide guidance to its international organization and NGO implementing partners and to engage with other donor countries and countries hosting Iraqi refugees. PRM primarily implements its U.S. humanitarian assistance goals for Iraqi refugees by funding and monitoring international organization and nongovernmental organization projects. USAID also provides some humanitarian assistance that benefits Iraqi refugees, but according to State and USAID, most of its programs focus on efforts within Iraq. PRM is also responsible for managing the U.S. Refugee Admissions Program (USRAP). Within this program, DHS’s U.S. Citizenship and Immigration Services (USCIS) is responsible for interviewing refugees and adjudicating their applications for resettlement in the United States. The Department of State and its international partners, including UN agencies and NGOs, have funded and implemented a number of programs and projects that benefit Iraqi refugees in Syria and Jordan. However, although State has established a broad goal and objectives for its 2008 efforts to protect and assist Iraqi refugees, it did not establish performance measures for assessing progress in achieving them. In addition, State and its implementing partners face challenges in monitoring their Iraqi refugee assistance projects. To implement its goal and objectives for Iraqi refugees, State primarily funds and monitors the activities of its implementing partners, which include international organizations and NGOs. According to State, U.S. funding through these organizations has supported the most vulnerable refugees and host country populations. UNHCR, other international humanitarian organizations, and NGO partners provided education, health care, food, financial assistance, and other assistance to Iraqi refugees and vulnerable host country populations (see fig. 2). For example, in Syria, UNHCR and the World Food Program provided food rations and nonfood items such as mattresses, blankets, and household items to Iraqi refugees. Additionally, in Syria and Jordan, UNHCR provided monthly cash assistance primarily to vulnerable Iraqi refugees, including single female heads of households. In Syria, for example, the heads of households received approximately $100 per month, with an additional $10 for each dependent. Appendix V provides more details on the number of Iraqis who benefited from UNHCR assistance in 2008. In terms of health care, we visited a clinic in Jordan, funded through the State Department’s PRM bureau, which assisted Iraqi refugees, and met with outreach workers. According to the program manager, the project provided health care to Iraqis and stipends for some Iraqi women conducting community outreach. (See fig. 3, showing an Iraqi volunteer conducting outreach.) In Syria, we visited another PRM-funded project that provided medical assistance to Iraqi refugees and vulnerable host country populations (see fig. 4). According to the program manager, the clinic provided primary health care, child health screening, chronic noncommunicable disease care, maternal health care, and health education. We toured the pharmacy, the dental unit, and the laboratory where basic tests are performed. At another NGO project site in Syria, we visited a summer school program for Iraqi refugee children. According to the program manager, in addition to the academic lessons provided in Arabic, English, math, and science, Iraqi students participate in summer camp activities. During our visit, we observed children participating in various camp activities, including arts and crafts and a musical production. According to the program manager, all of the participants were Iraqi children. He also stated that the children received meals while attending the activities. The program manager stated that these activities were designed to promote the Iraqi students’ emotional and social well-being. It is difficult to determine the progress of U.S. efforts to assist and protect Iraqi refugees because State’s 2008 goal and regional objectives were broad and difficult to measure. In addition, State did not have corresponding performance measures that clearly linked the achievements of its Iraqi refugee activities to progress in meeting its overall 2008 goal and objectives for Iraqi refugees. Prior GAO work suggests that leading organizations promote accountability by establishing results-oriented goals and corresponding performance measures by which to gauge progress. Measuring performance allows organizations to track the progress they are making toward their goals and give managers crucial information on which to base their organizational and management decisions. Figure 5 provides more information on State’s 2008 performance management efforts for Iraqi refugee assistance compared with leading results-oriented practices. As shown in figure 5, State established a goal and objectives for its 2008 efforts concerning Iraqi refugee efforts as part of its overall goals and objectives for its efforts to assist refugees, internally displaced persons, and other conflict victims. However, on the basis of our review of State’s assessment of progress achieved in fiscal year 2008, it was difficult to determine the extent to which State achieved its overall goal and objectives. Although State reported progress achieved in 2008 by sector and at the country level, it did not aggregate these data to demonstrate how these activities that it funded helped State meet its overall goal of assisting and protecting Iraqi refugees. Similarly, State did not develop corresponding performance measures and milestones, nor did it compile and aggregate the data it needed to assess and report on its progress in achieving its objectives to expand engagement through funding of NGOs and international organizations, contribute to regional security by channeling humanitarian assistance through primary international organization partners, promote UNHCR to achieve solutions for Iraqi refugees, or ensure greater burden sharing. State measures PRM’s bureauwide progress for humanitarian assistance at the global level, but this effort does not include specific performance measures for assessing progress toward its goal and objectives for Iraqi refugees. According to State officials, the goal and objectives for Iraqi refugees are in line with the PRM bureau’s overall humanitarian response strategic goal for fiscal year 2008 and with its performance goals for global refugee protection, solutions, and assistance. State officials said that progress on its global efforts is measured through bureauwide indicators, including acute malnutrition and crude mortality rates. Similarly, progress on protection efforts by PRM partners is measured at the global level through performance relating to “non-refoulement,” as reported in UNHCR’s annual protection reports. However, these indicators are not generally applicable to specific programs targeting Iraqi refugees. According to State, global acute malnutrition, for example, is used as a proxy of the overall health and well-being of a population. PRM monitors situations where more than 10 percent of refugee children are suffering from wasting; where this occurs, high malnutrition levels indicate a serious humanitarian crisis. However, according to State officials, the absence of reports of acute malnutrition occurring among Iraqi refugee children makes this indicator a poor choice for assessing the effectiveness of State’s Iraqi refugee programs. State’s implementing partners reported progress against agreed-upon performance indicators for assessing Iraqi refugee-related activities. However, State did not aggregate individual project or program performance so that it could measure progress toward its overall goal and objectives. GAO previously reported that leading organizations seeking to become more results-oriented clearly define desired outcomes, measure performance to gauge progress, and use performance information as a basis for decision making. For example, in its 2008 and 2009 policy papers on Iraqi refugees, State reported on a number of individual projects but did not specifically report how these project-level accomplishments helped State achieve its overall goal and objectives for Iraqi refugees. In addition, on the basis of our review of NGO monitoring reports, State received information on its partners’ achievements but did not identify how it would use these data to measure and report on overall progress for its Iraqi refugee goal and objectives. For example, in its NGO guidelines, State generally requires that a project demonstrate that at least 50 percent of beneficiaries are Iraqi refugees. According to State officials, NGO partners are required to submit beneficiary statistics by objectives and indicators. Our review of the 13 available final NGO reports showed that in 10 cases NGOs reported that 50 percent or more of beneficiaries were Iraqi refugees, while in 3 cases less than 50 percent were Iraqi refugees. However, these data were not aggregated or reported as a measure of progress in meeting the U.S. goal and objectives for assisting Iraqi refugees. For 2009, State has made progress in articulating more results-oriented goals and objectives; however, the elements that State identified as corresponding performance indicators are not clearly linked to the objectives and are not consistently measurable. State reported that, on the basis of discussions with GAO, it established more detailed objectives and indicators for fiscal year 2009 to measure progress in providing assistance and protection to Iraqi refugees, internally displaced persons, and conflict victims. According to State, it has developed a spreadsheet to track progress toward these objectives and indicators throughout the year. The Department of State and its implementing partners use a number of methods to monitor their refugee programs and activities; however, according to State and its implementing partners, a lack of resources, difficulty gaining physical access to projects and refugees, and a lack of reliable data create challenges to their monitoring and evaluation efforts. According to State officials, they monitor their partners’ programs and projects by conducting site visits, reviewing progress and final reports, reviewing NGO project beneficiary statistics, meeting and conducting follow-up with program managers, and consulting other donors and humanitarian organizations. According to UNHCR officials, they have an extensive monitoring system that includes field monitoring, program evaluations, and financial account and document reviews. State is working with its partners to improve their monitoring and evaluation efforts. A Framework for Cooperation between State and UNHCR noted that enhancement of the quality of monitoring and evaluation activities that UNHCR undertakes deserved particular attention. Additionally, in State’s Framework for Cooperation with IOM, both parties committed to strengthening monitoring and evaluation capacity and to quantify program results and impact more effectively. While there are challenges to monitoring and evaluation, State has taken steps to improve its oversight of NGO projects. For example, in the fiscal year 2007 NGO cooperative agreements, State required NGOs to provide two reports. The first report covered the first 4 months of the project, and the second report covered the last 8 months of the project. However, for NGOs funded in fiscal year 2008, State revised the formal reporting requirements included in the cooperative agreements. As a result, NGOs are required to provide quarterly reports on project progress, including progress against objectives and indicators. Additionally, State reported that it has expanded the template used to track the progress made by NGOs on a quarterly basis. However, according to State and implementing partner officials, monitoring continues to be impeded by the following challenges. Insufficient monitoring resources: In April 2008, State reported that UNHCR effectively monitored approximately 40 to 59 percent of its implementing partners’ program activity sites in Jordan. State noted that it faced the same challenges, given that program activities are conducted at more than 200 sites and that PRM’s officer would be able to visit only a fraction of these activities over the course of a year. During our visit to a small project site in Jordan, the embassy official responsible for monitoring in Jordan noted that this was the first visit to the site, given that it was one of the smaller projects and embassy staff had limited time to make site visits. Moreover, State reported that it expected the problem to increase for UNHCR as it continued with plans to decentralize its services to Iraqi refugees to 18 locations throughout Jordan. In commenting on a draft of this report, UNHCR noted that it has taken steps to mitigate the lack of monitoring resources in Jordan. In Syria, monitoring efforts are limited by a lack of PRM monitoring staff at the U.S. embassy. In August 2008, a senior U.S. embassy official in Syria stated that the U.S. embassy had limited staffing resources to monitor all Iraqi refugee program activities. According to State, monitoring efforts for Syria, Lebanon, and Jordan are carried out by two PRM staff based at the U.S. embassy in Jordan and visiting PRM staff from Washington, D.C. Difficulty gaining physical access to projects: In November 2008, State reported that the refugee coordinator did not complete annual reviews of UNHCR programs in Syria and Lebanon because of difficulties getting into each country because of visa and security restrictions. According to State officials, the United States is constrained in monitoring its assistance efforts in Syria because of its poor relationship with the government of Syria and resulting restrictions on the visas of U.S. government visitors. In addition, according to two interim program evaluations, State personnel were unable to monitor the two NGO projects in Lebanon because of security constraints. The U.S. embassy in Beirut operates under strict security protocols that limit the ability and flexibility of the mission to host visitors. State monitoring officials planned to travel to Beirut in May 2008, but this trip was canceled after violence escalated. Lack of reliable data: According to the UN, in both Syria and Jordan, difficulty obtaining reliable data in the education and health sectors has hindered efforts to monitor progress. For example, according to the UN, student attendance data in Jordan are not disaggregated by gender and age. According to the UN, information management systems in the Syrian and Jordanian health sector need improvement to collect more reliable data on beneficiaries served. U.S. and UNHCR efforts to provide sufficient humanitarian assistance to Iraqi refugees are challenged by the lack of reliable needs estimates and data on funding targeted at Iraqi refugee programs. Without a comprehensive assessment of the number and needs of Iraqi refugees in Jordan and Syria, it is difficult to prioritize and fund efforts to help ensure sufficient assistance and protection efforts. Donor countries are resistant to providing funds without further information on the needs. According to UN and donor representatives, they are also resistant because they believe the United States and Iraq should fund the majority of assistance efforts. Efforts to provide humanitarian assistance to Iraqi refugees are hindered by the lack of reliable information on their number, the extent of their needs, and the needs of the countries hosting them. Iraqi refugees primarily live interspersed among the local urban populations, rather than concentrated in camps, and are not easily identified. According to the UN, statistics on the number of Iraqi refugees in neighboring countries vary and are difficult to verify. The UN further notes that efforts are needed to improve data collection on Iraqi refugees across the region. In contrast to official host government estimates of Iraqi refugees, a significantly smaller number of refugees have registered with UNHCR for protection and assistance (see table 1). However, UNHCR officials stated that the registration numbers may not be a true proxy of the number of Iraqi refugees in each country because an unknown number of refugees do not register or seek assistance. The actual number of Iraqi refugees in need may be somewhere in between these figures. Further, neither Jordan nor Syria, the countries reporting the largest number of Iraqi refugees, has enabled an independent, comprehensive survey of refugees to be undertaken. As shown in table 1, as of September 30, 2008, UNHCR reported that the estimated number of refugees, as provided by the governments of Syria and Jordan, was 1.2 million to 1.5 million in Syria and 450,000 to 500,000 in Jordan. However, State, NGOs, and international organizations have questioned these high numbers. In 2007, the Jordanian government tasked Fafo, a Norwegian research institute, to estimate the number of Iraqi refugees living in the country. After Fafo estimated that 161,000 Iraqi refugees resided in Jordan, the Jordanian government disagreed with the institute’s findings, citing conflicting estimates. Fafo conducted further work with the Jordanian government that resulted in an estimate of 450,000 to 500,000 Iraqi refugees as of May 2007. According to State, while some NGOs agree with this estimate, others believe the number may be as low as 200,000. State further reported that although the Jordanian government initially approved a UNHCR proposal for a joint study to assess Iraqi refugee needs in September 2008, it has yet to take any action to initiate the required work. In Syria, the United Nations Development Program (UNDP) produced a preliminary study in January 2008 that was intended to analyze the Syrian economy since 2003 and assess the macroeconomic impact of Iraqi refugees. However, the report, which included estimates of the numbers of Iraqi refugees in Syria, has not been released to the public. According to a UNDP official, the study was only a preliminary report pending the commissioning of a survey on the number, geographic location, and socioeconomic characteristics of Iraqis in Syria. UNDP received comments from the Syrian government and agreed to incorporate them into the final report. UNDP also found that some of the results were contradicted by other studies and agreed with the Syrian government on the need to further analyze and validate the preliminary results once a survey is conducted. Moreover, government officials in Jordan and Syria stress that their most vulnerable citizens as well as refugees need assistance. As a result, both countries prohibit parallel assistance systems that would provide refugees with increased aid and potentially create resentment within their respective populations. Both countries have primarily based their requests for international assistance on their countries’ overall health and education needs rather than on the numbers of Iraqi refugees. In the 2009 UN Consolidated Appeal for Iraq and the Region, the UN notes that host countries have drawn on their existing social services to assist Iraqi refugees. The UN concludes that, therefore, efforts should continue to reinforce basic needs such as health and education, among others, for all refugees and local populations. Although the figure has been debated, according to State, the Jordanian government contends that Iraqi migration into Jordan has cost it about $2 billion over the last 3 years because of increased stress on its health, education, and water infrastructure in Amman, Zarqa, and Irbid. However, the extent to which Iraqi refugees affect these sectors is not clear, government numbers are not clearly supported, and supporting government assessments are not publicly available. For example, according to State, the Jordanian government stated that a total of 24,000 Iraqis enrolled in public and private schools during the 2007 to 2008 school year, but some NGOs estimated that the public school attendance figure may have been as low as 9,000 students. Both State and the UN have reported that the Jordanian government has not made disaggregated figures available and has declined to allow independent confirmation of the number of students in the public school system. Further, NGOs reported that outreach efforts in Syria were discouraged by the Syrian government, limiting the ability to obtain information to better understand the needs of Iraqi refugees in Syria. Similarly, according to State, the Jordanian government has withheld permission from UNHCR to conduct mobile registration drives and public outreach campaigns. In the absence of a comprehensive survey of the needs of all Iraqi refugees and a transparent assessment of the impact of Iraqis on host countries, the UN relied on available information to identify refugee needs. In 2008, the UN expanded the efforts of its working groups and relied on the UNHCR central registration system as the most effective means for UN agencies to assess needs, estimate refugee movements, and understand the changing circumstances of the Iraqi refugee community. The UN also considered other information, such as public studies, limited surveys, and host government data. As a result of its working groups’ assessments, in its 2009 Consolidated Appeal, the UN targeted assistance in areas such as protection, health, education, sexual and gender-based violence, food, psychosocial support and mental health, and skills development. The UN tailored programs for what was known at the time about the situation in each host country. According to UNHCR and NGO officials, to ensure that these programs reach Iraqi refugees, they target their assistance programs in Jordan and Syria in poor and underserved areas where Iraqi refugees are known to live. However, according to the UN, a growing number of Iraqi refugees are leaving costly urban areas, resulting in a more dispersed population and creating the need for further outreach. The amount of U.S., UN, and other funding spent to assist Iraqi refugees is not readily available. The U.S. government and UNHCR, reportedly the largest bilateral and multilateral funding sources, do not always designate and report funding solely for Iraqi refugee programs, which target refugees and the vulnerable populations of the countries that host them. Instead, the U.S. government reports funding for all Iraq-related humanitarian assistance that may include assistance to Iraqi refugees, internally displaced Iraqis, and other vulnerable populations in Iraq and host countries. According to funding data provided by State and USAID, for fiscal years 2003 through 2008, the U.S. government has apportioned about $1.6 billion, obligated about $1.5 billion, and expended about $1.2 billion for all Iraq-related humanitarian assistance (see app. III). Similarly, UNHCR includes Iraqi refugees in its Iraq Operation and obtains funding through a number of funding appeals made to the international community. Some appeals, such as the 2008 UN Iraq Consolidated Appeal, were for efforts inside Iraq; others, such as the 2008 UNHCR Iraq Situation Supplementary Appeal, were intended for programs that benefit Iraqi refugees, internally displaced persons in Iraq, non-Iraqi refugees in Iraq (such as Palestinian refugees in Iraq), and Iraqi returnees. For calendar years 2003 through 2008, UNHCR appeals for its Iraq operation, including Iraqi refugees, totaled about $730 million and resulted in about $542 million in contributions (see app. IV). The United States contributed about 58 percent of the donor contributions to these appeals. Moreover, in addition to providing UNHCR funding, donor countries also fund the appeals and efforts of other UN agencies and international organizations that assist Iraqis and other conflict victims in the region. Because of the number of overlapping appeals, it is difficult to track the amount requested and funded for all Iraq-related humanitarian assistance. To better coordinate efforts among UN agencies, humanitarian organizations, and donors, in December 2008, for the first time, the UN consolidated all of its Iraq-related appeals for UN agencies and over 15 NGOs. The 2009 UN Consolidated Appeal for Iraq and the Region requests $547.3 million, of which $355 million is requested for efforts to assist Iraqi refugees and host country populations and $192.3 million is requested for efforts within Iraq. In addition to multilateral funding, an unknown amount of bilateral funding and private contributions is made to programs benefiting Iraqi refugees and others. The UN’s Office for the Coordination of Humanitarian Affairs reports data on multilateral and bilateral contributions. However, it relies primarily on self-reporting, and the data may be incomplete. According to State, all donations from other countries meet a small fraction of the needs inside and out of Iraq. State officials also noted that the department demarched both the Gulf States and traditional donors in 2007 and 2008, asking for greater support. However, representatives of donor countries raised concerns regarding the uncertain numbers of Iraqi refugees and the extent of their needs, and they noted that the lack of objective and complete information made it difficult to garner support for funding. Some also noted that the United States, given its role in the Iraqi humanitarian crisis, and Iraq, given its budget surplus and that the refugees are its citizens, should bear most of the funding costs. Although the Iraqi government pledged funds in 2007 to support the assistance of Iraqi refugees in neighboring host countries, it is unclear whether additional funds will be provided. The Iraqi government pledged $25 million to assist neighboring countries hosting Iraqi refugees. Of this amount, the government provided $15 million to Syria, $2 million to Lebanon, and $8 million to UNHCR in Jordan. For efforts within Iraq, the Iraqi government donated $40 million, left over from the Oil for Food Program, to the World Food Program through the UN’s 2008 Iraq Consolidated Appeal. In August 2008, Iraq’s Council of Representatives passed a supplemental budget that included an additional $208 million primarily for IDPs and Iraqi returnees. It is unclear whether any of these funds are intended for or have been expended for Iraqi refugees. Iraqi officials noted that the government is reluctant to fund programs for Iraqi refugees because improving refugee conditions in neighboring countries may discourage refugees from returning to Iraq. Instead, the Iraqi government’s position is to improve conditions in Iraq to encourage returns and focus government resources on those Iraqis who are displaced within the country. According to the UN, in 2009, the Iraqi government plans to direct more of its resources to the poorest Iraqi families in Iraq. The U.S. government and UNHCR face challenges in offering permanent solutions for Iraqi refugees. Conditions in Iraq are not suitable for their return, and host countries such as Jordan and Syria prefer that the refugees return to Iraq. Although the United States is making progress resettling Iraqi refugees in the United States, a limited number of Iraqi refugees are being resettled abroad. According to UNHCR, voluntary repatriation is the preferred permanent solution for the majority of refugees worldwide. However, in the case of Iraq, according to the UN and the IDP Working Group, the conditions for their return are not yet suitable. According to IOM, the Iraqi government has cited improvements in security and offered financial incentives (about 1 million Iraqi dinars) to returning refugee families. However, while the UN notes that some improvements have been made, the UN cites major obstacles to large-scale returns, including the uncertain security situation, lack of a mechanism for restoring ownership of property, lack of access to basic services, and the need for reconciliation among ethno- religious groups and political solutions. According to the U.S. Senior Coordinator for Iraqi Refugees and IDP Affairs, the most critical challenge is the uncertain security environment. According to the UN, although voluntary return is the preferred solution, Iraqi refugees should not be encouraged to return until the security situation allows for large-scale return and sufficient monitoring. Nonetheless, according to the UN, a limited number of Iraqis may be returning, but it may be more due to increasing hardship in the host country and some recent improvements in security rather than significant improvements in Iraq. According to UNHCR, there is no clear trend regarding the number of Iraqis returning to or leaving their country. In Jordan and Syria, difficulties in renewing visas and a lack of funds, employment, and public services affect Iraqi refugees’ decisions to stay or return to Iraq. Moreover, according to UNHCR, refugees may return to Iraq for religious holidays and school breaks or to visit family and property. Returning refugees may become internally displaced if their homes have been destroyed or occupied. In early August 2008, the Iraqi Chairman of the Committee for the Displaced noted the difficulties in removing the current occupants of homes owned by Iraqi refugees who want to return. According to UNHCR and the IDP Working Group, returnees primarily return to neighborhoods, districts, and governates under control of the sects to which they belong, and as of August 2008, few families had returned to areas under the control of another sect. Moreover, some refugees, including many with whom we met in Jordan and Syria, will not leave because they fear that they will be unable to return to their host country, if needed, because of the tightening of borders since they left Iraq. Others fear they cannot safely return to Iraq because of their ethnic or religious identity or employment by coalition forces. Although the Iraqi government, with the support of UNHCR and others in the international community, has initiated planning for the return of refugees, some international organizations reported that it is unknown whether the Iraqi government has the capacity to implement such plans. Meanwhile, according to the UN, the continued willingness of countries in the region to host Iraqi refugees is essential to ensuring refugee protection; however, opportunities for local integration in neighboring countries are limited for Iraqi refugees. The governments of Syria and Jordan consider Iraqi refugees to be “guests” and have stated their preference that the refugees return to Iraq once the security situation in Iraq improves rather than integrate and settle in their countries. On the one hand, a tradition of hosting and protecting Arab nationals provides a political and moral imperative to accept Iraqis in need of refuge, according to the UN and the international community. On the other hand, Syria and Jordan are determined not to establish arrangements that might lead to permanence, such as officially allowing employment of Iraqi refugees, according to UNHCR. According to Jordanian and Syrian government officials, neither government anticipated a long-term Iraqi presence. According to the UN, most countries in the region have provided Iraqi refugees with access to education and health care even though social services and infrastructure were already strained meeting the needs of the local population. Although the international community has commended both Syria and Jordan—Syria in particular—for initially opening their borders to refugees, both countries have now tightened their borders because of security and economic factors and their own capacity to address the situation. According to State, UNHCR, and host government officials, both governments are concerned that the past Palestinian refugee experience may repeat itself. According to State, UNHCR, and host government officials, parallel assistance systems or institutions, such as schools, camps, and social services that were created to serve the Palestinian population became an incentive for Palestinians to stay in Jordan or Syria. These parallel structures created resentment among the host population, which led to a strong desire for these governments not to do the same for the Iraqis. State reported that the Jordanian government wishes to avoid the perception that Iraqis, like Palestinians, intend to stay in Jordan and compete with Jordanians for jobs and resources. The U.S. government has made progress in resettling Iraqi refugees under its U.S. Refugee Admissions Program; however, only a limited number of other countries have admitted Iraqi refugees through resettlement programs. Once the program was announced, in February 2007, State estimated that if USRAP became fully operational, then the U.S. government would be able to admit 2,000 to 3,000 refugees in fiscal year 2007. For fiscal year 2008, the U.S. administration formally established an admission goal of 12,000 Iraqi refugees. Although the U.S. government did not meet State’s fiscal year 2007 goal, admitting 1,608 Iraqi refugees, it surpassed its fiscal year 2008 goal, admitting 13,823 Iraqi refugees as of September 30, 2008 (see table 2 for processing steps and progress made). PRM is responsible for managing USRAP. PRM’s regional refugee coordinator accepts referrals from UNHCR, embassies, and certain NGOs and provides them to an overseas processing entity (OPE). Certain categories of Iraqis with U.S. affiliations may apply directly for consideration under the USRAP program in Jordan, Egypt, and Iraq. The OPEs, working under a cooperative agreement with State, prescreen cases by collecting and verifying personal and family information, details of persecution or feared harm, and information for security name checks. State has cooperative agreements with IOM, which operates processing centers in Damascus, Amman, Cairo, and Baghdad, and the International Catholic Migration Commission, which operates centers in Istanbul and Beirut. Once the OPE prescreens the case, it is then provided to USCIS, of DHS, which makes periodic visits to the regions to interview refugees and adjudicate their applications for resettlement in the United States. Once USCIS approves or conditionally approves cases, they are returned to the OPE, which coordinates outprocessing, including security clearances, medical examinations, cultural orientation, and travel arrangements. Once the security background check and medical examination are completed with no adverse findings, then the refugee and eligible family members are cleared for departure to the United States. The U.S. government and UNHCR acknowledged that they initially faced challenges setting up and expanding their resettlement programs for Iraqi refugees. State’s Office of Inspector General reported that State had little processing infrastructure in place in the region when the Iraqi resettlement program was announced in February 2007. According to the Inspector General, State had no permanent OPE presence in Damascus or Amman, UNHCR was not actively engaged in registering refugees, and USCIS had no permanent presence in the region. According to DHS and State, one reason for initial delays in processing resettlement referrals in Syria was the Syrian government’s delays in approving visas for DHS officials and limitations set on IOM staffing and operations. However, according to UNHCR and State, a significant increase in the number of resettlement departures to the United States has occurred since June 2008. According to State and IOM officials, this has been due to increased processing capabilities after the initial expansion of the U.S. refugee-processing program. According to the Inspector General, on average, the total processing time from case creation to arrival in the United States for Iraqi refugee cases is 222 days. This is less than the average of 452 days for all other refugee cases worldwide. According to State officials, every case moves through USRAP at a different pace and can be delayed at any step along the way; however, if serious delays occur in any one case, they are generally due to the time it takes to complete security clearances. In contrast to U.S. efforts, only a small number of nations take part in resettlement programs and accept annual quotas of refugees from around the world, according to UNHCR. UNHCR refers cases to potential resettlement countries. According to State officials, most of its USRAP applicants come to the program through UNHCR referrals. According to UNHCR, the numbers referred to each country are negotiated based on the numbers each country is willing to consider for resettlement. In August 2008, UNHCR reported that since the first quarter of calendar year 2007, of the more than 40,000 Iraqis referred for resettlement, about 30,000 were referred to the United States. According to UNHCR, for calendar years 2007 and 2008, the United States had resettled a total of 15,170 Iraqi refugees, while other countries had resettled 5,852 Iraqi refugees, as of September 30, 2008 (see table 3). According to U.S., UN, foreign government, and NGO officials, the international community lacks a comprehensive strategy to address the Iraqi refugee situation. We previously reported that strategic planning is a key element in results-oriented management. A strategic plan should contain long-term goals that cover a period of not less than 5 years from the year it is submitted and should be updated and revised at least every 3 years. Although the international community has recognized the need to strategically plan for the Iraqi refugee situation, it has often focused on the crisis within Iraq and annual planning efforts while deferring strategic planning for the refugee situation. Specifically, the international community lacks a comprehensive international strategy that fully identifies and aligns the need with resources, identifies and addresses factors that may affect planning efforts, and ensures coordination among stakeholders. Although the international community has recognized the need for international strategic planning to address the Iraqi refugee situation, its strategic planning efforts have focused on the situation in Iraq while calling for more to be done for Iraqi refugees. In January 2007, UNHCR stated that its operational and contingency plans must be revised and undertaken as part of a wider effort that involves other UN agencies and government and NGO stakeholders. UNHCR further noted that the security, political, social, and financial impact on Iraq, the region, and beyond would be felt for many years and that the response to Iraqi displacement must incorporate a long-term perspective to ensure protection for Iraqis and other displaced groups and overall stability in the region. According to the UN, beginning in January 2007, a series of high- level and technical consultations took place, involving key humanitarian agencies, UN headquarters, and UN member states, including the Iraqi government. These consultations resulted in the broad recognition that a humanitarian crisis was unfolding in Iraq and that a multisector interagency response was required. Accordingly, in April 2007, the UN Country Team for Iraq, under the leadership of the UN Humanitarian Coordinator, developed the Strategic Framework for Humanitarian Action in Iraq as a basis for a coordinated response by the international community. However, this framework solely focused on the immediate measures needed to expedite humanitarian assistance inside Iraq. It also called for a comprehensive approach to addressing the concerns of the Iraqi population displaced to neighboring countries, particularly Jordan and Syria. Moreover, when governments in the region, donors, international organizations, and NGOs convened in April 2007 at a UNHCR-initiated international humanitarian conference on displaced Iraqis, the NGOs called for a multifaceted international strategy to address the Iraqi refugee situation. However, a comprehensive long term approach has yet to be developed. UNHCR and State have focused on UNHCR’s annual planning efforts for UNHCR and its implementing partners and myriad funding appeals rather than on a comprehensive international strategic plan. State and UNHCR note that planning for Iraqi and other refugees is done through the annual UNHCR country operations plans. Each year, with donor input, UNHCR develops country operations plans that provide a summary of UNHCR’s program goals and objectives for refugees in each country in which it operates. However, these plans, focusing on the efforts of UNHCR and its implementing partners, do not contain a mechanism to measure longer term progress in achieving strategic goals. Further, the complete plan has not always been made public. In January 2008, UNHCR issued its Iraq Situation Supplementary Appeal, which sought funds and support to address the immediate protection and assistance needs of Iraqi refugees, internally displaced Iraqis, refugees returning to Iraq, and refugees from other countries living in Iraq. Although the appeal provided information on activities, objectives, and targets, it did not prioritize efforts for funding and sets targets only for the immediate appeal. In February 2008, UNHCR stated that the international community needed to develop strategies and allocate resources that not only address immediate and medium-term needs, but also acknowledge that, over the long term, a significant portion of displaced Iraqis may never return. According to the 2007 study by Fafo, a Norwegian research institute, only one in five Iraqis in Jordan had concrete plans to immigrate to a third country. With the release of its 2009 Consolidated Appeal for Iraq and the Region in December 2008, the UN has shown progress in its strategic planning efforts for Iraqi refugees. However, the 2009 UN Consolidated Appeal is a 1-year funding request and plan and does not include or refer to strategic plans for the longer term. According to the UN, the 2009 UN Consolidated Appeal’s Pillar II, which focuses on Iraqi refugees, targets Iraqi refugee needs in accordance with priorities agreed to by all concerned humanitarian actors and, for the first time, presents a comprehensive statement of their planned response. Rather than have separate and sometimes overlapping appeals and strategies as in the past, UN agencies came together, and with NGO and donor input, developed one funding appeal and plan for the Iraqi refugee situation. Pillar II states the mission, and the objectives of the humanitarian action plans for each host country are clearly aligned with the strategic objectives for the year and with UNHCR’s overall goals to protect and assist refugees. The UN expects its 2009 Consolidated Appeal to serve as a framework for UN and NGO collaboration across the region. The 2009 UN Consolidated Appeal also includes a monitoring and evaluation plan and notes that there will be a midyear progress report in June 2009. However, the 2009 UN Consolidated Appeal lacks long term goals, and while it uses available information to assess needs, it is not based on a comprehensive needs assessment and is unclear on how efforts will be prioritized if the appeal is not fully funded. Further, the 2009 UN Consolidated Appeal relies on existing coordination mechanisms that the NGOs stated were problematic. According to NGOs, the lack of a comprehensive international strategy has hindered efforts to effectively assist Iraqi refugees in Jordan and Syria. Specifically, the international community lacks a strategic planning effort for the assistance of Iraqi refugees that includes (1) a comprehensive assessment of the needs of Iraqi refugees and vulnerable host government populations and uses this assessment to prioritize activities for funding; (2) a discussion of the limitations of annual budget cycles and efforts to mitigate these limitations; and (3) a coordination mechanism involving all stakeholders, including host country governments, international organizations, international and local NGOs (including local churches), and donor countries. First, the international community lacks a comprehensive assessment of the needs of vulnerable Iraqi refugees and the economically vulnerable populations that host them that would establish a baseline for strategic planning. Without a comprehensive needs assessment in host countries such as Jordan and Syria, it is difficult to determine the scope of the problem and to appropriately prioritize and align resources to address the Iraqi refugee situation. This is particularly important given the limited amount of funding and resources, as well as the decision to avoid developing parallel systems. However, to date, host countries’ unwillingness to enable completion of these assessments impedes strategic planning. Second, State, UNHCR, and NGOs do not have a strategy that addresses concerns raised about factors that may impact assistance efforts, such as the limitations of working with annual budget cycles and efforts to mitigate these limitations. According to State, UNHCR, and NGOs, the annual budget cycle of UNHCR and State’s annual funding determinations for NGOs impede strategic planning efforts. According to State, planning is constrained by a reliance on donors whose contributions are inconsistent from year to year and whose annual budget cycles undermine multiyear planning on the part of UNHCR and other international humanitarian organizations. According to a UNHCR official, the organization is constrained by a supplementary budget process that has to be approved and renewed each year, thus forcing UNHCR to focus on annual objectives and targets. According to NGOs, the annual budget focus of UNHCR and key donor countries, including the United States, makes it difficult for them to conduct longer-term planning because they do not know whether their efforts will be funded from one year to the next. Thus, they may focus on shorter term efforts in lieu of more effective long term efforts. Third, NGOs noted that a comprehensive international strategy with long- term goals is needed to improve coordination among all stakeholders to provide humanitarian assistance, effectively use the limited resources available, and prevent duplication of effort. On the basis of discussions with NGOs and UNHCR and a review of NGO progress reports and State’s interim progress evaluations of its NGO implementing partners, we found that the lack of coordination among stakeholders has hindered progress. For example, according to interviews and reporting, the international community in Syria lacks an adequate coordination mechanism. UNHCR, to maintain a good working relationship with Syrian authorities, will officially meet and coordinate only with NGOs formally approved to work in the country by the Syrian Arab Red Crescent (SARC). According to U.S., UNHCR, and NGO officials, the SARC registration process is lengthy and nontransparent. Few NGOs have obtained formal SARC approval, although the number of approvals is increasing. According to NGOs, unapproved NGOs are not invited to UN coordination meetings and attempts to meet with UN agencies in Syria and develop formal beneficiary referral processes have been unsuccessful, even for those implementing U.S. programs. Moreover, NGOs in Syria further stated that there is limited information sharing between church and other humanitarian organizations and UNHCR and relevant UN organizations. The Syrian government has not required SARC approval for assistance provided by churches in Syria. Church officials stated that they were unaware of UNHCR coordination meetings. According to UNHCR, its religious organization partners are aware of coordination meetings but may not attend because they want to maintain a low profile. An NGO that was approved by SARC reported to State that the lack of full NGO participation, including that of churches, means that coordination meetings do not include all NGO activities assisting Iraqis in Syria. According to a State official, the department ensures coordination among its NGO implementing partners. NGOs noted that more needs to be done to coordinate efforts in Syria as the number of NGOs increases. In Jordan, UNHCR reported that implementing partners do not speak directly with each other to coordinate areas and types of coverage. For example, UNHCR reported in its Annual Program Interim Report for 2008 that its effort to decentralize the delivery of essential services and humanitarian assistance in 17 geographical areas in Jordan was not fully implemented and was delayed because of operational constraints and lack of coordination among implementing partners. As a result, UNHCR decided to decentralize fewer services in fewer locations and conduct outreach to other locations. Also, according to NGOs in Jordan, coordination is made difficult by the large number of NGOs operating in Jordan on similar programs. NGO officials stated that at one point, the same beneficiaries were attending multiple programs offering the same services and that NGOs were competing for and taking beneficiaries from each other’s programs. UNHCR commented that as soon as the organization became aware of the situation, it took immediate action. According to NGOs, they are now working by sector (health, education, etc.) in conjunction with UN agencies to prevent duplication that may have occurred among their programs. UNHCR is also developing a database of beneficiaries in Jordan—the Beneficiary Information System—that is intended to make enrollment in NGO programs more transparent. However, UNHCR encountered difficulties establishing the new system, including delays in data entry, inconsistent use of the system, and noncompliance with established procedures and guidelines on the part of implementing partners. According to UNHCR’s 2008 annual interim program report, it has provided additional data entry staff and training for implementing partners to address these issues. According to international organization, NGO, and State officials, it may be difficult to engage countries hosting Iraqi refugees in international strategic planning efforts because these countries want the refugees to be repatriated as soon as feasible. According to Jordanian, Syrian, and Iraqi government officials, they did not initially expect the refugee situation to be a long term problem. However, Jordanian and Syrian government officials spoke of the long term needs of their education and health sectors, which they said were most affected by the refugee situation. In accordance with host country requirements that parallel assistance systems not be developed, refugee assistance programs have been targeted to both refugees and vulnerable populations in each country. Moreover, according to UNHCR, although repatriation is the primary goal, the return of refugees to Iraq will need to be phased in over time. While NGOs praise Syria and Jordan for hosting refugees, they also note that more needs to be done to coordinate efforts to register refugees and facilitate the work of relief and resettlement organizations. The global community is looking to the United States to address the Iraqi refugee situation. However, without a comprehensive assessment of the number and needs of Iraqi refugees in Jordan and Syria, it is difficult to prioritize and fund efforts to help ensure assistance and protection for these refugees. Given that programs and funding currently target both refugees and vulnerable host country populations, the lack of transparent and complete assessments of the impact of the refugees on critical sectors, such as health and education, further exacerbates planning efforts. Similarly, the lack of transparent data on funding complicates efforts to make decisions regarding the assistance to be provided for neighboring countries. Further, without performance measures that assess overall progress in achieving U.S. goals and objectives for Iraqi refugees, it is not possible to show the full impact of U.S. assistance efforts. Moreover, without a comprehensive international strategy with long-term goals and the involvement of all stakeholders, it is difficult to effectively use the limited resources available. To enhance the ability of the Department of State to evaluate and report progress toward its stated goals and objectives to assist Iraqi refugees, we recommend that the Secretary of State develop performance measures to fully assess and report progress in achieving U.S. goals and objectives for Iraqi refugees. Performance measures and indicators should be clearly linked to progress in achieving stated goals and objectives. Performance goals, objectives, and measures should clearly and transparently address the extent to which programs should target refugees and host government populations, respectively, to the extent practicable. To provide more transparency in funding provided for Iraqi refugee programs and help Congress and the Administration consider funding requests for neighboring countries, we recommend that the Secretary of State and the USAID Administrator develop systems to separately track and report funding apportioned, obligated, and expended for Iraqi refugee programs in each host country, to the extent practicable. To enhance the ability of the U.S. government and the international community to plan their assistance programs based on need and provide longer term solutions for Iraqi refugees, we recommend that the Secretary of State take the following two actions: 1. Work with UNHCR and the governments of Jordan, Syria, and other relevant host governments to expedite efforts to conduct independent comprehensive assessments of the number and needs of Iraqi refugees and the related needs of the countries hosting them. 2. In conjunction with relevant U. S. agencies and in coordination with the donor community, work with UNHCR and the governments of Iraq, Jordan, Syria, and other relevant host governments to build on the efforts in the 2009 UN Consolidated Appeal for Iraq and the Region and develop a comprehensive international strategy for providing assistance and solutions for Iraqi refugees. We provided a draft of this report to the Departments of State and Homeland Security, USAID, and UNHCR. State and USAID provided written comments, which are reprinted in appendixes VI and VII, respectively. State, DHS, and UNHCR provided technical comments, which we incorporated where appropriate. In commenting on a draft of this report, State generally agreed with our recommendations regarding the need for improvements in measuring progress, assessing needs, tracking and reporting funding, and developing an international strategic plan for Iraqi refugees. However, State commented that it does not measure progress for specific refugee populations because such specificity runs counter to State’s principles of universality and impartiality. We recognize throughout the report that State’s refugee programs help both Iraqi refugees and vulnerable populations in the host countries. However, State’s NGO guidelines generally require that its projects demonstrate that at least 50 percent of beneficiaries are Iraqi refugees. Given the importance of the Iraqi refugee situation to the United States, and the fact that State established goals and objectives specifically for Iraqi refugees and efforts within Iraq for 2008 and 2009, we believe that it is important that State establish performance measures and indicators that are clearly linked to its goals and objectives. Additionally, regarding our recommendation to track and report U.S. funding for Iraqi refugee programs, State noted that it is not practicable to track and report multilateral contributions for Iraqi refugees at the country level. We realize that State may not always be able to specifically track and report funding that is comingled by multilateral and international organizations before being apportioned to projects in each host country. However, State could provide Congress with information on the large percentage of U.S. contributions to UNHCR appeals and information from UNHCR on projects funded in each country. In addition, State should track and report bilateral funding for neighboring countries hosting Iraqi refugees, funding for its NGO implementing partners, and funding for specific multilateral and international organization projects. As a result, Congress and the Administration would be better able to assess funding requests from Iraq’s neighboring countries and incorporate funding data into future planning efforts. In response to our recommendation that the USAID Administrator develop systems to separately track and report funding for Iraqi refugee programs, USAID noted that the issue was resolved because the agency no longer provides assistance to Iraqi refugees. We continue to believe that USAID needs improvement in tracking and reporting funding for Iraqi refugee assistance. First, based on data that USAID provided, it appears that the agency is still expending funds on Iraqi refugee programs. Second, the agency had considerable difficulty tracking, reporting, and verifying the accuracy of its funding data when GAO requested the information, resulting in a protracted effort that extended over a period of months. USAID had difficulty reconciling its funding data with amounts it previously reported to State as Iraq-related humanitarian assistance. USAID officials stated that the agency does not have a centralized system for tracking funding for Iraq-related humanitarian assistance. To help Congress and the Administration consider funding requests for neighboring countries and to better incorporate these requests into planning efforts, USAID should develop a system for tracking and reporting funding for Iraqi refugee assistance. We are sending copies of this report to interested congressional committees and the Secretary of State, the Secretary of Homeland Security, and the Administrator for USAID. We will also make copies 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 or christoffj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. Two U.S. special immigrant visa (SIV) programs afford qualified Iraqis with opportunities to immigrate to the United States. Some Iraqi refugees may qualify under these programs. The first SIV program, established in fiscal year 2006, targeted Iraqi and Afghan translators and their dependents and resulted in 2,130 visas issued in fiscal years 2007 and 2008. The second SIV program, established in fiscal year 2008, targeted certain Iraqis who had been U.S. government employees, contractors, or subcontractors and their dependents. This program resulted in a total of 705 visas issued in fiscal year 2008. The Department of State’s (State) Bureau of Consular Affairs administers laws, formulates regulations, and implements policies relating to consular services and immigration. Consular Affairs administers two SIV programs, in conjunction with the Department of Homeland Security (DHS), to further assist Iraqis wanting to permanently immigrate to the United States. Principal applicants and their families who meet the conditions may file a petition (Form I-360) with DHS’s U.S. Citizenship and Immigration Services (USCIS). The petition is to include information about the petitioners and their immediate family members, proof of nationality, a favorable recommendation documenting their service, and other supporting documents. USCIS examiners evaluate the petition and, if it is approved, send it to State’s National Visa Center. The center contacts the applicants and sets an embassy or consulate location for a visa interview, informs the applicant about the materials and documents required, verifies by e-mail that applicants have collected all required documents, and may request a security advisory opinion. The applicants and family members formally submit their application to a consular officer in person at the embassy or consulate. Consular officers interview applicants and review documents submitted and security and medical clearances and issue an immigrant visa if candidates satisfy all criteria. Iraqi SIV recipients are eligible for the same resettlement assistance, entitlement programs, and other benefits as Iraqi refugees admitted under the U.S. Refugee Admissions Program (USRAP). Finally, DHS officers verify the entire SIV package upon the applicants’ arrival in the United States before granting individuals admission as lawful permanent resident aliens. Recipients of SIVs have lawful permanent residence status upon entry into the United States and are eligible to apply for U.S. citizenship after residing for 5 years in the United States. The Departments of State and Homeland Security have implemented two SIV programs, established by Congress, to further assist qualified Iraqis who worked for the U.S. government and want to immigrate to the United States. Qualifying Iraqi refugees may apply for these programs. However, the Departments of State and Defense have not maintained a complete record of Iraqis working for the U.S. government. In August 2008, the Congressional Budget Office reported that between 2003 and 2007, an estimated 70,500 Iraqi nationals worked as contractors for the U.S. government. However, this number does not include Iraqi subcontractors because the Department of State and the U.S. Agency for International Development could not provide this information. The first SIV program, established under section 1059 of the National Defense Authorization Act for fiscal year 2006, targeted Iraqi and Afghan translators and their dependents and resulted in a total of 2,130 visas issued in fiscal years 2007 and 2008, as of September 30, 2008. In January 2006, Congress authorized that up to 50 Iraqi or Afghan translators who worked directly with U.S. armed forces and met other conditions as outlined in the law could receive SIVs during any fiscal year. Those who qualified are known as principal applicants. Spouses and children of principal applicants could also receive SIVs, but they were not counted against the authorized cap. In June 2007, Congress amended the program, authorizing an increase in the limit to 500 SIVs for each fiscal year 2007 and 2008 and expanding it to cover both translators and interpreters who worked directly for the U.S. armed forces and those that worked under the chief of mission authority. According to State, given that Congress increased the limit late in the fiscal year, the department had little time to notify and process an additional 450 applicants. Therefore, according to State, it exercised its authority, under section 203(g) of the Immigration and Nationality Act, as amended, to estimate and anticipate the future number of visa approvals and thus scheduled far more applicants for interviews than the available number of SIVs. According to State, this was done on the assumptions that some would not appear for the interview, clearances would not be received, or some might not qualify. State officials said that while a cutoff date is usually imposed for other immigrant visa categories, it was not imposed for this program because these applicants faced imminent danger and State did not want to fall short of the cap. The result was that State exceeded its 500 limit in fiscal year 2007 by issuing 526 SIVs for principal applicants and in fiscal year 2008 by issuing 560 SIVs for principal applicants (see table 4). The second SIV program, established under section 1244 of the National Defense Authorization Act for fiscal year 2008, targets certain Iraqis who have been U.S. government employees, contractors, or subcontractors and their dependents. This program had resulted in 705 visas issued in fiscal year 2008. In January 2008, Congress authorized up to 5,000 Iraqis, per year for the next 5 fiscal years, who worked for or on behalf of the U.S. government in Iraq and had experienced or are experiencing an ongoing serious threat as a consequence of that employment and who meet other conditions outlined in the law, could receive SIVs. Further, the law allowed that if the 5,000 ceiling was not met in any given year, the unused authorized amounts could be carried over to the following year. Additionally, spouses and children of principal applicants are also eligible to receive SIVs, although these are not counted against the 5,000 cap. In June 2008, Congress amended section 1244 to allow processing to begin immediately and authorized State to convert approved section 1059 SIV petitions filed before October 1, 2008, for which a visa was not immediately available, to section 1244 SIV petitions. As of September 30, 2008, State had issued 371 visas to Iraqi and Afghan principal applicants under section 1244, all of which were converted from section 1059 petitions (see table 5). According to a May 2008 State Department Office of Inspector General report, several challenges may delay processing of Iraqi employees under the second SIV program. Officials we spoke with reiterated two key challenges: Eligibility screening takes time because no central repository or database containing the names of the thousands of Iraqis that have been employed on behalf of the U.S. government since March 2003 is available. Embassies in Amman, Baghdad, and Damascus will require additional staff and physical changes to their workspaces to accommodate the increased workload, according to the Office of Inspector General and consular officers we spoke with in Amman, Baghdad, and Damascus. According to State’s Bureau of Consular Affairs, since the publication of the Office of Inspector General report, it has (1) added an officer in Amman and is working with the embassy to add additional interview space and an interviewing window, and (2) authorized an additional officer and two locally employed staff for the consular section in Baghdad. To examine efforts to protect and assist Iraqi refugees, we assessed challenges in (1) measuring and monitoring progress in achieving U.S. goals for assisting Iraqi refugees, (2) providing humanitarian assistance to Iraqi refugees, (3) offering solutions for Iraqi refugees, and (4) developing an international strategic plan to address the Iraqi refugee situation. In addition, we reviewed the progress made in implementing special immigrant visa (SIV) programs for Iraqis, which may also benefit some refugees but are not designed specifically for them (see app. I). We also conducted fieldwork in Washington, D.C.; Geneva, Switzerland; Rome, Italy; Amman, Jordan; Damascus, Syria; and, to a limited extent, Iraq. To assess progress in achieving U.S. goals for Iraqi refugees, we interviewed officials from the Department of State (State), the United Nations High Commissioner for Refugees (UNHCR), and their implementing partners and reviewed their policies, strategies, planning, programming, progress reporting, and monitoring documents. We also reviewed 13 Department of State interim program evaluation reports and 13 final nongovernmental organization (NGO) reports to assess progress in meeting goals. In Washington, D.C., we met with officials within State’s Population, Refugee, and Migration (PRM) bureau from the Office of Policy and Resource Planning and the Office of Assistance for Asia and the Near East. We obtained and assessed information on the general management of refugee assistance programs, coordination with international partners, and progress and program performance reporting. In Jordan and Syria, we interviewed U.S. embassy officials responsible for monitoring the programs and their implementing partners, including UNHCR and nongovernmental organizations. We also toured U.S. and UNHCR projects and met with project implementers. We discussed implementation and monitoring challenges with NGOs in Washington, D.C.; Jordan; and Syria. To assess U.S. government and international efforts to provide humanitarian assistance to Iraqi refugees and to assess international strategic planning efforts to address the Iraqi refugee situation, we interviewed officials of the U.S., Jordanian, Syrian, and Iraqi governments; UNHCR, the International Organization for Migration (IOM), and other United Nations (UN) agencies; nongovernmental organizations; and research institutes. We reviewed and analyzed relevant strategies, funding appeals, planning and reporting documentation, studies, and other related documents. We also held discussion groups with NGOs with a presence in Jordan, Syria, and/or Iraq to discuss program and overarching challenges and held discussion groups with Iraqi refugees in Jordan and Syria to discuss their situations, needs, assistance received, and challenges encountered. To further assess the numbers and needs of Iraqi refugees, we reviewed and assessed the reliability of available assessments and report data. To identify the nature and extent of U.S. and international funding, we reviewed funding data provided by State’s PRM, the U.S. Agency for International Development (USAID), the UN, UNHCR, and the Iraqi government. According to PRM, its official data were obtained from its Global Financial Management System. USAID’s Office of U.S. Foreign Disaster Assistance provided its official data from its Abacus and Phoenix systems, and USAID’s Food for Peace program provided its data from its Food for Peace Information System, New Management System, and Phoenix system. UNHCR’s Donor Relations & Resource Mobilization Service, the UN’s Office for the Coordination of Humanitarian Affairs, and State’s PRM bureau provided funding data for the UNHCR appeals and contributions received by the United States and other donors. To verify our summarization of the funding data, we sent out draft tables to agency and UN contributors and made supported changes. To assess the key challenges the U.S. government and UNHCR face in offering solutions for Iraqi refugees and the special immigrant visa program, we interviewed and assessed documentation from State’s PRM; State’s Bureau of Consular Affairs; State’s Office of Inspector General; the Department of Homeland Security’s U.S. Citizenship and Immigration Services (USCIS); U.S. embassy officials in Jordan, Syria, and Iraq; UNHCR, Office for the Coordination of Humanitarian Affairs, IOM, and other UN agencies; nongovernmental organizations; and research institutes. In the United States, we held discussion sessions with nongovernmental organizations with a presence in Iraq, Syria, and Jordan. In Jordan and Syria, we held discussion sessions with Iraqi refugees and visited U.S.- and UN-funded programs. To further assess the U.S. Refugee Admissions program, we obtained and assessed data from State’s Worldwide Refugee Admissions Program System. We toured State’s overseas processing entities managed by IOM and reviewed processing steps and data with IOM, USCIS, State, and U.S. embassy officials, including refugee coordinators. We analyzed U.S. admissions data and found the data to be sufficiently reliable for the purposes of this report. To further address the SIV programs, we reviewed the legislative requirements for the two SIV programs found in Section 1059 of the Fiscal Year 2006 National Defense Authorization Act and Section 1244 of the Fiscal Year 2008 National Defense Authorization Act. We reviewed relevant documents from the Bureau of Consular Affairs concerning Iraqi interpreter/translator SIV program planning, processes, resources, and implementation. Also, we met with Consular Affairs officials in Washington, D.C.; Iraq; Syria; and Jordan, who provided information on general consular management and oversight, visa processing and procedures, staffing, and resource needs. We analyzed SIV data and found the data to be sufficiently reliable for the purposes of this report. We conducted this performance audit from January 2008 to January 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. State/ Population, Refugees, and Migration Bureau (PRM) USAID/Office of U.S. Foreign Disaster Assistance (OFDA) In region: government of Jordan to meet the needs of Iraqi refugees and host country population 48.8 In Iraq: IDPs and vulnerable In region: Iraqi refugees and host country populations 26.3 In Iraq: IDPs and vulnerable 5.7 In Iraq: IDPs According to USAID, in 2003, USAID’s Food for Peace Program received $191.1 million, which was reallocated from funds originally appropriated in P.L. 108-7 to Development Assistance, Economic Support Fund, Child Survival and Health, and International Disaster and Famine Assistance accounts. The U.S. Emergency Refugee and Migration Assistance (ERMA) fund is drawn upon by the President to meet unexpected urgent refugee and migration needs whenever the President determines that it is in the U.S. national interest to do so. Funds are appropriated annually to the ERMA fund and remain available until expended. U.S. portion of new contributions (percentage) In region: Iraqi refugees and host country populations In Iraq: IDPs and vulnerable populations In region: Iraqi refugees and host country populations applicable The 2003 UNHCR Iraq Revised Appeal reduced the original appeal from $154.1 million to $90.6 million. The 2007 UNHCR Iraq Situation Response appeal increased the appeal from $59.7 million to $123.7 million. UNHCR’s portion of a 2007 Joint Health Sector Appeal and contributions made were folded into the 2007 UNHCR Iraq Situation Response appeal. The UNICEF portion of the Joint Education Appeal included additional funding requirements for $31.0 million. The amount of this portion of the appeal that was funded was $9.4 million, including $9.0 million in contributions from the United States, representing 95.7 percent of total contributions to the UNICEF portion of the Joint Education Appeal. Contributions to the 2008 UNHCR Iraq Situation Supplementary Appeal included here are as of December 10, 2008. Syria (individuals) Jordan (individuals) 1. We added text in the background to describe other components of PRM’s work. 2. As stated in the draft of this report, in April 2008, State reported that UNHCR “effectively monitors 40 to 59 percent of its partners.” In State’s written and technical comments, the department notes that the statement in its document should have read “implementing partners’ program activity sites.” We have revised this report to correct State’s reporting error. Further, despite our requests for an updated evaluation, State did not provide updated percentages of site visits. UNHCR, in its technical comments on the draft, provided evidence on the steps it has taken in 2009 to mitigate this challenge. We incorporated this information, as appropriate. 3. This statement was deleted from the text. 4. We added a footnote to provide information on the 1244 program’s requirement for Chief of Mission approval and the approval process. In addition, Audrey Solis, Assistant Director; Minty Abraham; Lynn Cothern; David Dornisch; Timothy Fairbanks; Kathleen Monahan; Mary Moutsos; Andrew Stavisky; and Heather Whitehead made key contributions to this report. Technical assistance was provided by Shirley Brothwell, Elizabeth Curda, Aniruddha Dasgupta, Etana Finkler, David Hancock, and Jeremy Sebest. | Iraqi refugees are one of the largest urban populations the UN has been called on to assist. The UN reports government estimates of up to 4.8 million Iraqis displaced within the last 5 years, with 2 million fleeing, primarily to Syria and Jordan. GAO examined challenges in (1) measuring and monitoring progress in achieving U.S. goals for assisting Iraqi refugees, (2) providing humanitarian assistance to Iraqi refugees, (3) offering solutions for Iraqi refugees, and (4) developing an international strategic plan to address the Iraqi refugee situation. GAO analyzed reports and data; met with officials from the U.S. government, the UN High Commissioner for Refugees (UNHCR), international organizations, and NGOs; and did fieldwork in Jordan and Syria. To implement its 2008 goal and objectives for Iraqi refugees, State primarily funded and monitored the efforts of its implementing partners, which include international organizations and nongovernmental organizations (NGO). These activities provided Iraqi refugees and host country populations with education, vocational training, health care, food, and financial support. However, State did not clearly link program achievements to its stated goal and objectives for Iraqi refugees. As a result, State has limited information to assess and report its progress in reaching its goal and objectives and improve program effectiveness. Insufficient numbers of staff to monitor projects, difficulties gaining access to projects and refugees, and the lack of reliable data have challenged State's efforts to ensure that projects help the intended beneficiaries. U.S. and international efforts to provide humanitarian assistance to Iraqi refugees in neighboring countries are impeded by the lack of reliable estimates on the needs of Iraqi refugees and data on the funding targeted at Iraqi refugee programs. Iraqi refugees live interspersed among the local urban populations and are not easily identified. Official government estimates on the number of Iraqi refugees in each country may be overstated. It is also difficult to determine the amount of funding provided for Iraqi refugee programs because the U.S. government and UNHCR, the largest bilateral and multilateral funding sources, do not report funding for Iraqi refugee programs separately from that provided for all Iraq-related humanitarian assistance. The U.S. government and UNHCR face challenges in offering solutions for Iraqi refugees. According to UNHCR, voluntary repatriation is the preferred solution, but conditions in Iraq are not yet suitable for Iraqis to return. According to the International Organization for Migration, the Iraqi government has cited improvements in security and offered financial incentives to returning refugee families. Although another solution is integration and settlement in host countries, Syria and Jordan consider Iraqi refugees "guests" who should return to Iraq once the security situation improves. The U.S. government has made progress in resettling Iraqi refugees under its U.S. Refugee Admissions Program, with 15,431 refugees resettled in the United States in fiscal years 2007 and 2008. According to U.S., UN, foreign government, and NGO officials, the international community lacks a comprehensive international strategy to address the Iraqi refugee situation. Although the 2009 UN Consolidated Appeal showed progress in strategic planning, the UN and international community continue to lack a longer-term approach. First, the international community lacks a comprehensive independent assessment of the needs of vulnerable Iraqi refugees and the populations that host them. Second, State, UNHCR, and NGOs do not have a strategy that addresses factors that may affect assistance efforts. Third, the international community has lacked a coordination mechanism that involves all stakeholders. |
Wind power is one of several renewable energy options. Other renewable sources include sunlight (photovoltaics), heat from the sun (solar thermal), naturally occurring underground steam and heat (geothermal), plant and animal waste (biomass), and water (hydropower). Unlike fossil fuels, renewable energy sources are continuously replenished. Wind turbines can be used by themselves or be connected to a utility power grid. Stand-alone turbines can be used for pumping water—for example, to irrigate fields. However, homeowners and farmers in windy areas can also use stand-alone turbines to generate electricity for their own personal or on-farm use. For utility-scale sources of wind power, a number of turbines are usually built close together to form a wind farm. Currently, more than 50 electric power utilities use wind farms to produce part of the electricity supplied to their customers. In general, wind turbines are divided into two major categories: horizontal axis turbines, which resemble a windmill, and vertical axis turbines, which resemble an eggbeater. Figure 2 depicts each type of turbine. The horizontal axis turbine is the most commonly used, constituting nearly all utility-scale turbines in the United States. To generate electricity, this type of turbine captures the wind’s energy with two or three propellerlike blades that are mounted on a rotor. These rotors sit atop towers, taking advantage of the stronger and less turbulent wind at 100 feet (30 meters) or more above ground. The turbine blades generally are constructed of fiberglass, may be up to 20 meters in length, and may weigh several thousand pounds each. A horizontal axis turbine typically has a mechanism to keep the rotor headed into the wind, while a vertical axis turbine can accept wind from any direction. The federal government represents the largest institutional user of energy in the world, and thus it is potentially a large market for wind and other renewable energy sources. Specifically, through its purchasing decisions, the federal government has the opportunity to affirm its energy and environmental policies and goals, including its goals for promoting the use of renewable sources such as wind power. In this regard, Executive Order 13123, issued in 1999, requires federal agencies to increase their use of renewable energy to a percentage determined by the Secretary of Energy. In 2000, the Secretary directed that federal agencies obtain the equivalent of 2.5 percent of their electricity from renewable sources by 2005. As of March 2003, federal agencies were using about 663 million kWh of renewable energy, or about 48 percent of the goal established by the Secretary. For example, according to Department of Defense officials, 15 military bases, including Edwards Air Force Base in California, Shriever Air Force Base in Colorado, and Ellsworth Air Force Base in South Dakota, use wind power to varying degrees. In addition, one of these bases, Dyess Air Force Base in Texas, bought 78 million kWh of wind power-produced energy in 2003, meeting the base’s entire electricity needs for that year. In addition, other federal agencies, including DOE, EPA, and USDA, are using wind power for part of their energy needs. For example, USDA’s Animal and Plant Health Inspection Service purchases 25 percent of the electricity used at its National Wildlife Research Center in Colorado from wind- generated sources. The federal government is also the nation’s largest landholder, controlling nearly 700 million acres of land. Much of this land is in the western United States and includes some areas of the country with the highest wind potential. Thus, according to federal and industry officials, areas on these federal lands could be leased to wind power or other renewable energy developers, with the federal government collecting substantial land rental payments. For example, the Department of the Interior’s Bureau of Land Management (Bureau) has rented some of the land that it manages in California and Wyoming for wind projects. Overall, these projects include more than 1,300 turbines with a total production capacity of nearly 900 MW, and the associated rental payments provide more than $800,000 in income to the Bureau annually. The administration’s National Energy Policy also recognizes this potential. For example, the policy recommends that the Secretaries of the Interior and of Energy re-evaluate access limitations to federal lands in order to increase renewable energy production, such as biomass, wind, geothermal, and solar, on these lands. Although the establishment of renewable energy production on federal lands would result in some environmental impacts, some federal and industry officials note these impacts would be far less than the mining, drilling, and hauling associated with fossil fuel extraction. In addition, through various programs, the federal government has helped to promote the use of wind power by municipal electric utilities; rural electric cooperatives; state, local, and tribal governments; businesses; and consumers. For example, DOE, in conjunction with wind stakeholders across the country, launched the Wind Powering America program in 1999 to increase the use of wind energy in the United States in order to promote rural economic development, protect the environment, and increase the nation’s energy security. The program’s original goals included (1) providing 5 percent of the nation’s electricity from wind by 2020, with near- term goals of 5,000 MW by 2005 and 10,000 MW by 2010; (2) increasing the number of states with at least 20 MW of installed wind capacity to 16 by 2005 and 24 states by 2010; and (3) increasing the federal government’s use of wind power to 5 percent of its annual consumption of electricity by 2010. The program’s work is organized under four themes: state-based activities, rural economic development, greening federal electricity consumption, and utility partnerships. Among other things, the program encourages partnerships between government and industry; educates, equips, and supports state wind working groups; and develops innovative pilot projects, such as identifying rural ownership options for small wind systems. In another case, EPA promotes the use of wind power and other renewable sources of electricity—collectively known as green power—through its Green Power Partnership Program. Specifically, EPA provides technical assistance and public recognition to companies and organizations that make a commitment to using green power for a portion of their electricity needs. More than 200 companies, including a number of major corporations, participate in this program. In addition, the Department of Housing and Urban Development’s community development block grants have been used to assist municipal-owned utilities to purchase wind turbines. For example, in Iowa, three cities received community development block grant funds in either fiscal year 2002 or fiscal year 2003 to erect wind turbines for energy generation; these grants totaled about $1 million. Furthermore, as discussed later in this report, USDA has several programs that can be used to provide financial assistance for renewable energy projects on farms or other rural lands. Although wind power accounted for about one-tenth of 1 percent of total U.S. electric power generation capacity in 2002, it had quadrupled in generating capacity between 1990 and 2003, and has been growing at a much higher rate than other sources of electric power generation. Nevertheless, wind power’s potential remains largely untapped. A number of factors, including limited transmission capacity and the higher capital start-up costs of wind power compared with fossil fuels in some markets, hamper wind power’s expansion, although other factors, such as federal and state financial incentives, have helped spur expansion. According to DOE estimates, the nation’s wind power generation capacity will continue to grow through 2025, but higher levels of production depend on the continued availability of federal and state financial incentives, particularly the federal production tax credit, expected price increases for fossil fuels, and continued research and development leading to further improvements in wind turbine technology. As of December 2003, wind power capacity accounted for about one-tenth of 1 percent of total U.S. generating capacity—about 6,370 MW—up from 1,525 MW in 1990. This growth exceeds the goal established by DOE’s Wind Powering America program for wind energy generation of at least 5,000 MW nationwide by 2005. This rate also makes wind power the fastest growing source of electric power generation, on a percentage basis, in the United States in recent years. For example, from 1999 through 2003, the average annual growth rate of wind power was 28 percent, and in 2003 alone, enough new wind turbines were erected to provide electricity to 400,000 to 500,000 U.S. homes. Figure 3 shows the growth in U.S. wind power generating capacity from 1981 through 2003. As of the end of 2003, about 90 percent of wind power generation occurred in 10 predominantly midwestern and western states—California, Colorado, Iowa, Minnesota, New Mexico, Oklahoma, Oregon, Texas, Washington, and Wyoming. Two of these states—California and Texas—accounted for about one-half of the nation’s 6,374 MW of installed wind generation capacity, as of the end of 2003. Figure 4 shows installed wind power generating capacity in these 10 states and other states with at least 0.1 MW of installed capacity, as of December 2003. The nation’s wind potential—particularly in areas with frequent, strong winds needed to generate electricity from wind power—remains largely untapped. According to a DOE study, the Midwest, including the Great Plains, theoretically has more than enough potential wind energy to fulfill the entire nation’s electricity needs. Specifically, just three wind-rich states—North Dakota, Texas, and Kansas—could accomplish this. Figure 5 shows areas of the United States with the highest wind potential. As a comparison of figures 4 and 5 shows, states with the greatest installed wind power capacity are not necessarily the states with the greatest wind potential. In addition, figure 6 shows this discrepancy for the leading states in each category. This discrepancy occurs, in part, because of factors that constrain growth, such as access to transmission lines, as well as factors that encourage development, such as state incentives. The following factors constrain the growth of wind power: The cost of wind power production in relationship to fossil fuels. According to AWEA, the cost of electricity from utility-scale wind power projects was as high as 30 cents per kWh in the 1980s, far greater than the cost of electricity from alternative technologies using fossil fuels to generate power. Various state and federal incentives helped overcome wind power's cost disadvantage in many locations, as did dramatic cost reductions due to improvements in wind turbine technology. At present, DOE estimates the cost of generating electricity from wind power ranges from 3 to 6 cents per kWh. Cost reductions also occurred in fossil-fuel power generation technologies, but recent increases in natural gas fuel costs may result in further market penetration by wind power. For example, if natural gas prices continue to be substantially higher than average levels in the 1990s, wind power is likely to be competitive in parts of the country with good wind resources and transmission access. However, wind power will continue to be too expensive to compete with fossil-fuel generation in parts of the country with poor wind resources. Although cost reductions due to technological improvements affect all segments of the electric industry, they tend to be particularly important for newer power generation technologies such as wind power in comparison to fossil-fuel generation technologies. Furthermore, continued federal and state actions that promote renewable energy power generation or raise the cost of emissions from fossil-fuel technologies could also play a significant role in improving the competitiveness of wind power. Connection to the power transmission grid. In general, frequent, strong winds tend to be found in sparsely populated areas, which may be far from transmission lines or lines with adequate capacity to bring power to consumers. For example, renewable energy generators in the wind- rich areas of the Upper Midwest, such as North Dakota, may want to transmit electricity to heavily populated areas in other states. However, as with any remotely located power source, a renewable energy generator can incur transmission pricing mechanisms that charge according to the distance covered or according to the number of utility territories crossed. In addition, transmission capacity is limited in many areas of the nation for all electric power sources. According to AWEA and industry sources, transmission congestion policies generally allocate limited capacity on a “first-come, first-served” basis and discriminate against recent market entrants. Moreover, interconnection policies are often controlled by utilities that make it difficult for new entrants, such as wind power projects, to have timely interconnection at reasonable rates. The Federal Energy Regulatory Commission, which is responsible for approving rates for the transmission of electricity—and overseeing the sale of electricity—in competitive wholesale markets, is currently developing market standards for new entrants, such as wind and other renewable sources, to connect to the transmission grid. DOE is also conducting research to develop efficient, lower-speed wind turbines for deployment in less windy areas of the nation; such turbines would enhance the ability of industry to bring cost-effective wind power closer to population centers and avoid already congested long-distance transmission lines. Intermittency of wind power. Renewable energy sources such as wind power have unique technical characteristics that can constrain their use in an existing transmission system that was built to accommodate large central-station power plants located near population centers. This system relies on precisely predicting and controlling power plant output to avoid blackouts and other disruptions. As a result, with this system, the value of electricity is determined in part by the time of day at which the electricity is delivered to the grid and also by the probability that it will be available when needed. In general, fossil fuel and nuclear power generation plants can be run without interruption and are consistently available when called upon, except when idled by equipment problems or for maintenance. However, wind power is an intermittent source in that wind speed and availability can vary from day to day, and thus the amount of electricity produced varies. On average, wind power turbines operate the equivalent of less than 40 percent of the peak hours in a year due to the intermittency of wind. While penalties may apply whenever energy deliveries vary from scheduled amounts, the possibility of penalties is of particular concern for intermittent sources. As a result, utilities that derive part of their electricity generation from wind power may have to develop or purchase costly reserve capacity in case wind power is not available on demand. However, some federal and wind industry officials downplayed the importance of this factor, noting that if wind power constitutes less than 20 percent of a utility’s generating capacity, the remaining capacity may be sufficient to meet demand during periods of low winds. Furthermore, according to DOE, recent studies show that in cases where wind power constitutes up to 10 percent to 20 percent of a utility’s generating capacity, the additional operating cost of integrating wind power is only up to 0.5 cents per kWh. Specifically, this amount represents the ancillary cost due to the variability of wind. Barriers to marketplace entry. As emerging technologies, renewable energy sources such as wind power face market entry barriers. For example, developing new renewable facilities requires high up-front costs to build the necessary infrastructure, such as construction costs to connect power lines to the transmission grid. According to DOE, the average cost of building new power lines to connect wind turbines to the transmission grid could be $100,000 or more per mile, depending on such factors as the size of the wind project, terrain, and the transmission line rating. In addition, manufacturers produce renewable energy components on assembly lines, where mass production can reduce costs. As long as relatively few units are produced, prices will remain high. Economies of scale would likely lead to cost reductions for wind and other renewable technologies. Furthermore, small renewable energy projects have high transaction and other costs at various stages of the development cycle. For example, lending institutions charge more to evaluate the creditworthiness of many small projects than one large one. These institutions also are generally unfamiliar with new technologies and are more likely to perceive them as riskier, causing the institutions to lend money at higher interest rates. Higher financing costs are especially significant for the competitive position of renewable energy sources such as wind power because these sources generally require higher initial investments per unit of electricity produced than fossil fuel plants, even though renewable sources have lower operating costs. Impacts on visual landscape, bird deaths, and noise issues. Although wind power turbines do not emit pollutants, they do present some environmental issues. According to AWEA and industry sources, wind power project developers must gauge a local community’s receptivity to the placement of wind turbines in scenic areas that may have high wind potential, such as ridge lines, mountain passes, or off-shore coastal areas, or else risk expensive litigation. Regarding birds that die when they collide with turbine blades, these sources said that developers should study the numbers and species of birds (and bats) present at various times of the year at potential site locations. In general, if the locations are commonly used by endangered or threatened avian species or are in bird migration pathways, they may be unsuitable for wind power development. New construction techniques and technologies may help to reduce bird deaths, such as switching from latticework towers that entice birds to perch to smooth-sided cylindrical towers that do not offer perches. In addition, the longer blades on newer, larger turbines turn more slowly—about 21 to 23 revolutions per minute in optimum wind conditions—than earlier turbines with shorter blades, making these longer blades more visible to birds in daylight. Concerning noise, new turbine designs and engineering as well as the use of appropriate setbacks from residences have helped to decrease the importance of this issue. For example, aerodynamic noise has been reduced by adjusting the thickness of the turbine blades’ trailing edges and by orienting blades upwind of the turbine tower. Several factors help promote wind power’s growth. First, according to federal and industry officials, direct public sector support programs have been important to increasing the demand for wind power in the United States because of wind power’s competitive disadvantages in most domestic markets. For example, the federal production tax credit, established by the Energy Policy Act of 1992, as amended, is available to tax-paying owners of wind or “closed loop” biomass energy generation systems. The act provides a credit of 1.5 cents per kWh for the first 10 years from initial plant operation, indexed for inflation, for electricity generated by renewable energy sources such as wind turbines; it was 1.8 cents per kWh during 2003. According to our analysis, using this incentive, a moderate-sized wind farm with 30 MW of generating capacity could receive up to $1.6 million a year in tax credits. In addition, in some cases this tax credit may be combined with the 5-year depreciation schedule allowed for renewable energy systems under the Economic Recovery Tax Act of 1981, as amended. In conjunction with the tax credit, this accelerated depreciation allows an even greater tax break for renewable projects facing high initial capital costs. The authority for new facilities to qualify for the production tax credit expired at the end of calendar year 2003; as of August 2004, legislation was pending in Congress that would reauthorize this tax credit. At the state level, the states with the most installed wind power capacity generally have implemented strong policies providing regulatory, financial, or tax incentives to wind power development. For example, 17 states have implemented renewable portfolio standards. Under these standards, utilities must derive a certain percentage of their overall electric generation (on a sales basis) from renewable energy sources, such as wind power. California and Texas—2 of the 17 states that have instituted these standards—also are the leading states with installed wind power capacity. California requires that 20 percent of the state’s electric generation be derived from renewable sources by 2017. In Texas, the requirement is 2.7 percent by 2009. Figure 7 shows the states that have enacted these standards, including the target amount of generation from renewable sources and the associated dates for achievement. Multiple states have taken other, similar actions to support renewable energy sources, including wind power. Specifically, according to the Database of State Incentives for Renewable Energy compiled by the Interstate Renewable Energy Council in August 2004: Thirty-two states and the District of Columbia have implemented net metering laws, which allow customers with their own power generating units, such as small wind turbines, to sell power that is excess to their needs back to the power grid, enabling the flow of electricity to and from the customer through a single meter. Twenty states offer property tax exemptions or special assessments for renewable energy sources, and 6 states allow localities to offer this exemption. Fifteen states allow sales tax exemptions for renewable energy sources. Twenty states offer personal or corporate income tax incentives for renewable energy sources. Many states have grant (20), loan (18), and rebate (12) programs to promote renewable energy sources. Utilities or private sources offer these types of financial incentives in many of these states as well. Fifteen states have public benefit funds for renewable energy sources. In these states, a surcharge is assessed to all customers on utility bills. The money generated goes into a public benefit fund to, among other things, support renewable energy research and development and education programs. Some states promote wind power creatively. For example, California has formed a collaborative—known as the California Wind Energy Collaborative—to promote wind power’s growth in the state. The collaborative includes officials from federal and state government agencies, wind energy developers, electricity suppliers, environmental groups, and the academic community. Its primary purpose is to coordinate statewide activities related to wind power and to recommend policies to support its growth. The collaborative has developed a number of recommendations, such as (1) simplifying the permitting process for establishing a wind project in California and (2) focusing research and development on, among other things, improving turbine performance and reliability, addressing transmission grid and interconnection challenges, and enhancing wind forecasting. The California State Energy Commission funds the collaborative, providing about $350,000 annually for its activities. A second factor helping to further wind power’s expansion is environmental benefits. Wind power is considered a green technology because it has only minor impacts on the environment. In contrast, fossil fuel power plants are a significant source of air pollution. In general, these plants produce harmful emissions, such as carbon dioxide, nitrogen oxides, sulfur dioxide, mercury, and particulate matter, which can pose human health and environmental risks, such as acid rain and global warming. In some cases, these emissions may increase as electricity generated by fossil fuels increases to meet growing demand. For example, EIA forecasts that if this generation increases by 42 percent from 2000 through 2020—from 3.5 trillion kWh in 2000 to almost 5 trillion kWh in 2020—annual emissions of carbon dioxide and mercury from these plants will rise nationwide by about 800 million tons (or 35 percent more) and 4 tons (or 9 percent more), respectively. To some extent, these anticipated increases could be offset by an increasing reliance on nonpolluting, renewable sources such as wind power. For example, according to DOE, by 2020, the growth of wind power could eliminate millions of tons of atmospheric carbon that would otherwise be released by fossil fuel power plants, thereby reducing greenhouse gas emissions. Fossil fuel power plants are also the nation’s second largest user of water resources after agriculture. Specifically, power plants use about 48.2 trillion gallons of fresh water from rivers, lakes, and other sources each year, primarily to produce steam to turn turbines and for cooling, according to the U.S. Geological Survey. This amount represents nearly 40 percent of the nation’s total water usage. Power plants’ water requirements will likely rise as demand for electricity grows over the next 2 decades. Although state and local authorities protect certain water uses, such as for drinking water, when approving the construction of new power plants, these plants nevertheless can affect aquatic ecosystems. For example, drawing water into a plant can kill fish, and discharging water with elevated temperatures back to its source can damage aquatic organisms or habitats. Wind power, as an alternative energy source, does not use water to generate electricity. In addition, increasing environmental consciousness has created “green consumerism”—a segment of consumers who are willing to pay more for products, including wind-generated electricity, whose production, application, and disposal are less harmful to the environment. Thus, utilities may offer customers the option of paying a higher rate for electricity produced from renewable sources such as wind power in lieu of electricity produced from fossil resources, arrangements often referred to as green pricing programs. For example, in the program sponsored by Xcel Power in Colorado, known as Windsource®, customers pay a premium of $2.50 per 100 kWh for wind-generated electricity. According to some sources, customer interest in this program was an important factor in the installation of more than 230 MW of wind power capacity in the state. In Texas, Austin Energy has a green pricing program, known as GreenChoice®, for wind power, which accounts for about 4 percent of its annual electricity sales. Although participating customers generally pay a premium for this wind-generated electricity, demand is such that this utility is currently negotiating to add an additional 91 MW of wind power capacity. As an added inducement, this utility offers its wind power customers the choice of locking in a rate for a period of 10 years, while regular customers are subject to possible rate increases if the costs for fossil fuels increase. A third factor is energy security. This could help promote wind power and other renewable energy sources in order to reduce the nation’s dependence on foreign fossil resources, including oil and natural gas. For example, the United States currently imports about 65 percent of the oil and 15 percent of the natural gas it uses. Natural gas, in particular, is increasingly used to produce electricity, and according to DOE, the anticipated growth in demand for this fossil fuel will lead to an increasing reliance on imports. According to DOE, this dependence harms the U.S. trade balance and exposes our economy to potential supply disruptions. In light of these concerns, federal legislative and regulatory initiatives have encouraged a diversified energy portfolio. For example, the Public Utilities Regulatory Policies Act of 1978, as amended, was enacted in part to encourage the development of alternative energy resources. More recently, the administration’s National Energy Policy, issued in May 2001, states that sound energy policy should encourage a diverse portfolio of domestic energy supplies and that renewable energy can be a reliable source of energy at a stable price because it does not depend on the availability of fossil fuels. Furthermore, while the nation’s transmission grid and central power plants remain vulnerable to terrorist attack, renewable sources, such as wind power, are geographically more dispersed and contain no volatile or radioactive fuel stocks. Fourth, government and industry experts expect that improvements in wind power technology and forecasts for higher fossil fuel prices will continue to help wind power compete with other sources of electric power generation. For example, technology improvements in turbine design and components have dramatically increased the efficiency and cost competitiveness of wind power generation, and continuing research and development will likely lead to further improvements. Regarding forecasts for higher prices, EIA projects that 69 percent of the 235,000 MW of new generating capacity needed in the United States by 2020 will be fueled by natural gas and another 9 percent by coal. In recent years, prices for natural gas have, at times, spiked dramatically, and the market for natural gas remains volatile, with small shifts in the supply of or demand for gas likely to cause wide price fluctuations. In addition, DOE and industry sources anticipate that as domestic and international demand for natural gas increases in the electric and other industrial and commercial sectors, the prices for natural gas will rise, making alternative energy sources such as wind power more competitive. According to EIA forecasts prepared at our request, future wind power capacity could increase to 48,000 MW or more by 2025—enough to power about 13 million homes based on current usage rates—if the federal production tax credit were to remain available through 2010. On the other hand, if this credit is not available after December 31, 2003 (its authorization expired after that date and it had not been reauthorized as of August 2004), capacity will increase to only about 11,000 MW by 2025. According to EIA and other DOE officials, these forecasts are likely conservative estimates because the assumptions used were conservative. Other stakeholders have offered larger estimates. For example, AWEA estimates that wind power capacity could grow to 100,000 MW by 2020, representing about 6 percent of total U.S. production. In another case, the National Petroleum Council estimates that renewable capacity—primarily wind power—will grow to between 73,000 MW and 155,000 MW by 2025, with the larger number dependent in part on proactive public policies to promote renewable sources. Despite these varying estimates, DOE and industry sources agreed that the key to the potential future growth of the wind industry is the continued availability of the production tax credit or other subsidy support, although expected increases in fossil fuel prices, particularly for natural gas, also will be an important factor. DOE and industry sources noted that prior periods of uncertainty about the availability of the production tax credit led to a boom-and-bust cycle in the installation of new wind power capacity. For example, in years in which the authorization for the credit expired and its renewal was delayed, the installation of new capacity fell dramatically compared with the years in which it was available without interruption. Figure 8 provides information on this cycle. According to DOE and wind industry sources, the expiration of the production tax credit at the end of 2003 has significantly reduced wind power expansion. Potential developers are reluctant to commit resources to the planning and construction of new capacity without the certainty that the tax credit will be reauthorized. For example, AWEA estimates that the uncertainty over the reauthorization of the tax credit has caused the loss of over 2,000 manufacturing and construction jobs related to wind power and put about 2,000 MW of new wind energy production and nearly $2 billion in economic activity on hold. Thus, industry sources expect a significant drop in the installation of new capacity in 2004 from 2003 levels—capacity expansion in 2003 was a near record 1,700 MW, attributable in large measure to the availability of the tax credit. According to EIA, without the production tax credit, wind power will be relegated to a niche resource whose expansion will depend largely on long- term trends in natural gas prices. Furthermore, in the view of some stakeholders, the most stable, predictable production tax credit would have a long-term or permanent authorization that would not induce market booms and busts but would facilitate steady market development for wind power and other renewable sources. Other stakeholders note, however, that to the extent this credit would be used, tax revenues would be lost to the federal government that could be used for deficit reduction or other purposes. For example, the Congressional Joint Committee on Taxation estimates that if the authorization for the production tax credit were extended through 2006, its cost to the Treasury for the 10-year period ending in 2013 would be $3 billion, or about $300 million annually. On the other hand, some stakeholders believe that renewable energy sources require subsidies such as the production tax credit to level the playing field because various subsidies for fossil fuel and nuclear technologies have made it difficult for renewable energy sources to compete, even when renewable technologies become cost competitive with these conventional technologies. In general, it is difficult to quantify all of the subsidies provided to the fossil fuel and nuclear power industries, and there is sometimes disagreement on how to define a subsidy. Nevertheless, many stakeholders maintain that these subsidies are substantial—measuring in the billions of dollars annually. For example, EIA estimates that the federal subsidies to the oil, natural gas, coal, and nuclear power industries totaled about $2.8 billion in fiscal year 1999, the most recent year for which EIA compiled these data. Wind power does not currently contribute significantly to total farm income in the 10 states with the highest installed wind power capacity, although some individual farmers and rural communities have benefited considerably from this energy source. However, wind projects located on farmland have increased some individual farmers’ income significantly, according to our site visits and analysis. In addition, large wind power projects established in some of the poorest rural counties in the United States have generally benefited these counties through the tax revenues they produce and the employment opportunities they provide. In the 10 states we examined, total net farm income exceeded $14 billion in 2002, but total direct income to all U.S. farmers from wind power ranged from only $10 million to $45 million, representing only a fraction of 1 percent of net farm income in these states. Nevertheless, wind projects located on privately owned farmland—the majority of U.S. wind power projects, according to AWEA—have increased individual farmers’ income by as much as tens of thousand of dollars annually, according to our analysis and site visits. In most cases, the farmers do not have an ownership interest in the projects. Rather, they receive lease payments from energy development companies for the use of the land and the associated “wind rights.” According to AWEA and other sources, the compensation a farmer receives for leasing land for wind power turbines effectively amounts to between $2,000 and $5,000 per year per MW of installed capacity. However, actual compensation received varies widely, depending the following factors: The number of turbines. One California project includes turbines with a total generating capacity of approximately 60 MW. Based on data developed from our site visit to this project, we estimate that one of the landowners has enough turbines on his land to have generated over $200,000 in annual lease payments from the project owner. In another case, an Iowa project consisting of about 260 turbines has a total generating capacity of approximately 190 MW. However, the turbines are spread out over separate properties owned by 65 farmers. According to the project owner and one of these farmers, the average annual lease payment is about $2,000 per turbine, with each farmer’s total payments depending on the number of turbines located on that farmer’s land. The value of electric power generated by the project. Land lease income is often linked to wind power project revenues. For example, land lease income may be a percentage of the gross revenues from the sale of the project’s wind power. Thus, the higher the sale price of power, the higher the lease income to the landowner. The price paid by utilities for the electricity produced from wind power projects has varied by location and over time. Nationwide, these prices currently range from $20 to $35 per MW hours (MWh). However, power purchase contracts signed in California in the early 1990s tended to be well above this range. For example, the price currently received for electricity from one California wind power project is about $70 per MWh. The terms of the lease payments. The lease payments may include a single lump sum payment, fixed annual fees per turbine or per unit of power generation capacity, or a percentage of the project’s gross revenues. The farmer may receive additional lease payments for other structures or considerations related to the wind project, such as substations, operations and maintenance buildings, and rights-of-way, including roads leading to and from the project and transmission poles and lines to connect the project to the local power grid. In cases in which the farmer has an ownership interest in the project, the potential financial benefits may be even greater per turbine. However, farmer- owned wind projects tend to be smaller, because farmers generally do not have the financial resources of an energy development company to establish larger projects with more turbines. Whatever the lease arrangements, the income farmers receive from wind projects located on their land is relatively stable compared with the income they derive from crop and livestock production, according to some farmers and other sources. Although the income from wind projects may be modest, these individuals said, it serves as an important hedge against possible fluctuations in income from crop and livestock production. Furthermore, income from wind turbines located on a farmer’s land generally does not fluctuate significantly, although higher or lower average wind speeds from one year to another can affect the amount of royalty payments a farmer receives. Royalty payment rates—for example, 4 percent of gross revenues for electric power generated—are generally negotiated for a period of years. In addition, contracts between a landowner and a wind project owner often have a provision for minimum payment per turbine per year to protect a landowner’s income in cases of unusual low-wind periods or if a turbine is out of operation because of weather-related damage or maintenance. In some cases, a farmer said the additional income from the wind project helps keep the farm solvent and the farmer’s family on the farm. The construction and operation of a large wind project in a rural county is likely to increase the county’s general level of economic activity and wealth. Constructing a large wind power project with several dozen turbines requires the services of multiple businesses and scores of skilled and unskilled workers, as well as the purchase of equipment and material, such as turbines, towers, asphalt, cement, concrete, and electrical cables. In these activities, wind power project developers and operators have directly benefited rural communities by hiring local people and purchasing locally some of the goods and services needed to construct and operate a project. Furthermore, according to DOE, increasing the proportion of the nation’s energy generation attributable to wind power to 5 percent by 2020 would add about $60 billion in capital investment in rural America; provide an estimated $1.2 billion in new income to farmers, Native Americans, and rural landowners; and create approximately 80,000 new jobs. (To determine the overall economic benefits of increasing wind power to farms and rural communities, any losses to the fossil fuel industry need to be counted as an offsetting factor.) In general, a county with a larger, more diversified economic base can more likely provide these services and supplies, thereby retaining more of the project’s direct economic benefits. For example, according to the developers of a large wind project—High Winds in Solano County, California—they obtained much of the services and supplies needed to construct this project within the county, which has over 400,000 residents and a diversified business community. However, if a county cannot provide some of the services and supplies needed, other nearby counties or cities that can provide these services and supplies may benefit. In Pipestone County, Minnesota, for example, wind power developers purchased some supplies locally, such as concrete, but had to contract with a firm in Fargo, North Dakota, for a crane large enough to erect the turbines and with a firm in Minneapolis to do the electrical wiring. Pipestone County, located in southwestern Minnesota, has about 9,800 residents and a small business community. Furthermore, businesses and individuals directly employed by the wind project are likely to spend part of their income at local businesses, such as restaurants, hotels, and gas stations, and hardware, clothing, and food stores. In some cases, the benefits from these activities may exceed the level of a project’s direct benefits. For example, according to the Fort Stockton Economic Development Corporation in Pecos County, Texas, the county experienced a 10 percent increase in gross sales during the construction of several wind power projects. The property tax revenues resulting from the establishment of a wind power project in a county creates additional revenues that support schools, hospitals, fire protection, and other public services. Following are some examples: Lincoln County, Minnesota, with a population of about 6,200, obtained about $470,000, or 18 percent of its property tax revenues, in 2003 from local wind power projects with a combined capacity of 156 MW. Pipestone County, Minnesota, obtained about $660,000, or 8 percent of its property tax revenues, in 2001 from wind projects with a combined capacity of 113 MW. In Pecos County, Texas, with a population of about 16,000 the school districts received about $5 million in 2002 from property tax revenues directly associated with wind power projects in that county. For example, the Iraan-Sheffield School District, obtained one-third of its property tax revenues from wind power projects that year. These projects also added about 30 to 35 full-time permanent jobs to operate and maintain the projects. For some counties, tax benefits may have to be deferred to attract wind power developers. These counties have offered generous tax abatements, forgoing part or much of the tax revenues that would have otherwise been collected for the period covered by the abatement. For example, to attract wind power developers, Texas’s Upton County offers a tax abatement of 10 years, waiving all property taxes during this period with the exception of taxes collected for schools. In terms of other taxes, counties that have sales taxes or that receive a share of state sales tax revenues are likely to realize income from the sale of taxable goods and services connected with the construction and operation of a wind power project. In addition, in states that have a personal or corporate income tax, the increased employment and business opportunities associated with a wind power project are likely to increase these tax revenues, which are then shared with counties in the state or used for public projects that benefit county residents. To better gauge the significance of general increases in economic activity, we asked NREL to use its Wind Impact Model to estimate these benefits, as well as direct benefits, for the counties we visited. NREL developed a number of estimates, varying the size of the wind project but otherwise keeping key model assumptions constant. In general, the results of NREL’s analysis confirm our observations from our site visits. For example, NREL estimates that the operation of a 150 MW project located in Alameda County, California—a county with a large population and diversified economic base—would result in the creation of 65 new jobs in the county and increase total income in the county by $5.4 million. However, the same size project located in Upton County, Texas, which has a much smaller population and economic base, would result in only 47 new jobs and an increase in total county income of $2.75 million. This is because in the case of Upton County, more of the staff needed to operate the project would be hired from outside the county. Nevertheless, the impact of the local hires on employment in Upton County may be greater than in Alameda County because the population of Upton County is so much smaller. A detailed discussion of this model and NREL’s analysis is contained in appendix III. Ownership of a wind power project may be more profitable to a farmer than leasing, based on our fieldwork and analysis. For example, whereas lease payments per turbine may provide several thousand dollars a year to the farmer, ownership may double or triple that income per turbine as the profits are not shared with an energy company. On the other hand, a farmer may only be able to afford to construct 1 or 2 turbines, as the cost per MW of installed capacity is about $1 million. In contrast, leasing land to an energy development company could result in the installation of a dozen or more turbines. In the latter case, although the farmer’s income per turbine is less, the total income received by the farmer would be substantially greater. In addition, farmers and other small investors generally lack sufficient tax liability to take full advantage of the federal renewable energy production tax credit. However, some states offer incentives that help landowners develop wind power projects. Nationwide, farmers and other landowners own less than 1 percent of utility-scale wind power capacity. We found that farmers generally find leasing their land for wind power projects to be easier than owning projects because of the complexity of, and risk associated with, developing a wind power project. In general, development of a project may take 2 years or more from conception to completion, especially when multiple turbines are involved. Table 1 summarizes the major steps in project development. These steps are also discussed in greater detail in appendix V. The associated capital costs for a wind power project could also be daunting to an individual landowner—approximately $1 million per MW of generating capacity installed. Thus, even purchasing just one or two utility- scale wind turbines can be a substantial investment for even a large farm or ranch. Leasing land to a wind power developer relieves a farmer of many of the formidable challenges of developing a wind power project, but the benefits of leasing may depend on the type of the lease arrangement offered. Table 2 summarizes information on lease payment options. A landowner may need expert advice—from an attorney to ensure the lease protects the landowner’s interests and from a financial adviser to understand the income and tax implications of various lease payment options. For example, University of Texas officials indicated that legal and technical resources available to the university were critical to negotiating a favorable lease agreement for a wind project on university property. Landowners may also face other problems in leasing land for wind power projects, as illustrated in the following examples: A Minnesota wind developer went bankrupt before completing the project. Unable to collect from the developer, the construction contractor that poured the concrete foundations for the turbines placed a lien on the farmer’s land. In the end, the farmer assumed responsibility for completing the project. In California, a landowner who leased land to wind developers for 200 turbines had to renegotiate leases with the tenant farmers who also use this land. These farmers charged that they were disadvantaged by the wind power project because (1) the turbines prevented them from using aerial crop dusting; (2) the project created obstacles, such as the turbines, substations, and access roads, that the farmers had to drive their equipment around, causing their fuel costs to rise; and (3) the turbines and associated structures had reduced the acreage available for cultivation (by approximately 40 to 50 acres out of a total of 1,100 acres). Although he lost some revenue from the renegotiated lease agreements with the tenant farmers, the landowner indicated he had more than recouped these losses from the income associated with the lease agreement for the wind turbines. The landowner also said the tenant farmers ultimately benefited by the adjusted (lower) rents for the land they farm. During our fieldwork, some farmers indicated it was difficult to make informed decisions about owning a wind power project or leasing their land to a commercial wind power developer because of a lack of readily accessible information. One farmer also noted it would be helpful to have a forum in which farmers could exchange relevant information and experiences. A number of entities offer information on wind power, including the pros and cons of ownership versus leasing. These include AWEA, NREL, the Union of Concerned Scientists, Wind Powering America, and Windustry. They also include state-based groups such as the California Wind Energy Collaborative, Iowa Policy Project, Minnesota Sustainable Energy for Economic Development Coalition, Oklahoma Wind Power Initiative, and Texas Renewable Energy Industries Association. However, federal and industry officials said that while access to information is important, it is not enough. According to these officials, given the complexity of owning a wind project or leasing land to a wind power developer, farmers and other rural landowners should seek legal, financial, and technical advice, as appropriate, before making a commitment to a project. Farmers generally cannot use the federal renewable energy production tax credit, which many stakeholder groups view as crucial to making wind energy projects economically viable for project owners because of these projects’ high capital costs. According to Department of Treasury officials, for a farmer who does not materially participate in a wind power project to make use of the production tax credit, the farmer must have tax liability attributable to passive income (e.g., rental income or income from businesses in which the farmer participates only as an investor) against which to claim the production tax credit. Passive income does not include income from the farmer’s active farming business, wage income, or interest and dividend income. Unless a farmer materially participates in the production of wind power, the production tax credit cannot offset tax liability attributable to income from these sources. Since many farmers do not have passive income and do not materially participate in wind power production, this passive versus nonpassive income distinction limits the number of farmers that are able to take advantage of the renewable energy production tax credit. Furthermore, even in a case where a farmer materially participates in and operates a wind project, the value of the tax credit is usually greater than the income tax on the revenue earned by the project for wholesale electricity generation as well as from other relevant sources, such as revenue from the farming business and wage income related to off-farm employment. Although an individual farmer may not be able to use the full amount of the production tax credit, farmers can benefit from this tax credit in other ways. For example, in Rock County, Minnesota, some farmers interested in wind power have formed two limited liability companies, pooling their individual passive incomes and associated tax liabilities in order to make use of the production tax credit. These arrangements have led to the establishment of two wind power projects, Minwind I and II. Each company has rules similar to a traditional farmer cooperative, although legally they are not cooperatives. Each company sold stock to more than 30 individuals and required that 85 percent of the shares be owned by farmers; the remaining 15 percent of the shares are available to local residents and investors. No single person can own more than 15 percent of the shares. These projects started operating in late 2002, and each has a capacity of 1.9 MW. Furthermore, seven additional Minwind projects (III through IX) are under development in Rock County. When complete, these projects will have 200 local owners and a combined capacity of 12 MW. In addition, some individual farmers in Minnesota have entered into equity partnerships with an investor in order to benefit from the production tax credit indirectly. In these cases, the investor owns nearly all of the interest in the project for the first 10 years, receiving most of the net cash from the project and the benefits of the production tax credit and accelerated depreciation. After this 10-year period, the ownership switches, or “flips,” to the farmer and the farmer receives most of the project income. For example, at one wind project we visited in Pipestone County, an equity partner owns a 99 percent interest in a 1.5 MW project (two 750 kilowatt turbines) for the first 10 years of the project’s operation. The farmer who provided the land for the project has the other 1 percent interest. The equity partner provided most of the up-front capital needed to establish the project, and the project’s assets provide the collateral for the remaining required debt. However, the equity partner also reaps most of the profits and the benefits of the federal production tax credit. During these first 10 years, the farmer receives lease payments of about $2,000 per year per turbine, plus management service payments of about $30,000 per year, based on a percentage of the revenues associated with the electricity production. After the 10th year, majority ownership of the project will be transferred to the farmer, who will start earning about $120,000 per year through the end of the project’s expected lifetime (an additional 10 years or more). Thus, beginning with the 11th year, the farmer’s annual income from the project will more than triple. In addition to the federal tax credit, landowners may benefit from state incentives. For example, Minnesota offers several incentives to promote farmer, rural landowner, and rural business ownership of small wind power projects. Federal and industry officials often cited Minnesota as being particularly proactive in this regard. Table 3 summarizes these incentives. According to Minnesota and wind industry officials, the most important of these incentives is the state’s Renewable Energy Production Incentive program. As of December 2003, this program had benefited about 170 renewable energy projects in the state, including 130 wind power projects that are collecting incentive payments and another 43 that have secured eligibility but are not yet operational. According to a Windustry official, more than one-third of the beneficiaries have been farmers and rural small businesses over the life of the program. This official also said that because of current difficult fiscal conditions, it is uncertain whether Minnesota will expand the program beyond the 200 MW cap to assist additional projects. USDA has not fully utilized all of the farm bill’s renewable energy provisions to promote wind power development on farms and in rural communities, although it has provided some funding through other provisions of the farm bill. In particular, USDA had not issued a regulation for loans and loan guarantees under the farm bill’s key wind power assistance program—the Renewable Energy Systems and Energy Efficiency Improvements Program (Renewable Energy Program). As a result, although grants are available, farmers and other applicants cannot obtain loans and loan guarantees under this program, which limits the ability of the program to promote renewable energy sources. In addition, USDA may be missing opportunities to leverage information, resources, and expertise available from EPA in implementing the Renewable Energy Program and to simplify the program’s application process. Among other things, the 2002 farm bill promotes the use of renewable energy systems, such as wind turbines, on the nation’s approximately 900 million acres of farmland and rangeland. According to USDA and other sources, these farm bill provisions will create economic opportunities in rural communities, give farmers a means to earn additional income, diversify the nation’s energy production, reduce its dependence on imported fossil fuels, and help protect the environment. Table 4 summarizes information on the farm bill provisions for promoting renewable energy systems, including wind power. During fiscal year 2003 and through August 2004, USDA has made limited progress in using the farm bill provisions to further the use of renewable energy systems. Table 5 shows the status of USDA’s efforts. As the table shows, in several cases these provisions have not been used yet. In other cases, the provisions cannot be fully used until USDA has developed relevant regulations. USDA officials told us that the newness of these provisions—the farm bill was enacted in May 2002—and the lead time needed to train its staff, disseminate information to the farm community, and develop regulations and publish them in the Federal Register for comment, as appropriate, has slowed the agency’s ability to fully use these provisions. Many stakeholders consider the Renewable Energy Program as the key USDA program for promoting renewable energy sources, including wind power, on farms, ranches, or other rural lands. The program focuses on promoting renewable energy generation and energy efficiency improvements and was authorized a total of $115 million—$23 million yearly—for fiscal years 2003 through 2007 for its implementation. This funding can be used for loans, loan guarantees, or grants to farmers, ranchers, or rural small businesses. Eligible projects include those that derive energy from a wind, solar, biomass, or geothermal source. Since passage of the farm bill, USDA has undertaken a number of actions to begin to implement the Renewable Energy Program. In November 2002, USDA formed a rural energy working group—with representatives from several USDA agencies as well as DOE and EPA— to strengthen interagency relationships and to leverage information, resources, and expertise to assist in implementing the Renewable Energy Program. This group met again in December 2002 and January 2003. In November 2002, USDA issued a Federal Register notice announcing a public meeting to solicit comments and suggestions from stakeholder groups on how to implement the Renewable Energy Program. This meeting was held on December 3, 2002. In February 2003, the Under Secretary for Rural Development requested that all Rural Development State Directors designate a Rural Energy Coordinator to, among other things, coordinate the implementation of the Renewable Energy Program. In April 2003, USDA issued a Notice of Funds Availability (NOFA) in the Federal Register inviting applications for grant assistance under the Renewable Energy Program for fiscal year 2003. According to this notice, $23 million was available for this program. Applications were initially due by June 6, 2003. In May 2003, USDA issued another NOFA extending the application deadline to June 27, 2003, and clarifying information regarding requirements for financial information and utility interconnection agreements. In August 2003, USDA signed an Interagency Acquisition Agreement with DOE to obtain its assistance in implementing the Renewable Energy Program. Among other things, this agreement calls for DOE to assist USDA in evaluating the technical aspects of proposals submitted for renewable energy projects or energy efficiency improvements. In part, this agreement also helps to fulfill the farm bill’s requirement that USDA consult with DOE in implementing the Renewable Energy Program. USDA’s Rural Development mission area made about $162,000 available for this purpose. In August 2003, USDA signed a contract with MACTEC Federal Programs (MACTEC), a consultant, to develop a regulation for the program, including proposed and final regulations to be published in the Federal Register. USDA’s Rural Development mission area made about $317,000 available for this purpose. In May 2004, USDA issued a NOFA in the Federal Register inviting applications for grant assistance under the Renewable Energy Program for fiscal year 2004. According to this notice, $22.8 million is available for this program in fiscal year 2004. Applications were to be postmarked by July 19, 2004. As of August 2, 2004, USDA indicated that it received a total of 56 applications for wind projects totaling about $10.8 million. In fiscal year 2003, wind power projects represented about one-third of the projects selected and grant funds awarded under the Renewable Energy Program, or 35 of the 114 grantees selected and $7.4 million of the $21.7 million awarded. The applicants selected for wind projects included four farmers and 31 rural small businesses located in eight states. Table 6 summarizes the grant assistance provided for renewable energy projects, including wind power, under the program in fiscal year 2003. Notwithstanding the above actions, USDA’s implementation of the Renewable Energy Program in fiscal year 2004 remains incomplete. Although USDA has issued a NOFA, it will again offer only grants, as was done in fiscal year 2003. According to USDA officials and documents, the Rural Business-Cooperative Service (RBS)—the USDA agency responsible for implementing the program—had planned to issue proposed and final versions of the program regulation during fiscal year 2004 and to make awards of loans and loan guarantees, as well as grants, during the year based on the final regulation. However, RBS was not able to hold to this schedule. According to RBS officials, they underestimated the time that would be needed to develop and process the regulation. In this regard, they cited several factors that have contributed to the time needed. First, these officials said the Office of Management and Budget (OMB) designated the regulation as “significant” according to Executive Order 12866, as amended. A regulation designated as significant is subject to OMB review. Specifically, the executive order provides that significant regulations are subject to review by OMB’s Office of Information and Regulatory Affairs. This office may take up to 90 days for its reviews at the proposed and final regulation stages before publication of the regulation in the Federal Register. In addition, the executive order provides that agencies should afford the public a meaningful opportunity to comment on any proposed regulation, which in most cases should include a comment period of not less than 60 days. Second, USDA has opted to apply the Administrative Procedure Act’s notice of proposed rule making and public comment requirements in certain instances where not required by law. This policy, promulgated by former Secretary of Agriculture Clifford Hardin, was published in the Federal Register in 1971. The policy is known informally as the “Hardin memo.” Specifically, this memo provides, in part, that the public participation requirements prescribed by the Administrative Procedure Act, 5 U.S.C. 553 (b) and (c), will be followed by all agencies of the department in rule making relating to public property, loans, grants, benefits, or contracts. Thus, while the act does not require notice and public comment for regulations related to these matters, USDA’s policy is to follow the public participation requirements of the act for these types of regulations as well. USDA officials noted that the Hardin memo is consistent with the recommendations of the Administrative Conference of the United States, and although the memo was promulgated more than 30 years ago, it remains in effect. Third, delays occurred in contracting with MACTEC. This contract was signed in August 2003, about 15 months after the farm bill’s enactment (May 13, 2002). Specifically, delays occurred with GovWorks, a federal contract acquisition and administration office used by USDA to handle the contract solicitation and administration. According to USDA officials, GovWorks took longer than expected to complete the solicitation phase— including advertising the solicitation and performing the initial evaluation of applicants—due to staffing shortages and its responsibilities for other major federal contracts. The solicitation produced a number of applicants, from which four were selected for interview by RBS staff. USDA officials indicated that it took additional time to arrange these interviews. MACTEC was selected from among the final four firms. Fourth, USDA officials noted that the draft proposed program regulation is a very large document—over 200 pages. Thus, the time needed for review is longer. In early June 2004, USDA officials noted that the draft had been under review within USDA since February and was now in final departmental clearance. Among other offices, the Rural Development mission area, the Office of General Counsel, and the Office of Budget and Program Analysis have reviewed the draft. USDA officials noted that as much as possible, the draft was reviewed concurrently by relevant offices and that the Office of General Counsel assigned one of its attorneys virtually full time to review the regulation in order to expedite that office’s review. Finally, USDA officials described the Renewable Energy Program as a new and unique program. These officials said that neither USDA nor DOE had a grant or loan program similar to it before its creation in the energy title of the farm bill. Thus, USDA did not have an existing program to use as a model for developing the program regulation. In addition, these officials said that RBS staff were generally not familiar with renewable energy technologies and thus needed to reach out to other agencies, such as DOE and EPA, to obtain technical assistance. They also noted that consultation with DOE is required in section 9006 of the farm bill. Although USDA officials maintain that the agency’s development in early 2004 of an emergency pilot program for developing renewable energy systems from the use of diseased livestock as a process raw material for energy generation was not a source of delay, it may have been a contributing factor. This pilot program was announced in a NOFA published in the Federal Register on May 18, 2004. According to the NOFA, this program is a further action to support USDA’s efforts to address the risks associated with bovine spongiform encephalopathy (BSE), also known as mad cow disease. The NOFA states that RBS expects projects to be constructed that will produce energy through the destruction of diseased cattle. Under the pilot program, USDA plans to provide guaranteed loans totaling up to $50 million for up to three project proposals. USDA estimates the cost of the pilot to be about $3.1 million, needed to fund the credit subsidy costs. According to USDA officials, these funds will come from the fiscal year 2004 appropriation for the Renewable Energy Program, reducing the funds available to make grant awards under this program by an equivalent amount. Although it will use funds from the Renewable Energy Program, these officials said the pilot program is a distinct 1-year program that will not be addressed in the regulation for the Renewable Energy Program. Instead, the NOFA indicates that the program regulation for USDA’s Business and Industry Loan Guarantee Program is being used as the basis for the delivery of the pilot program, with certain provisions of that regulation revised to accommodate the pilot’s purpose. For example, changes to the guaranteed fee and the percent of guarantee were made to provide a further incentive to lenders to participate in the pilot program. MACTEC, the same contractor that USDA is using to develop the proposed regulation for the Renewable Energy Program, was also used to develop the NOFA for the pilot program. The original contract with MACTEC was modified for this purpose. Specifically, a contract amendment signed in February 2004 provided for additional payments of about $25,000 for this purpose, increasing the total value of the contract to about $342,000. According to the amendment, MACTEC was to begin work on the NOFA in late February 2004. USDA officials indicated that MACTEC had delivered the draft proposed program regulation for the Renewable Energy Program to USDA for review prior to beginning work on the pilot program, and thus the work on the pilot did not delay the work on the proposed program regulation. However, progress reports prepared by MACTEC in March and April 2004 indicate that there was overlap between the two efforts, although the reports do not make clear whether work on the pilot delayed progress on the program regulation. USDA’s continuing inability to offer loans and loan guarantees under the Renewable Energy Program, as specified in the farm bill, limits the agency’s ability to achieve a much higher program level. For example, according to USDA’s fiscal year 2005 Budget Summary, the Consolidated Appropriations Act for 2004 and the administration’s budget proposal for 2005 provide sufficient funding for the Renewable Energy Program—about $23 million in 2004 and about $11 million in 2005—for $200 million in program level each year, based on a combination of loans, loan guarantees, and grants. This is possible because for direct loans and loan guarantees, program funds would be needed only for the credit subsidy cost. Otherwise, direct loans are made from funds borrowed from the U.S. Treasury, and guaranteed loans are made by private lending institutions. Thus, a greater number of renewable energy projects could be financed. In addition, providing loans or loan guarantees in conjunction with grants could provide individual recipients with a greater level of assistance. That is, while grants can be used to pay up to 25 percent of the eligible project costs, a combination of grants and loans or loan guarantees may be used to pay up to 50 percent of the eligible costs. In addition, loans may be a more cost-effective way to provide federal assistance than outright grants, as the funds used for loans are repaid by the recipient. USDA’s continuing inability to offer loans and loan guarantees under the Renewable Energy Program also limits the program’s potential benefits and the agency’s ability to achieve one of its performance goals: to increase economic opportunity in rural areas. For example, USDA’s fiscal year 2005 Budget Explanatory Notes indicate that the $21.7 million in grant awards made in fiscal year 2003 under the Renewable Energy Program resulted in an estimated 736 jobs created or saved and 100 million kWh of electricity generated. However, the agency estimates that the addition of loans and loan guarantees in fiscal year 2004 would result in (1) a program of about $200 million, (2) an estimated 7,169 jobs created or saved, and (3) 888 million kWh of electricity generated. Jobs created or saved and electricity generated are identified as key performance measures in the Budget Explanatory Notes. USDA’s ability to offer loans and loan guarantees is also important because of uncertainty regarding the Renewable Energy Program’s future funding. Although the program was fully funded in fiscal years 2003 and 2004, the administration’s budget proposal for fiscal year 2005 provides only $10.77 million of the $23 million authorized in the farm bill. If enacted as proposed, this level of funding would represent less than 50 percent of the resources authorized for the program. Since direct loans and loan guarantees require appropriations for only the credit subsidy cost, not their full face value, they may result in making more financing available at less cost to the government than outright grants. Also, the ability to leverage greater amounts of private financing with loan guarantees would take on added importance. Many stakeholder organizations, including AWEA, the Environmental and Energy Study Institute, the American Council for an Energy-Efficient Economy, and the Environmental Law and Policy Center, have expressed concerns regarding this proposed cut. In June 2004, USDA officials indicated that they anticipate publishing the final regulation for the Renewable Energy Program in late spring 2005. Specifically, documentation related to the agency’s contract with MACTEC indicates that the final regulation will be published in the Federal Register on May 31, 2005. Assuming this schedule is met, only 4 months in fiscal year 2005 would remain for (1) USDA to issue a notice in the Federal Register announcing the availability of funds for loans, loan guarantees, and grants; (2) program applicants to prepare project proposals and applications, including obtaining professional assistance from an engineer, financial adviser, or environmental consultant; and (3) USDA to receive and analyze program applications and to consult with DOE or EPA, as appropriate, regarding the technical merit of the proposals. USDA officials acknowledged that this would be a very tight schedule, but expressed the view that they could offer loans and loan guarantees in fiscal year 2005 if this schedule is met. However, questions remain as to when the proposed and final program regulation will be published. The proposed regulation completed final departmental clearance on June 23, 2004, and was sent to OMB for review. As noted, OMB may take up to 90 days for its review. USDA must then make revisions to the proposed regulation to address OMB’s comments before its publication in the Federal Register for public comment. USDA has already revised its target date for publishing the proposed regulation several times—from November 17, 2003, to May 24, 2004, to the fall of 2004. Similarly, it has revised its target date to publish the final regulation from June 7, 2004, to May 31, 2005. USDA officials said that 60 days would be allowed for public comment on the proposed regulation after its publication. In addition, they said they expect a large volume of comments and that it will take time to review these comments and consider revisions to the regulation. These officials said they would consider options to speed up the agency’s review, including detailing additional staff to assist with this work. Once USDA has completed its review of the comments and revised the regulation, as appropriate, the agency will submit the final regulation to its internal clearance process and then to OMB for review. Regarding its internal clearance process, USDA officials said they would consider doing concurrent reviews to speed up this process. However, these officials noted that RBS lacks the authority or control to compel other offices in USDA to expedite their reviews of the program regulation. These officials noted that USDA’s Office of Budget and Program Analysis is responsible for overseeing the timely completion of this clearance process. Regarding OMB’s review, this agency again may take up to 90 days for its review. Any unanticipated problems could affect USDA’s current plan to issue the proposed regulation by the fall of 2004 and the final regulation by May 31, 2005. As noted, many delays already have been experienced in developing this regulation. Further delays, possibly pushing the publication date for the final regulation beyond May 31, 2005, would likely preclude USDA from offering loans and loan guarantees in fiscal year 2005, as was the case in fiscal years 2003 and 2004. The Renewable Energy Program was authorized for 5 years—fiscal years 2003 through 2007. If USDA is unable to offer loans and loan guarantees again in fiscal year 2005, only 2 years will remain to utilize all of the financial mechanisms provided by the legislation. As noted, utilization of these mechanisms would increase the program level and benefits. In this regard, eight members of the Senate Agriculture Committee sent a letter to USDA in June 2004 noting that a third year without a final regulation in place could impede and undermine the full potential of the Renewable Energy Program. Accordingly, they urged USDA to issue the proposed and final rules as soon as possible. Another concern is staffing. RBS’s Processing Branch has lead responsibility for implementing the Renewable Energy Program. This branch is also responsible for administering five other national grant or loan programs. According to USDA officials, the branch has been able to implement the Renewable Energy Program as a grant program to date without the need for additional staff. However, these officials said that once USDA starts to offer loans and loan guarantees under the Renewable Energy Program, staffing could become an issue. Currently, the branch has four program specialists in addition to the Branch Chief. According to the Chief, administering a loan program is more complicated than a grant program, and therefore a loan program requires more staff resources and time. For example, administering a direct loan program requires agency resources to handle loan origination, processing, and servicing functions. Aside from its actions to implement specific provisions of the 2002 farm bill to promote wind power, USDA has provided additional assistance for this purpose under several of its programs. For example: From May 1997 through March 2004, USDA provided about $13.3 million in grant and loan assistance to 25 rural electric cooperatives or small businesses to procure or manufacture small wind turbines for on-farm use. In 2001, the Animal and Plant Health Inspection Service entered into an agreement with a local utility to purchase 25 percent of the electricity used at its National Wildlife Research Center in Colorado from wind- generated sources. In fiscal year 2003, USDA provided a $2.5 million grant under its High Energy Cost Program to the Alaska Village Electric Cooperative to address high energy costs in Chevak, Alaska, an impoverished community of about 800 residents. Among other things, the funds will be used for a wind generation system. In October 2003, USDA signed a memorandum of understanding with the National Rural Electric Cooperative Association to increase the use of renewable resources to generate electricity. The agreement provides for cooperation in conducting renewable energy technology research and for conducting education and outreach to promote the use of renewable energy resources, such as biomass, solar, and wind power, in rural areas. The Agricultural Research Service conducts research and development to lower the costs of wind generation for isolated farms, ranches, and rural communities that lack access to affordable and reliable electrical energy. Currently, the service is conducting research with Sandia National Laboratories on lowering the costs of wind turbine blades, which account for more than 50 percent of the cost of new wind turbines. In implementing the Renewable Energy Program, USDA may also be missing opportunities to obtain further assistance from EPA. USDA’s rural energy working group included a representative from EPA’s AgStar Program, but this program is focused solely on the production of power from the anaerobic digestion of biomass such as livestock manure. According to EPA officials, other EPA offices also may be able to offer information, resources, and expertise to assist USDA’s implementation of the Renewable Energy Program for other renewable sources, including wind power. For example, an official in EPA’s Office of Air and Radiation said that this office has extensive contacts with the electric power utilities through its Green Power Partnership Program, and could therefore help Renewable Energy Program applicants find buyers for the electricity they will generate and negotiate related power purchase agreements. In addition, this office could help answer applicants’ questions on project site selection and permitting for environmental impacts, where applicable. USDA officials said they recognize that other EPA offices may be able to offer assistance and that they would welcome such assistance. However, these officials noted that the rural energy working group has not met since January 2003, having identified at that time the information, resources, and expertise available from the group’s participants to assist USDA’s implementation of the Renewable Energy Program. There are no plans for the group to meet again. More recently, USDA officials indicated that they are considering an interagency acquisition agreement with EPA to obtain technical assistance from the AgStar program in reviewing project proposals for anaerobic digestion. This agreement would be similar to the agreement USDA has with DOE regarding the review of project proposals for other renewable energy technologies. According to the Chief of RBS’s Processing Branch, he has had discussions with the lead EPA official for the AgStar program as to whether other EPA offices should be included in this agreement; as of June 2004, USDA officials said this matter was still under discussion. Various stakeholders have expressed concerns about the complexity and short time frames for submitting grant applications under the Renewable Energy Program. For example, in the course of our fieldwork during 2003, we heard a number of concerns from farmers and others about the complexity of this application process and the short time frames for completing and submitting applications. The applications must include economic feasibility studies, tentative agreements with an electricity buyer, financial information demonstrating need under the program, and information for completing environmental assessments. USDA officials acknowledged some of these concerns and indicated they have been and continue to look for ways to simplify the application process. However, these officials also cautioned that renewable energy projects are, by their nature, legally, technically, and financially complicated ventures, and, consequently, it is not surprising that applicants might find the application process difficult and need the assistance of an attorney, engineer, or financial consultant. Regarding the complexity of the application process, USDA officials noted they have applied lessons learned from the agency’s experience under the fiscal year 2003 grant program to the fiscal year 2004 program. The NOFA for the fiscal year 2003 program invited comments from applicants and other stakeholder groups. USDA officials said they considered these comments and other subsequent comments that have been received from various stakeholders over the past year. As a result, the NOFA for the fiscal year 2004 grant program is about three times as long as the one for the previous year. Among other changes, the 2004 NOFA contains specific application guidance for each renewable energy technology covered by the program. Regarding time frames, USDA initially gave applicants 2 months to submit their applications under the fiscal year 2003 grant program. Specifically, USDA issued a NOFA in the Federal Register on April 8, 2003, with a requirement that applications be postmarked no later than June 6, 2003. However, in part because of complaints from applicants and other stakeholders regarding the short time frame, USDA issued a subsequent notice in the Federal Register on May 19, 2003, to extend the application deadline to June 27, 2003. As for the fiscal year 2004 program, USDA issued the NOFA on May 5, 2004, with a requirement that the applications be postmarked no later than 75 calendar days after the date of the published notice (July 19, 2004). Although USDA’s issuance of the 2004 NOFA fell a month later in the fiscal year than the 2003 NOFA’s issuance and the time frame allowed under the 2004 NOFA is shorter than that allowed under the 2003 NOFA (including the extension), USDA officials said they believed the time allowed in 2004 is sufficient. They noted that the guidance in the 2004 NOFA is more detailed than the 2003 NOFA. They also said that the agency’s rural energy coordinators encouraged potential program applicants to begin pulling together information needed for environmental assessments even before the 2004 NOFA was published. In June 2004, USDA officials also said they expect to receive further detailed comments on the application process and other aspects of the program when the proposed program regulation is published in the Federal Register for comment later in 2004. These officials indicated they would use these comments to consider further refinements to the application process. Also in June 2004, we discussed with these officials the potential advantages of surveying program applicants, the agency’s rural energy coordinators, and other stakeholders, as appropriate, regarding their views as to how the application process could be improved and streamlined. We suggested that a survey would comprehensively document problems and related suggestions to better inform USDA as to the severity or extent of the problems cited and whether corrective actions are warranted. USDA officials indicated they did not think a survey is needed in addition to the comments already received and those expected after publication of the proposed regulation. They also noted the rural energy coordinators often provide information on problems or concerns related to the application process during monthly conference calls with USDA’s Rural Development state offices. USDA has yet to utilize all of the financial mechanisms of the farm bill’s Renewable Energy and Energy Efficiency Improvements Program. Among other things, USDA has not issued the final program regulation yet that would allow it to offer loans and loan guarantees, as well as grants. The addition of loans and loan guarantees would allow USDA to achieve a much higher level of program activity, potentially increasing the number of projects financed and providing benefits such as increased economic opportunities in rural areas. Loans may also be a more cost-effective way to provide federal assistance than outright grants. In addition, the provision of loans or loan guarantees in conjunction with grants would enable USDA to offer a greater level of assistance to program applicants. While USDA has taken a number of actions to coordinate its efforts to implement the program internally and externally, it may be missing opportunities to leverage information, resources, and expertise that may be available from EPA, such as from EPA’s Office of Air and Radiation. Finally, applicants and other stakeholders have raised concerns regarding the complexity of the application process for the program, as well as the limited time frame provided for submitting these applications. USDA’s continued collection and consideration of these concerns may identify ways to improve and streamline this process. To ensure USDA’s timely and effective implementation of the farm bill’s Renewable Energy Systems and Energy Efficiency Improvements Program, we recommend that the Secretary of Agriculture direct the Rural Business- Cooperative Service to take the following actions: Work with other USDA offices, such as the Office of General Counsel and the Office of Budget and Program Analysis, to identify possible ways to accelerate the development of the program regulation to ensure that all of the funding mechanisms required by the farm bill, including loans and loan guarantees, be made available as expeditiously as possible. Work with EPA to identify other EPA offices, such as the Office of Air and Radiation, which may be able to offer information, resources, and expertise to assist USDA in its implementation of this program. Continue to examine ways to simplify, improve, and streamline the application process for the program, and as part of that effort, consider the views of program applicants, the agency’s rural energy coordinators, and other interested stakeholders. We provided a draft of this report to USDA for review and comment. We received written comments from USDA’s Acting Under Secretary for Rural Development, which are reprinted in appendix VI. USDA also provided us with suggested technical corrections, which we have incorporated into this report, as appropriate. USDA agreed with our recommendations and provided information on how it planned to implement them. Specifically, the Acting Under Secretary for Rural Development stated that the agency is continuing to expedite the development of the program regulation, noting that it is in the best interests of all parties to expedite the rule making process. This official stated further that the agency would work with EPA officials to identify EPA offices that could provide USDA with information, resources, or expertise to implement the program and that a draft interagency agreement, which it planned to execute before the end of the fiscal year, would allow USDA to fund specific support activities provided by EPA. Finally, this official stated that the agency would continue to examine ways to simplify the program application process through consultation with DOE, EPA, and other interested stakeholders, including those commenting on the proposed rule making during its 60-day comment period. We also provided a draft of this report to DOE and EPA for review and comment. These agencies provided us with suggested technical corrections, which we incorporated into the report, as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. We will then send copies to interested congressional committees; the Secretary of Agriculture; the Secretary of Energy; the Administrator, Energy Information Administration; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix VII. At the request of the Ranking Democratic Member, Senate Committee on Agriculture, Nutrition, and Forestry, we agreed to examine (1) the amount of wind power generation in relation to all U.S. electricity generation and the prospects for wind power’s growth, (2) the contribution of wind power generation to farmers’ income and to the economic well-being of rural communities in the 10 states with the highest wind power generation capacity, (3) the advantages and disadvantages for farmers and rural communities of owning a wind power project or leasing their land to a commercial wind power developer, and (4) the efforts of the U.S. Department of Agriculture (USDA) to promote the development of wind power on farms and in rural communities. To determine the amount of wind power generation in relation to all U.S. electricity generation and the prospects for wind power’s growth, we interviewed officials or reviewed the documentation they provided at the Department of Energy’s (DOE) Energy Information Administration (EIA), Office of Energy Efficiency and Renewable Energy, National Renewable Energy Laboratory (NREL), and Wind Powering America program. We also interviewed officials or reviewed documentation from the American Wind Energy Association (AWEA), Bonneville Power Administration, Edison Electric Institute, Electric Power Research Institute, Environmental and Energy Study Institute, Interstate Renewable Energy Council, Windustry (a rural-based, wind stakeholder organization), Union of Concerned Scientists, Energy Foundation, California Wind Energy Collaborative, and National Corn Growers Association. From these sources we were able to determine the extent of wind power capacity installed in the United States, including a state-by-state breakdown, and information on the wind potential of various parts of the United States. These sources also provided information on prospects for wind power’s growth, including factors that may either constrain or promote it. Regarding these factors, we also reviewed our own past work, relevant publications of the Congressional Budget Office and the Congressional Research Service, and applicable laws, regulations, and executive orders. Concerning one of these factors—production tax credits—we spoke with staff of the Congressional Joint Tax Committee and the Department of Treasury, as well as two tax lawyers and a certified public accountant who specialize in these tax issues. In addition, we reviewed relevant literature addressing the growth potential of wind power and discussed data related to these projections with DOE officials. We also asked EIA to use its National Energy Modeling System to forecast wind power’s growth by 2025 under two scenarios. EIA uses this computer- based model to annually forecast future energy supply, demand, and prices, typically over a 20-year period. The model uses assumptions regarding economic growth; changes in world energy prices; technology, demographic, and other trends; and the possible changes to current laws and regulations. In short, the first scenario—EIA’s reference case— assumed that the authorization for the federal production tax credit would expire and not be available after December 2003. The second scenario assumed that authorization for the production tax credit would continue through December 2010. Other assumptions, including those for demographic and other trends, price increases for fossil resources, and current laws and regulations, were held constant in modeling these scenarios. In addition, EIA assumed that further design and technological improvements in turbines—known as the “learning effect”—would occur in both scenarios. However, the agency assumed that this effect would be greater in the second scenario due to the continued availability of the production tax credit. Specifically, the continued availability of this credit would lead to greater interest in wind power, spurring further design and technological improvements. These improvements would result in more efficient and productive turbines, making wind power more competitive with fossil fuels. To determine the contribution of wind power generation to farmers’ income and to the economic well-being of rural communities in the 10 states with the highest wind power generation capacity, we started with the information collected above to identify the relevant states. In particular, we used data developed by DOE and AWEA to determine the 10 states with the largest amount of wind power generating capacity as of December 2002; these states represented about 90 percent of the nation’s wind generating capacity at that time. From this list of 10 states, we selected 5 states to visit: the 4 states with the largest generating capacity—California, Texas, Minnesota, and Iowa—and the state—Colorado—that had the 10th largest capacity. We chose Colorado as a point of contrast—unlike the top four states, Colorado had few state programs to promote wind power. For each state, we collected information on the number of farms; the types of agriculture crops produced; total farm income; farm, ranch, and rural lands acreage; wind energy generation sources; and state policies and financial and tax incentives designed to encourage wind power development. We obtained this information from a variety of sources, including USDA’s Farm Services Agency, Economic Research Service, and National Agricultural Statistics Service, and state and local taxing authorities. In the five states, we then visited nine wind projects in 10 counties to obtain information on specific wind power projects. In addition, we visited two other wind projects during the course of our work, but we did not obtain detailed information on these projects. To select the projects visited, we compared lists of wind projects for each state; we obtained these lists from AWEA, Windustry, and the states of California, Iowa, and Minnesota. From these lists we selected a mixture of leased, farmer-owned, and community-operated wind projects that also were geographically dispersed within a state. In addition to operating projects, we sought information on projects that may have failed in the past 5 years; however, federal, state, and local officials were unaware of any such failures in these states. Our work focused on utility-scale wind power projects—projects that generate at least 1 megawatt (MW) of electric power (from one or more turbines) annually for sale to a local utility. Utility-scale wind power accounts for over 90 percent of wind power generation in the United States. In addition, we defined “community projects” as those operated by a municipal or rural utility or by a school district. At the project locations, we generally met with landowners, project owners and investors, state and local taxing authorities, community leaders, and electric utility officials. To some extent, our work was limited because we did not have access to cost and income data of a proprietary nature. In other cases, we were able to obtain this information but used it only to develop ranges. In addition, we asked NREL to model the economic impact of wind power projects on the counties we visited. Specifically, we asked NREL to use its Wind Impact Model to assess the employment and income impacts of three hypothetical scenarios on the 10 counties included in our visits. The scenarios were (1) a 150 MW project that is owned by an out-of-state firm, (2) a 40 MW project that is owned by an out-of-state firm, and (3) several small projects with total capacity of 40 MW that are owned by county residents. This modeling work, including related assumptions, is discussed in greater detail in appendix III. To determine the advantages and disadvantages for farmers and rural communities of owning a wind power project or leasing their land to a commercial wind power developer, we interviewed officials or reviewed documentation from DOE’s NREL and Wind Powering America program; AWEA; the Environmental and Energy Study Institute; the National Wind Coordinating Committee; Windustry; the Izaak Walton League of America; and the Union of Concerned Scientists. The documentation we reviewed covered issues such as wind project economics and development, research, technology, site selection, electricity transmission, economic and legal constraints, and various federal and state incentives. We also discussed these issues with farmers, landowners, wind project investors, state and local government officials, including local taxing authorities, and others during the course of our site visits. To determine USDA’s efforts to promote the development of wind power on farms and in rural communities, we interviewed officials or reviewed documentation from USDA’s Agricultural Research Service, Economic Research Service, Office of Energy Policy and New Uses, Natural Resources Conservation Service, Rural Business-Cooperative Service, Rural Utilities Service, and Office of General Counsel. In particular, we reviewed USDA’s efforts to implement the Renewable Energy Systems and Energy Efficiency Improvements Program (Renewable Energy Program) provided for in section 9006 of the 2002 Farm Security and Rural Investment Act (farm bill). We also spoke with USDA officials and reviewed documents they furnished to determine the extent to which USDA provided assistance under other rural development loan or grant programs for wind project research, planning, or construction. In addition, regarding USDA’s implementation of the Renewable Energy Program, we discussed USDA’s consultation with DOE and the Environmental Protection Agency (EPA) with officials from all three agencies. Furthermore, during our site visits in the selected states, we discussed with farmers, ranchers, and rural small business officials the financial or technical assistance they may have received from USDA or other federal agencies in developing their wind power projects. We also discussed with them their experiences with the application process for seeking assistance under the section 9006 program, including obtaining information on the program and completing the application, as well as obtaining information and assistance from USDA or other sources on the factors—economic, technical, and legal—that need to be considered before embarking on a wind project. Finally, we reviewed written comments submitted to USDA in response to a December 2002 public meeting to solicit suggestions from interested stakeholders about USDA’s implementation of the section 9006 program. Finally, to get a better sense of what the federal government is doing more generally to promote wind power generation and how these efforts may be coordinated with USDA’s efforts to foster its development on farms and in rural communities, we spoke with officials or reviewed documentation from DOE, USDA, the Department of Defense, the Department of the Interior, and EPA. We conducted our review from February 2003 through August 2004 in accordance with generally accepted government auditing standards. We did not independently verify the data obtained from the sources noted above. However, as appropriate, we discussed with these sources the measures they take to ensure the accuracy of these data. These measures seemed reasonable. Appendix II provides further information on the sources used in our work. Following are the names, addresses, and Web sites for sources of information on wind power generation used in our work. We asked NREL to model the economic impact of wind power projects on the counties we visited during our review. This appendix describes the model used for the analysis, including the key data inputs and parameters. It also describes the model results. NREL has retained the services of MRG & Associates, a consulting firm (the firm) that specializes in energy economic analysis. The firm developed the Wind Impact Model (the model) to assess the impact of wind power investments on employment, earnings, and economic output at the state and local levels. Economic output as defined in the model is a measure of economic activity (value of production) on the state or local level that is similar to the measure of the gross domestic product on the national level. For simplicity, this appendix refers to economic output as “income.” We asked NREL to assess the employment and income impacts of three hypothetical scenarios on 11 counties in the five states we visited. The scenarios are: (1) a 150 MW project that is owned by an out-of-state firm, (2) a 40 MW project that is owned by an out-of-state firm; and (3) several small projects totaling 40 MW of capacity that are owned by county residents. Table 7 lists the 11 counties for which the firm conducted the analysis. We selected these counties because we determined that the NREL analysis would be an appropriate complement to our visits. We also believed that our visits would give us some general sense of the economic conditions of the counties, helping us judge the differences in assumptions regarding the counties in NREL’s modeling. The model provides a tool that can be used by wind power developers, decision makers, and others to identify the local economic impacts associated with constructing and operating wind power projects. The model, based on a spreadsheet, emulates, on a small scale, the basic function of an input-output model. It relies on input-output multipliers that, in this case, estimate how much a dollar of expenditures injected into an economy will generate in total employment or income. Employment and income multipliers for a given sector of a state’s or a county’s economy depend on the spending patterns and the specific economic structure of the jurisdiction in question. The source of the multipliers used in the model is Minnesota IMPLAN Group Inc., whose databases and modeling system are used by many government agencies, academic institutions, and other researchers worldwide for economic impact modeling and analyses. Input-output models are used to trace supply linkages in the economy. For example, an input-output model of wind power would show how investments in wind turbines benefit turbine manufacturers as well as fabricated metal industries and others businesses supplying inputs to those manufacturers. An input-output analysis of local benefits generated by wind power project expenditures would depend upon how much of those expenditures are spent locally and the structure of the local economy. Different levels of expenditures support varying levels of employment, income, and output, consistent with the spending pattern and local economic structure. “Inputs” into the model include cost data for a given wind power project and parameters that characterize the particular state- or county-level economy being analyzed. Multipliers are used on the input data to calculate the “outputs,” which are the estimated employment and income impacts of the project. The model is designed to examine economic impact on the state or county levels, and it does so separately for the “construction period” and “operating years” of a wind power project. Construction phase impacts are reported as a 1-year equivalent of the incremental change to state or county employment, earnings, and income attributable to a new project. For example, if a project results in full-time employment of 200 workers for 6 months, the model will “see” this effect as 100 full-time jobs added for 1 year. On the other hand, a model output of 25 jobs for the operating years of a project means that this project is expected to employ (directly at the plant and indirectly) 25 full-time equivalent workers annually over its lifetime. The model divides a state or county economy into 14 sectors. For each sector, the model has three sets of employment, earnings, and income multipliers. One set is for direct effects, another for indirect effects, and a third for induced effects. In the case of a 150 MW wind power project, for example, the construction period direct employment effect includes the on- site jobs of the contractors and crews hired to build the project and jobs at the manufacturing plants that produce the turbines. In the operating years, the direct employment effect includes all of the workers who are employed directly by the project (field technicians, administrative staff, and project managers) as well as employment directly supported by expenditures for goods and services used by the plant. The indirect employment effect includes employment that results because suppliers of goods and services to the project also procure goods and services from others. The contractor who builds the project, for example, procures goods and services from bankers, accountants, suppliers of construction and other materials, and others. Finally, the induced employment effects refer to the change in employment that occurs due to the spending of those persons directly and indirectly generating income associated with the project. Direct, indirect, and induced income effects follow the same logic. A major portion of the required “inputs” into the model are cost data, including the following: construction costs—for materials and labor, for example; equipment costs for such things as turbines, rotors, and towers; other construction period costs, such as for interconnection to the electric grid, engineering services, land easements, and permitting; annual operating and maintenance costs, including payroll of direct employees, material, and various services; and financing and lease costs and taxes. Other inputs include estimates of “local share value” for certain dollar expenditures and labor. For example, a 10 percent local share value for construction material expenditures for Pecos County, Texas, means that, for a wind project being built in this county, the model assumes that only 10 percent of the value of project expenditures on construction materials accrues to local vendors. The relatively low number means that Pecos County has a limited economy and much of the construction material needed for the project would have to be obtained from outside the county—possibly from neighboring urban centers, such as the cities of Midland-Odessa and Lubbock, or from out-of-state locations. Similarly, for Pecos County, the model assumes that only 10 percent of the labor used for laying the foundations for the project’s turbines would be hired locally. In contrast, the corresponding percentages for Alameda County, California—a county with a much larger population and larger and more diversified economic base—would be 90 percent for the local share of construction material expenditures and 100 percent for the local share of labor used for foundation work. The local share values and multipliers used in the model determine how an expenditure of a particular type translates into employment and income impacts on a county’s economy. The interaction between the model inputs may be partly illustrated by comparing Rock County, Minnesota, with Weld County, Colorado. For Rock County, the model assumes the local share value for construction expenditures is 4 percent. The model also uses a direct employment multiplier of 10.1 jobs for every $1 million spent on construction in the county. For Weld County, the model assumes the local share value for total construction expenditures is 76 percent, and the direct employment multiplier is 8.3 jobs for every $1 million spent on construction in the county. The differences in the local share values and multipliers for these two counties are attributable to the differing population and economic characteristics of these counties. Rock County is rural, with a small population and economic base, and thus the project developer must obtain much of the construction material, equipment, and labor needed from outside the county. In contrast, Weld County has a much larger population and economic base capable of fulfilling more of the developer’s material and labor needs. On the other hand, the direct construction employment multiplier for Rock County, at 10.1 jobs per million dollars of expenditure, is somewhat higher than the corresponding multiplier of 8.3 for Weld County, reflecting a more labor-intensive local economy in the former. The difference in local share values and employment multipliers for Rock County, Minnesota, and Weld County, Colorado, results in bigger employment impacts of a wind power project in the latter. For example, the model assumes that the construction of a 150 MW project will cost about $15 million in each county. However, in the case of Rock County, only about $600,000 of this amount will be spent within the county, while the corresponding local share for Weld County will be $11.5 million. Consequently, according to the model results, the $15 million construction project results in direct construction phase employment for Rock County of only 16 jobs compared with 141 jobs for Weld County. We have not summarized all model results—to do so would involve publishing 33 large tables. However, those we do include are illustrative of the results we found. Overall, the model results showed that employment and income impacts tend to be greater for counties that are more highly populated and have a larger economic base, and are considerably greater for projects that are locally owned than for projects that are owned by out-of-area firms. As discussed, the model estimates economic impacts for the construction period separately from impacts during the years of the project’s operation. Tables 8 and 9 summarize the model’s estimates of economic impacts for the construction period, while tables 10 through 12 summarize the estimates for the years of operation. Estimates for the construction period are 1-year impacts. Table 8 shows the economic impacts of constructing a 150 MW wind power project owned by an out-of-area energy company (a company headquartered outside the county). Table 9 depicts the impacts of constructing a 40 MW project owned by an out-of-area company. As depicted in these tables, the economic impacts during the construction period are bigger for counties that have a larger population and economic base. For example, the impacts of constructing a 150 MW project on Weld County, Colorado, would include the creation of the equivalent of 349 full- time jobs for 1 year. Weld County has a population of over 200,000. In contrast, the construction of a 150 MW project in Pecos County, Texas, would create the equivalent of only 36 full-time jobs for 1 year in the county. Pecos County has a much smaller population—about 16,000 people—and economic base. Thus, most of the labor and professional staff resources needed to construct the project would be hired from outside the county. Tables 10, 11, and 12 provide annual estimates of the economic impacts during the operations period of various size projects. Table 10 shows the impacts of a 150 MW project owned by an out-of-area energy company. Table 11 depicts the impacts of 40 MW project owned by an out-of-area company. Table 12 shows the combined impacts of 20 small projects—each 2 MW—that are locally owned. Together, these 20 projects would constitute 40 MW of generating capacity. A comparison of tables 11 and 12 shows that local ownership can generate significantly higher economic impacts for a county. For example, a single 40 MW project built in Pipestone County, Minnesota, would generate about $650,000 in new income for the county annually. In contrast, 20 locally owned projects that are 2 MW each (40 MW total) would generate about $3.3 million annually in the same county. We did not expect a high level of accuracy in the model results because data sources on costs and expenditures are limited, in part because companies may consider these data to be proprietary. Rather, we expected the model’s analysis to illustrate the differences between counties that have different economic structures. The cost data and assumptions for local share values seemed reasonable and consistent with what we found during our visits regarding economic conditions in these counties. The model’s results also generally conform to what we found during our visits, especially for employment effects. This appendix summarizes key information for the nine wind power projects we visited in 10 counties in five states (California, Colorado, Iowa, Minnesota, and Texas). At each site, we discussed the planning, development, construction, and operation of the project with landowners, project developers and owners, and local government officials. In addition to the individuals named above, Jacqueline Cook, Philip Farah, William Roach, and Carol Herrnstadt Shulman made key contributions to this report. Important contributions were also made by Carol Bray, Oliver Easterwood, Richard Kasdan, and Lynn Musser. We also wish to give special recognition to our dear friend and colleague, Patricia Gleason, who passed away during the course of our work. Pat’s distinguished career with GAO was characterized by her strong desire to make government programs more effective and efficient. Furthermore, her courage, humor, and determination to keep working even as her health declined were an inspiration to her co-workers who held her in the highest esteem and miss her greatly. Federal Energy Management: Facility and Vehicle Energy Efficiency Issues. GAO-03-545T. Washington, D.C.: March 12, 2003. Air Pollution: Meeting Future Electricity Demand Will Increase Emissions of Some Harmful Substances. GAO-03-49. Washington, D.C.: October 30, 2002. Natural Gas: Analysis of Changes in Market Price. GAO-03-46. Washington, D.C.: December 18, 2002. Restructured Electricity Markets: Three States’ Experiences in Adding Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002. Renewable Energy: DOE’s Funding and Markets for Wind Energy and Solar Cell Technologies. GAO/RCED-99-130. Washington, D.C.: May 14, 1999. Department of Energy: Solar and Renewable Resources Technologies Program. GAO/RCED-97-188. Washington, D.C.: July 11, 1997. Energy Security: Evaluating U.S. Vulnerability to Oil Supply Disruptions and Options for Mitigating Their Effects. GAO/RCED-97-6. Washington, D.C.: December 12, 1996. Federal Research: Changes in Electricity-Related R&D Funding. GAO/RCED-96-203. Washington, D.C.: August 16, 1996. Energy Research: Opportunities Exist to Recover Federal Investment in Technology Development Projects. GAO/RCED-96-141. Washington, D.C.: June 26, 1996. Electricity Supply: Consideration of Environmental Costs in Selecting Fuel Sources. GAO/RCED-95-187. Washington, D.C.: May 19, 1995. Electricity Supply: Efforts Under Way to Develop Solar and Wind Energy. GAO/RCED-93-118. Washington, D.C.: April 16, 1993. 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.” | Wind-generated electricity--wind power--has the potential to provide electricity to homes and businesses without causing air pollution or depleting nonrenewable resources, unlike electricity generated by fossil fuels (coal, natural gas, and oil). Furthermore, because wind power has no fuel costs--wind power depends on the energy of the wind--its operating costs are lower than the costs for power produced from fossil fuels, although its capital costs are greater. Wind power relies on frequent, strong winds to turn the blades of power-generating turbines. In the United States, a wind turbine with generating capacity of 2 megawatts (MW), placed on a tower situated on a farm, ranch, or other rural land, can generate enough electricity in a year--about 6 million kilowatt hours (kWh)--to serve the needs of 500 to 600 average U.S. households. In addition to environmental benefits, wind power has the potential to contribute significantly to America's growing energy needs while providing economic benefits to farms and communities in rural America. In this connection, the Department of Energy's (DOE) "Wind Powering America" program has set a goal of producing 5 percent of the nation's electricity from wind by 2020. DOE estimates that achieving this goal would add $60 billion in capital investment in rural America, provide $1.2 billion in new income for farmers and rural landowners, and create 80,000 new jobs by that year. Congress asked us to report on (1) the amount of wind power generation in relation to all U.S. electricity generation and the prospects for wind power's growth, (2) the contribution of wind power generation to farmers' income and to the economic well-being of rural communities in the 10 states with the highest wind power generation capacity, (3) the advantages and disadvantages for farmers of owning a wind power project versus leasing their land to a commercial wind power developer, and (4) the efforts of USDA to promote the development of wind power on farms and in rural communities. Nationwide, wind power accounted for only about one-tenth of 1 percent of total electric power generation capacity in 2003, and an even smaller percentage of electric power actually generated. However, U.S. wind power generating capacity quadrupled between 1990 and 2003--to 6,374 MW--and DOE has projected continued growth for this renewable power source through 2025. On a percentage basis, wind power capacity has been growing at a much higher rate than other sources of electric power generation--an average annual growth rate of 28 percent during the period 1999 through 2003. In addition, according to DOE, the U.S. Midwest theoretically has enough wind power potential to meet a significant portion of the nation's electricity needs; however, this potential remains largely untapped. Wind power does not currently contribute significantly to total farm income in the 10 states with the highest installed wind power capacity, but some individual farmers and rural communities have benefited considerably from this energy source. In these 10 states, net farm income was about $14 billion in 2002, but total direct income to farmers from wind power ranged from only $10 million to $45 million, representing a fraction of 1 percent of net farm income. However, wind projects located on farms have increased some individual farmers' income by tens of thousands of dollars annually. Farmers generally find leasing their land for wind power projects to be easier than owning projects. Leasing is easier because, unlike farmers, energy companies have the financial resources and legal and technical expertise to address the costs, complexity, tax advantages, and risks of wind power development. However, ownership may be more profitable than leasing. USDA has not fully utilized all of the farm bill's renewable energy provisions to promote wind power development on farms and in rural communities. For the Renewable Energy Systems and Energy Efficiency Improvements Program (Renewable Energy Program)--the key program for supporting wind power and other renewable energy initiatives--USDA offered grants totaling $7.4 million for 35 wind power projects in eight states in fiscal year 2003, the program's first year, but it has not implemented the loan and loan-guarantee components of the program. Without the latter, USDA has not fully fulfilled farm bill provisions and limits the ability of the program to promote renewable energy sources. |
The FBI’s mission responsibilities include investigating serious federal crimes, protecting the nation from foreign intelligence and terrorist threats, and assisting other law enforcement agencies. Approximately 12,000 special agents and 16,000 analysts and mission support personnel are located in the bureau’s Washington, D.C., headquarters and in more than 450 offices in the United States and 45 offices in foreign countries. Mission responsibilities at the bureau are divided among the following five major organizational components. ● Administration: manages the bureau’s personnel programs, budgetary and financial services, records, information resources, and information security. ● Counterterrorism and Counterintelligence: identifies, assesses, investigates, and responds to national security threats. ● Criminal Investigations: investigates serious federal crimes and probes federal statutory violations involving exploitation of the Internet and computer systems. ● Intelligence: collects, analyzes, and disseminates information on evolving threats to the United States. ● Law Enforcement Services: provides law enforcement information and forensic services to federal, state, local, and international agencies. The components are further organized into subcomponents, such as divisions, offices, and other groups (hereafter referred to as “divisions”). Table 1 lists the components and briefly describes their respective divisions. To execute its mission responsibilities, the FBI relies extensively on IT, and this reliance is expected to grow. For example, the bureau operates and maintains hundreds of computerized systems, networks, databases, and applications, such as ● the Combined DNA Index System, to support forensic ● the National Crime Information Center and the Integrated Automated Fingerprint Identification System, to help state and local law enforcement agencies identify criminals; ● the Automated Case Management System, to manage information collected on investigative cases; ● the Investigative Data Warehouse, to aggregate data in a standard format from disparate databases to facilitate content management and data mining; and ● the Terrorist Screening Database, to consolidate identification information about known or suspected international and domestic terrorists. According to the FBI, it also has almost 500 systems, applications, databases, and networks that are in operation, undergoing enhancement, or being developed or acquired. In particular, it has identified 18 new or enhancement projects that support its intelligence, investigative, and analyst activities. Included in these 18 is its Sentinel program, the FBI’s effort to deliver—using commercially available software and hardware components—a modern automated capability for investigative case management and information sharing, with the goal of helping field agents and analysts to perform their jobs more effectively and efficiently. As we have previously reported, these ongoing and planned IT programs and projects are part of the FBI’s systems modernization program. This program is based both on the bureau’s long-standing recognition of its antiquated, nonintegrated systems environment and its awareness of the importance of modern, integrated IT systems to its transformation efforts in the wake of the September 11 attacks. Currently, the FBI reports that it will spend approximately $484 million on modernization projects in fiscal year 2005 out of a total IT budget of $1.07 billion. Technology can be a valuable tool in helping organizations transform and better achieve mission goals and objectives. Our research on leading private and public sector organizations, as well as our past work at federal departments and agencies, shows that successful organizations embrace the central role of IT as an enabler for enterprisewide transformation. These leading organizations develop and implement institutional or agencywide system modernization management controls to ensure that the vast potential of technology is effectively applied to achieving mission outcomes. Among these management controls are ● assigning IT responsibility and providing commensurate authority centrally with the agency’s CIO, ● using a well-defined enterprise architecture as a systems modernization blueprint, ● following a portfolio-based approach to selecting among competing IT programs and projects and controlling investment in each during their life cycles, ● adhering to a structured and disciplined system development and acquisition life cycle management methodology, and ● employing sufficient and qualified IT human capital. We have observed that without these types of controls and capabilities, organizations increase the risk that system modernization projects will (1) experience cost, schedule, and performance shortfalls and (2) lead to systems that are redundant and overlap. They also risk not achieving their aim of increased interoperability and effective information sharing. All told, this means that technology will not effectively and efficiently support agency mission performance and help realize strategic mission outcomes and goals. The FBI Director has recognized the importance of IT to transformation, and accordingly made it one of the bureau’s top 10 priorities. Consistent with this, the FBI’s strategic plan contains explicit IT-related strategic goals, objectives, and initiatives (near- term and long-term) to support the collection, analysis, processing, and dissemination of information. However, as we have previously reported, the bureau’s long- standing approach to managing IT has not always been fully consistent with leading practices. The effects of this approach can be seen in, for example, the cost and schedule shortfalls experienced on a key infrastructure and applications modernization program, Trilogy, and particularly on one of its projects (the Virtual Case File), which was recently terminated by the bureau. Reviews of this project identified management weaknesses as the cause for its cost, schedule, and performance shortfalls. Among these weaknesses were lack of integration planning, inadequately defined requirements, project management deficiencies, and frequent turnover of key personnel. In place of the Virtual Case File project, the FBI launched its Sentinel program in early 2005 to develop what the bureau describes as its next-generation electronic information management system. According to the FBI, the system is planned to consolidate and replace its existing case management capabilities with an integrated, paperless file management and workflow system. The FBI is making progress in establishing institutional IT modernization management capabilities. It has centralized IT responsibility and authority under the CIO, and it is establishing and beginning to implement management capabilities in the areas of enterprise architecture, IT investment management, systems development and acquisition, and IT human capital. Before it can effectively leverage technology to transform itself, the FBI will have to build on these capabilities and effectively implement them on its system investments. Our research on leading private and public sector organizations, as well as our past work at federal departments and agencies, shows that successful organizations adopt a corporate, or agencywide, approach to managing IT under the leadership and control of a senior executive—commonly called a chief information officer— who operates as a full partner with the organizational leadership team in charting the strategic direction and making informed IT investment decisions. The Clinger-Cohen Act also mandates that major federal departments and agencies establish the position of CIO. As the focal point for IT management within an agency, the CIO is positioned to oversee the establishment and implementation of agencywide capabilities in IT management. In the FBI, responsibility for managing IT was historically decentralized and diffused. For example, we testified in March 2004 that the FBI had not provided its CIO with bureauwide IT management authority and responsibility, vesting these instead in the bureau’s divisions. This is part of the reason that the FBI’s IT environment at the time consisted of nonintegrated applications residing on different servers, each of which had its own unique databases, unable to share information with other applications or with other government agencies. To address this, we discussed with the Director in 2003 the importance of centralizing IT management responsibility and authority under the CIO, and we subsequently recommended that the CIO be provided with the responsibility and authority for managing IT bureauwide, including budget management control and oversight of IT programs and initiatives. The FBI has since taken steps to strengthen the scope and influence of the CIO Office. In particular, the CIO was assigned agencywide responsibility, authority, and control over IT resources, including responsibility for preparing the bureau’s IT strategic plan and operating budget; operating and maintaining existing systems and networks; developing and deploying new systems; defining and implementing IT management policies, procedures, and processes; and developing and maintaining the bureau’s enterprise architecture. To fulfill these responsibilities, the CIO’s office has begun the process of developing and implementing a corporatewide approach to managing IT. For example, the FBI reorganized the CIO Office, establishing four offices to carry out key institutional management functions, and issued an IT strategic plan in September 2004 that outlined ongoing and planned efforts to strengthen policies and procedures by standardizing them across the bureau and incorporating best practices. Among other things, this plan provided for building capabilities in a number of key IT management areas, including the following four areas: enterprise architecture, IT investment management, systems development and acquisition, and IT human capital. As our research and evaluations have shown, it is risky to attempt to modernize an IT environment without using an architecture, or blueprint, to guide and constrain the definition, design, and development of IT programs and projects. An enterprise architecture provides systematic structural descriptions—in useful models, diagrams, tables, and narrative—of how a given entity operates today and how it plans to operate in the future, and it includes a road map for transitioning from today to tomorrow. Our experience with federal agencies has shown that attempting to modernize systems without having an enterprise architecture often results in systems that are duplicative, not well integrated, unnecessarily costly to maintain, and limited in terms of optimizing mission performance. To assist agencies in effectively developing, maintaining, and implementing an enterprise architecture, we published a framework for architecture management, grounded in federal guidance and recognized best practices. In 2002 and again in 2003, we reported that the FBI did not have either an architecture to guide and constrain its IT investments or the means in place to develop and implement one. We further reported that the development of an architecture was not being given the priority that it deserved. Accordingly, we recommended that the Director make it an institutional priority, and provided a series of recommendations for building an architecture management foundation, developing and completing the architecture, and using it to inform IT investment decision making. In the last 12 months, the bureau has made important progress in developing its architecture. Last week we issued a congressionally mandated report on the state of the FBI’s enterprise architecture efforts. In summary, we found that the FBI is now managing its enterprise architecture program in accordance with many best practices, but it has yet to adopt others. Examples of best practices that the bureau has implemented include the following: ● the bureau has established a program office that is responsible for the development of the architecture; it has issued a written and approved policy governing architecture development; and it has ongoing efforts to complete a target architecture. We ascribed this important progress, in part, to the demonstrated commitment of the FBI’s top management to the enterprise architecture program. Nonetheless, we recognized that much remains to be accomplished before the FBI’s enterprise architecture program will be mature. For example, we reported that the architecture program office did not yet have appropriate human resources with architecture expertise and that the bureau was not following a defined methodology for developing its architecture, both of which are foundational items. Also, the bureau’s current and target architectures were not yet complete. (For instance, the program office had not completed mapping FBI data structures, classifications, and exchanges to the business processes that use the data, nor has it finished defining how the various IT applications currently interrelate.) Further, the bureau had not yet begun to develop its investment plans for transitioning from the current to the target architectural states. We also reported that the FBI had not employed effective contract management controls in developing its enterprise architecture, which is risky because the bureau is relying heavily on contractor support in this effort. (We discuss this contract management issue further in the section of this testimony dealing with system development and acquisition.) Because we had already made comprehensive recommendations regarding the FBI’s enterprise architecture program, we made no additional recommendations in this area. However, because of the FBI’s heavy reliance on contractor assistance in developing its architecture and the state of its contract management controls, we recommended that the FBI employ performance-based contracting on all further architecture contract actions (to the maximum extent practicable) and follow effective contract tracking and oversight practices. In response, the FBI stated that it would continue to strive to develop a robust enterprise architecture program supported by effective contract management practices and cited steps under way to strengthen its architecture management foundation. For example, since our report was issued, the FBI provided us with a document that the bureau stated defines its enterprise architecture methodology. In addition, the bureau reported that it is very close to hiring staff with architecture expertise (four senior level technologists) for the program office. Further, the FBI stated that it was taking steps to increase its use of performance-based contracting. Clinger-Cohen Act of 1996, 40 U.S.C. §§11101-11703. ● planned (proposed systems or system enhancements), ● under way (systems being developed or acquired), and ● completed (existing systems being operated and maintained). The FBI’s progress over the last 3 years to define and refine an IT investment approach has been slow. In 2002, the bureau first focused on developing an approach that addressed solely IT investments and in 2003 expanded the approach’s scope to include all capital investments. In 2004, under the leadership of the current CIO, the bureau redirected its investment selection, control, and evaluation activities back to include IT investments only. In September 2004, we reported that this redirected approach included one set of processes for new investments that are planned and under way and another set for the operation and maintenance of existing systems. At that time, the process for investments in new systems was still being defined, while a process for allocating operations and maintenance resources across existing systems had been developed. We also reported that the bureau was to pilot test its developed process on different types of investments (systems, applications, databases, and networks) with the goal of subsequently implementing the process enterprisewide. In our view, it was important that the implemented process be in accordance with key IT investment decision-making best practices (such as our ITIM framework). Accordingly, we made recommendations aimed at expediting implementation of ITIM-compliant policies and procedures. Since then, the FBI has taken a number of steps to strengthen its capability to manage IT investments. For example, in November 2004, the FBI established an investment review board, composed of senior executives, that meets about every 2 weeks to review proposed and ongoing investments in new systems. The CIO stated that the board recently completed its first evaluation of the bureau’s 89 ongoing IT investments to, among other things, establish cost, schedule, and performance baselines and to begin the process of having the CIO and other senior executive review the projects at critical development milestones. The CIO also reported that the bureau has reviewed over 37 new proposals and is using the results in preparing its fiscal year 2007 IT budget request. Further, to establish a more defined structure to support the board’s activities, the CIO’s office recently issued an ITIM guide, which defines, among other things, the processes that the board is to follow in selecting and controlling these investments. In addition, the CIO’s office is in the process of assessing the performance of existing systems (i.e., those in the operations and maintenance phase of their life cycle). Using cost and other criteria, these assessments are designed to determine which systems can be better used, replaced, outsourced, or retired. According to the CIO, the program recently completed a pilot assessment of projects in one FBI division, and it is currently preparing to perform similar assessments in the other divisions, which are scheduled to be completed by April 2006. Notwithstanding these efforts, until the FBI fully implements processes for selecting, controlling, and evaluating all its IT investments, it will not be able to ensure that it is applying its resources to the best mix of investments to meet the goals of modernizing IT and transforming itself. Having rigorous and disciplined IT system development and acquisition life cycle processes is an important component of IT management. The Clinger-Cohen Act recognizes the importance of such effective processes, and the Software Engineering Institute’s (SEI) Capability Maturity Models™ define a suite of such processes. Five process areas associated with systems acquisition (which collectively are composed of 30 key practice areas) are configuration management, project management, quality assurance, requirements development and management, and risk management. In combination with other process areas, these five provide a foundation for managing software-intensive systems in a manner that minimizes risks and increases the chances of systems delivering required system capabilities and benefits on time and within budget. In September 2004, we reported that the life cycle management policies and procedures then in place at the FBI for these five areas varied widely by division. On the one hand, for example, the policies and procedures for the six divisions that we examined generally addressed all the practices associated with the project management process area (see table 2); this process area involves management of project office activities so that projects are timely, efficient, and effective. On the other hand, for example, the policies and procedures for these six divisions generally did not address the key practices associated with requirements development and management process area (see table 3); this process area involves establishing and maintaining agreement on system requirements. We would note that according to the CIO, it was a lack of bureau rigor and discipline in this area that in part caused the Virtual Case File project to be terminated. Examples of requirements development and management practices that most divisions did not adequately address are (1) appraising changes to requirements for their impact on the project or the IT environment, which is important because it allows management and the project team to determine whether the benefits of changes to the requirements would be worth the likely cost and effect of making the changes, and (2) developing and baselining requirements and maintaining them under change control, which is important to ensuring that requirements are completely and correctly defined and that uncontrolled changes, commonly referred to as “requirements creep,” are avoided. In our September 2005 report, we addressed another key process area associated with system acquisition life cycle management— contract management. Federal acquisition regulations and relevant IT acquisition management guidance recognize the importance of effectively managing contractor activities. According to the Federal Acquisition Regulation (FAR), for example, agencies are to use performance-based contracting to the maximum extent practicable when acquiring most services. Under the FAR, performance-based contracting includes, among other things, defining the work to be performed in measurable, results-oriented terms and specifying performance standards (quality and timeliness). The FAR and associated regulations also require government oversight of contracts to ensure that the contractor performs the requirements of the contract, and the government receives the service as intended. Although the regulations do not prescribe specific methods for this oversight, other acquisition management guidance describes a number of practices associated with this activity. However, the FBI’s approach to managing its enterprise architecture contract did not include most of the performance-based contracting features described in the FAR. For example, the contract’s statement of work did not specify the products in results-oriented, measurable terms. In addition, the bureau did not have plans for assuring the quality of the contractor’s work; instead, according to bureau officials, they worked with the contractor to determine whether each deliverable was acceptable. In addition, in overseeing its contractor, the FBI has not employed the kind of effective practices specified in relevant guidance. For example, the bureau does not have a written policy to govern its tracking and oversight activities, has not designated responsibility or established a group for performing contract tracking and oversight activities, and has not developed an approved contractor monitoring plan. To address weaknesses in the FBI’s systems development and acquisition life cycle processes, we have recommended that the FBI establish effective policies and procedures for such systems acquisition and development areas as configuration management, project management, quality assurance, requirements development and management, risk management, and contract tracking and oversight. Recognizing the need to strengthen and standardize its IT requirements and development management capabilities, the FBI has issued a bureauwide standard life cycle management directive with the aim of achieving consistent processes in the systems acquisition and development areas mentioned above. A second goal is to integrate these processes with other key IT disciplines, including those discussed in this testimony as well as others, such as information security management. CIO officials told us that they recently began implementing parts of the life cycle management directive across all projects. According to the CIO, the directive is to be fully defined and implemented by the end of 2006. The FBI acknowledges that the directive needs to be enhanced and extended to adequately address all relevant process areas. For example, FBI officials stated that they are still working to define effective contract management controls, such as procedures for the use of performance-based contracting methods and the establishment of tracking and oversight structures, policies, and processes. For other key practices, procedures have been drafted but require further development. A strategic approach to human capital management includes viewing people as assets whose value to an organization can be enhanced by investing in them, and thus increasing both their value and the performance capacity of the organization. Based on our experience with leading organizations, we issued a model encompassing strategic human capital management, in which strategic human capital planning was one cornerstone. Strategic human capital planning enables organizations to remain aware of and be prepared for current and future needs as an organization, ensuring that they have the knowledge, skills, and abilities needed to pursue their missions. We have also issued a set of key practices for effective strategic human capital planning. These practices are generic, applying to any organization or component, such as an agency’s IT organization. They include involving top management, employees, and other stakeholders in developing, communicating, and implementing a strategic workforce plan; ● determining the critical skills and competencies needed to achieve current and future programmatic results; ● developing strategies tailored to address gaps between the current workforce and future needs; ● building the capability to support workforce strategies; and ● monitoring and evaluating an agency’s progress toward its human capital goals and the contribution that human capital results have made to achieving programmatic goals. As we have reported, the FBI’s enterprisewide strategic human capital plan, issued in March 2004, includes policies and procedures for IT human capital. These IT policies and procedures are in alignment with the key practices discussed above. More specifically, they call for the following. ● Top management stakeholders (e.g., the CIO, the head of the Office of Strategic Planning, and the head of Administration) and other stakeholders (e.g., section and unit chiefs) are to be involved with the development, communication, and implementation of the policies and procedures. ● A detailed data bank is to be developed to store critical skills needed in the development and selection of personnel, including IT staff. ● Strategies are to be defined to address workforce gaps, including recruiting programs that provide for tuition assistance and cooperative education. ● An IT center is to be established to support workforce strategies and train existing personnel for future competencies and skills that will be needed. ● The agency’s progress is to be monitored and evaluated by tracking implementation plans to ensure that results are achieved on schedule. Since that time, the CIO stated that his office is taking steps to enhance its IT human capital capability. For example, it is working with the bureau’s Training Division to identify the skills and abilities of the existing IT workforce and to provide training to enhance these skills and abilities, including having program and project managers work toward becoming certified in their respective disciplines. In addition, the CIO said that as part of reorganizing the CIO’s office, he has created 12 senior executive and 4 senior level technical positions and is in the process of filling them with experienced and qualified staff. According to the CIO, the bureau has hired 8 senior executives and is in the process of hiring the others as well as the 4 senior technical staff. However, the bureau has yet to create an integrated plan of action that is based on a comprehensive analysis of the human capital roles and responsibilities needed to support the IT functions established under the CIO office’s reorganization. Such an analysis should include an assessment of core competencies and essential knowledge, skills, and abilities, as well as linking current human capital strengths and weaknesses to permit gaps to be identified between current capabilities and those needed to perform the established IT functions. The plan should then describe actions needed to fill the identified gaps (that is, the planned combination of hiring, training, contractor support, and so on), along with time frames, resources, performance measures, and accountability structures. According to the CIO, he is in the process of hiring a contractor with human capital expertise to help identify gaps between existing skills and abilities and those that will be needed to successful modernize the bureau’s IT. The CIO intends to have this effort completed, including the development of an implementation plan to address any gaps, by the end of calendar year 2005. As part of this effort, the CIO stated that he is planning to implement a formal management structure within the Deputy CIO’s office to monitor and evaluate human capital initiatives to ensure that results are achieved on schedule. Notwithstanding the initiatives under way and planned, the FBI’s IT human capital situation remains a work in progress, and this is a significant challenge. As we have previously reported, when organizations implement a strategic approach to human capital management, how this is done, when it is done, and the basis on which it is done can make all the difference. With successful implementation, the bureau can better position itself to ensure that it has the right people, in the right place, at the right time to effectively modernize IT and transform the organization. The success of the FBI in using IT to support its transformation efforts and in achieving its mission goals and outcomes will depend on how well it actually implements and institutionalizes the IT management structures, processes, and controls that have been or are currently being put in place. When the bureau’s IT investments have been successfully delivered, and operational assets and tools are available to analysts and field agents to help them do their jobs better, only then can the mission value of technology be fully realized. The FBI has identified several ongoing new or enhanced system projects that in our view will need to employ these kinds of IT management capabilities in order for each to be successfully defined, designed, developed or acquired, and deployed. For example, the FBI reports that it currently has 18 IT investments that support its “investigative, intelligence, and analytical” line of business, which is a major component of how the bureau accomplishes its mission. According to the bureau, each of these 18 investments is benefiting from the bureau’s newly established IT management approach and capabilities. Included in these 18 investments is Sentinel, the FBI’s program to deliver an automated case management and information sharing capability; this is the successor to the Virtual Case File, the failed component of the Trilogy program. According to the FBI, Sentinel is to leverage commercially available technologies to consolidate and replace the bureau’s existing case management capabilities with an integrated, paperless file management and workflow system, and to enhance information access and promote information sharing with both the law enforcement and intelligence communities. Thus far, the bureau reports it has developed detailed system requirements, a concept of operations, an acquisition strategy and schedule, and a notional development and deployment strategy involving four increments delivered over 4 years. In August 2005, the FBI issued a request for vendor proposals to more than 40 eligible companies under a National Institutes of Health governmentwide contracting vehicle. According to the CIO, the request also was provided to over 500 eligible subcontractors. Vendor proposals are due later this month; the goal is to issue a contract in November 2005. As an FBI flagship program, Sentinel can serve as a barometer of how well the FBI defines and implements its new IT management approaches and capabilities, particularly with regard to a system that is to rely extensively on commercially available components (software and hardware). As we discuss above (and have previously reported), there are a number of IT system management practices related to architecture, investment, acquisition/development, and human capital that are critical to delivering promised system capabilities and benefits, on time and within budget. Moreover, these include management practices that are critical to any system, whether custom-developed or built from commercial components, as well as certain practices unique to systems based on commercial components. Although each of these practices is relevant to Sentinel, there are several that we believe to be especially germane given the FBI’s experience on the Virtual Case File, particularly with regard to requirements management and the bureau’s reported efforts and plans going forward. Specifically, it is critical for the FBI to examine and control its requirements in the context of what capabilities are to be addressed through enterprise-provided services (e.g., records management and security) and what capabilities are to be provided through Sentinel. At the same time, it is essential that the bureau examine its requirements in the context of which capabilities can be provided by commercially available products and which cannot, and for those that cannot, how such requirements will be satisfied, if at all. As we and others have reported, this examination involves continuous but controlled analyses of trade-offs among stated system requirements, commercial product availability, and enterprise architecture constraints; it also involves such practical constraints as human capital and financial resources. Another area that is critical with respect to Sentinel is ensuring that decisions about the use of commercial components are based on an approach that includes deliberate and thorough research, analysis, and evaluation of components’ dependencies. In this regard, it will be important for the FBI to ensure that it understands the behavioral interaction and compatibility of commercial off-the-shelf (COTS) components in order to select components that can be integrated in a predictable and standard way. We have found based on our research and past work that doing so requires an effective methodology to gain and apply such knowledge; without such a methodology, building a COTS-based system can quickly lapse into trial and error, which is fraught with risks. For example, a trial and error approach can lead to expensive, ad hoc modifications, customized solutions, or unnecessary increases in the number and complexity of interfaces—all of which increases costs, delays delivery, and postpones realization of expected benefits. An effective approach would include (1) performing gap analysis between requirements and component capabilities, as mentioned above, (2) allocating requirements among the various products for a given system design option, (3) defining the interactions that need to occur among the components, (4) documenting decisions, and (5) using iterative prototyping to assess the interactions among the components. Another very important area particularly relevant to Sentinel is ensuring that the project’s plans explicitly provide the necessary time and resources for (1) integrating the commercial components with the FBI’s existing systems and (2) preparing users for the impact that the business processes embedded in the COTS products will have on how the users will be expected to do their jobs, including potentially new roles and responsibilities. Available research suggests that insufficient attention to this organization change management issue has been a major cause of COTS solution implementations failing to live up their expectations. Other management practices relevant to commercial component- based systems will be important on Sentinel, including (1) discouraging the modification of COTS products; (2) managing the systems configuration in a way that provides for evaluation, acquisition, and implementation of new, often frequent, releases of COTS products; and (3) ensuring that contractors are experienced in implementing COTS-based system solutions. In light of the importance of these and other areas, we have just initiated a review of Sentinel at the request of the Chairman and Ranking Member of the House Judiciary Committee; as part of this review, we plan to address many of these keys to project success. In closing, the FBI has made important progress, particularly in the last 12 months under the new CIO’s leadership, in establishing certain IT management and control capabilities that our research and evaluations show are key to exploiting technology to enable transformation. But although the bureau has come a long way from where it was just 18 months ago, establishing these capabilities is not enough. For the FBI to effectively use technology to transform itself and accomplish its goals, it will need to ensure that its capabilities are appropriately enhanced and extended and, most important, effectively implemented on all IT programs and projects. Nowhere will this be more crucial than on the Sentinel program. Because of the FBI’s stated approach to building Sentinel, it will be particularly important for the bureau to ensure that it follows the kind of acquisition management practices that our work has shown to be critical for commercial component-based systems to be successful. If it does not, the FBI increases the likelihood that Sentinel will encounter the same cost, schedule, and performance shortfalls as its predecessor, the Virtual Case File. Mr. Chairman, this concludes our statement. We 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 Randolph C. Hite at (202) 512-3439 or hiter@gao.gov. Other major contributors to this testimony included Gary Mountjoy, Assistant Director; Justin Booth; Barbara Collier; Kush Malhotra; Lori Martinez; Teresa Neven; Warren Smith; and Teresa Tucker. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Federal Bureau of Investigation (FBI) is in the process of modernizing its information technology (IT) systems. Replacing much of its 1980s-based technology with modern system applications and supporting technical infrastructure, this modernization is intended to enable the FBI to take an integrated, agencywide approach to performing its critical missions, such as federal crime investigation and terrorism prevention. At the request of the Congress, GAO has conducted a series of reviews of the FBI's modernization management. GAO was requested to testify on the bureau's progress to date in several areas of IT management. In addition, GAO discusses the importance of these areas for maximizing the prospects for success of the bureau's ongoing and future IT system investments, including the FBI's flagship Sentinel program; this program replaces the bureau's failed Virtual Case File project and aims to acquire and deploy a modern investigative case management system. In this testimony, GAO relied extensively on its previous work on the FBI's management of its IT processes, human capital, and tools, and it obtained updates on these efforts through reviews of documentation and interviews with responsible FBI officials, including the Chief Information Officer (CIO). Over the last 18 months, the FBI has made important progress in establishing IT management controls and capabilities that GAO's research and experience show are key to exploiting technology to enable transformation. These include centralizing IT responsibility and authority under the CIO and establishing and beginning to implement management capabilities in the areas of enterprise architecture, IT investment management, systems development and acquisition life cycle management, and IT human capital. The FBI has developed an initial version of its enterprise architecture and is managing its architecture activities in accordance with many key practices, but it has yet to adopt others (such as ensuring that the program office has staff with appropriate architecture expertise). The FBI is in the process of defining and implementing investment management policies and procedures. For example, it is performing assessments of existing systems to determine if any can be better used, replaced, outsourced, or retired, but these assessments have yet to be completed. The bureau has issued an agencywide standard life cycle management directive, but it has yet to fully implement this directive on all projects. Also, certain key practices, such as acquisition management, require further development. The FBI has taken various steps to bolster its IT workforce, but it has yet to create an integrated plan based on a comprehensive analysis of existing and needed knowledge, skills, and abilities. According to the CIO, he intends to hire a contractor to perform this and develop an implementation plan. The CIO also intends to establish a management structure to carry out the plan. The challenge now for the FBI is to build on these foundational capabilities and implement them effectively on the program and project investments it has under way and planned, none of which is more important than the Sentinel program. The success of this program will depend on how well the FBI defines and implements its new IT management approaches and capabilities, particularly those associated with acquiring a system made up of commercial components, which Sentinel is to be. In this regard, it will be crucial for the FBI, among other things, to understand and control Sentinel requirements in the context of (1) its enterprise architecture, (2) the capabilities and interoperability of commercially available products, and the (3) bureau's human capital and financial resource constraints. It will also be important for the FBI to prepare users for the impact of the new system on how they do their jobs. To the extent that the FBI does not take these steps, it will introduce program risks that could lead to problems similar to those that contributed to the failure of the Virtual Case File project. |
Interest rates are key assumptions in calculating the present value of promised future pension benefits. When interest rates are lower, more money is needed today to finance future benefits because it will earn less income when invested. At a 6-percent interest rate, for example, a promise to pay $1.00 per year for the next 30 years has a present value of about $14. If the interest rate is reduced to 1.0 percent, however, the present value of $1.00 per year for the next 30 years increases to about $26 because the $26, when invested, will earn the relatively small income associated with a 1-percent interest rate. Therefore, lower interest rate assumptions result in higher current liability and lump-sum amounts. The interest rate appropriate for measuring the present value of a plan’s pension liabilities may differ depending on a number of factors, including the purpose of the measurement. For example, the interest rate appropriate for measuring the present value of a plan’s pension liabilities on an ongoing basis may reflect the assumed rate of return that the plan is expected to achieve on the investment of its assets. On the other hand, the interest rate appropriate for measuring the present value of that same plan’s pension liabilities at plan termination may reflect interest rates implicit in annuity purchase rates. Before ERISA, few rules governed the funding of defined benefit plans, and there were no guarantees that participants would receive promised benefits. When the pension plan of a major automobile manufacturer failed in the 1960s, for example, thousands of defined benefit plan participants lost their pensions. As part of ERISA, the Congress established PBGC to pay pension benefits in the event that an employer could not. In addition to establishing PBGC, ERISA and IRC require employers to make minimum contributions to under-funded plans and prevent employers from making tax-deductible contributions to plans exceeding specified funding limits. “. . . the determination of whether an interest rate is reasonable depends on the cost of purchasing an annuity sufficient to satisfy current liability. The interest rate is to be a reasonable estimate of the interest rate used to determine the cost of such annuity, assuming that the cost only reflected the present value of the payments under the annuity (i.e., and did not reflect the seller’s profit, administrative expenses, etc.). For example, if an annuity costs $1,100, the cost of $1,100 is considered to be the present value of the payments under the annuity for purposes of the interest rate rule, even though $100 of the $1,100 represents the seller’s administrative expenses and profit. In making the determination with respect to the interest rate . . . other factors and assumptions (e.g., mortality) are to be individually reasonable.” In 1987, the range of permissible interest rates was from 10-percent below to 10-percent above the weighted average 30-year Treasury bond rate. In 1994, IRC was amended to reduce the upper limit of the permissible range of interest rates from 10 percent to 5 percent above weighted average rate. The House Report accompanying the bill stated that the 1987 legislation was intended to address the chronic under-funding of pension plans that had persisted since passage of ERISA. However, when measuring current liability, plans could decrease contributions by choosing an interest rate at the high end of the range. According to the report, the highest allowable interest rate was reduced to 105 percent to minimize a plan’s ability to decrease its current liability through the choice of interest rates. Additionally, in 1994, IRC was amended to require that employers determine the minimum value of certain optional forms of benefit, such as lump sums, using an interest rate no higher than the interest rate for 30-year Treasury bonds. To prevent employers from exceeding the maximum lump-sum payment specified by law, IRC also required employers to use an interest rate no lower than 30-year Treasury bond rates when calculating lump sums for certain highly paid employees. The Congress enacted the amendment for a number of reasons, including to ensure that rates for determining lump-sum payments better reflected prices in the insurance annuity market. Figure 1 shows, for 1987 to 2002, the range of allowable rates for current liability calculations and the allowable interest rates for lump-sum calculations. In November 2002, for example, the interest rate for 30-year Treasury bonds was 4.96 percent. That month, the 4-year weighted average rate for 30-year Treasury bonds was 5.58 percent, and the range of allowable interest rates for current liability calculations was 5.02 percent to 6.70 percent. Our analysis of the law and related congressional documents, and discussions with PBGC and Treasury officials, indicates that the interest rates used in current liability and lump-sum calculations were to have two characteristics. They were to: (1) reflect group annuity purchase rates and (2) not be vulnerable to manipulation by interested parties. Because actual group annuity purchase rates are unknown, the Congress specified rates to regulate an employer’s selection of an interest rate. While 30-year Treasury rates may have been close to group annuity purchase rates in 1987, PBGC was not aware of any available studies that documented that proximity. Officials said that, in addition to their possible proximity to group annuity purchase rates, the Congress adopted 30-year Treasury bond rates as the basis for interest rates because they could not be easily manipulated by interested parties. In this regard, Treasury bonds were actively traded in large markets and interest rate data for them were available from government sources, which helped ensure that the rates accurately represented market conditions and could not be easily manipulated by interested parties. However, the Department of the Treasury stopped issuing new 30-year Treasury bonds in 2001. Information needed to determine actual group annuity purchase rates is not available because annuity purchases are private transactions between insurance companies and employers who terminate their pension plan. To terminate a defined benefit plan, an employer determines the benefits that have been earned by each participant up to the time of plan termination and purchases a single-premium group annuity contract from an insurance company, under which the insurance company guarantees to pay the accrued benefits when they are due. The insurance company determines the employer’s premium by analyzing participant demographics and making assumptions about a number of variables, including: Interest rates. The assumed interest rate is used to determine the present value of projected benefit payments and costs at the annuity purchase date. Rates reflect current market rates for the securities in which the company is likely to invest the premium paid by the plan: generally fixed income securities, such as corporate bonds and mortgage- backed securities, with a relatively low credit risk. Interest rate assumptions may vary according to a number of factors at plan termination, including the projected cash flow of the plan and the yield curve on relevant securities.(See app. II.) Interest rates are adjusted to produce the insurer’s target level of capital requirements and profits from the annuity. Mortality rates. The assumed mortality rate reflects death rates associated with known or assumed characteristics of the participant population, with some adjustments to account for future potential improvements in mortality. Administrative expenses, taxes, and other costs. Administrative expenses for annuities include the cost of setting up accounts and tracking payments. Many insurers assume a flat rate for each annuitant in pricing some administrative expenses, such as account set-up charges. Some insurers reduce their interest rate assumption to account for those expenses. Information about insurance company assumptions, or premium payments and projected benefits, would be needed to estimate actual group annuity purchase rates; however, this information is often not available publicly. For example, employers who decide to terminate their pension plans typically contact a broker or consultant who then solicits bids for a group annuity contract from qualified insurance companies. Insurance companies bid on the contract through the broker or consultant. Negotiations or an auction may take place, which may further affect the price. Insurance companies typically do not disclose assumptions made during this process. Thirty-year Treasury bonds had several desirable characteristics when they were selected to approximate group annuity purchase rates in 1987. For example, the American Academy of Actuaries said that in 1987, the 30-year Treasury bond rate plus 0.3 percentage points (30 basis points) would have replicated group annuity purchase rates. This would indicate that the difference between the rate of return on 30-year Treasury bonds and the typical insurance company investment (such as long-term, high- quality corporate bonds) approximated the expenses and other annuity pricing factors that insurance companies would consider. The extent to which 30-year Treasury bond rates maintained their proximity to group annuity purchase rates would depend upon how closely Treasury rates continued to approximate insurance company investment rates of return, after adjusting them for expected administrative expenses and other annuity pricing factors. Additionally, policymakers said that 30-year Treasury bond rates were selected as the interest rate in 1987 in part because interested parties could not easily manipulate Treasury rates. Two characteristics of 30-year Treasury bonds that would indicate their rates could not be easily manipulated were their “transparency” and “liquidity.” Thirty-year Treasury bond rates were transparent. For a rate to be transparent, information about it must be widely available and frequently updated. The Federal Reserve Board of Governors, using data provided by the Department of the Treasury, published information on 30-year Treasury rates. The Department of the Treasury constructed 30-year Treasury bond rates using data collected from private vendors and reviewed and compiled by the Federal Reserve Bank of New York. Thirty-year Treasury bonds were liquid. For a bond to be liquid, the market in which it is traded must be large and active so that isolated events or erratic behavior by a single market participant are unlikely to have a major effect on market prices. According to a senior market analyst, the 30-year Treasury bond market in 1987 was likely the deepest and most liquid market in low risk 30-year bonds in the world. While 30-year Treasury bonds had several favorable characteristics when they were selected to approximate group annuity purchase rates, their issuance has since been suspended. The 30-year Treasury bond rates that are currently used as an interest rate for pension calculations are published by the Internal Revenue Service (IRS) based on rates for the last 30-year Treasury bonds, which were issued in February 2001. Actuaries and others have proposed a number of alternatives that could be used to control the selection of interest rates for current liability and lump-sum calculations, including (1) interest rates set in credit markets for various securities, such as long-term Treasury securities; long-term, high- quality corporate bonds; 30-year GSE bonds; and 30-year interest rate swaps; and (2) PBGC interest rate factors based on surveys of insurance company group annuity purchase rates. As shown in table 1, each alternative has characteristics that affect its likelihood of approximating group annuity purchase rates over time and its potential vulnerability to manipulation. For example, the closer an alternative’s interest rate levels match the net return on investment of insurance companies offering group annuities, the more likely that alternative will match group annuity purchase rates. Similarly, the closer the underlying credit rating of an alternative matches that of an insurance company offering group annuities, the more likely that alternative will match group annuity purchase rates. Various calculations can be applied to any interest rate to make it more suitable for its intended use. For example, each of the alternatives could be specified as: (1) a single monthly interest rate, which is currently the case for lump-sum calculations; (2) a corridor of interest rates around the 4-year weighted average of a monthly rate, which is currently the case for current liability calculations; or (3) a yield curve. According to several actuaries and others, specifying the alternative as a yield curve, instead of a single rate or corridor of rates around a weighted average rate, would have advantages and disadvantages. For example, specifying a yield curve might enable each plan to more closely approximate its group annuity purchase rate, but doing so might increase the difficulty of plan calculations and could prove relatively costly for small plans. The Department of the Treasury continues to construct rates for long-term bonds that could be used as a basis for selecting interest rates for current liability and lump-sum calculations. For example, the Treasury Department constructs a rate, called the long-term applicable federal rate, which approximates Treasury’s borrowing costs for securities with maturities exceeding 9 years. IRS publishes applicable federal rates. Figure 2 compares the long-term applicable federal and 30-year Treasury bond rates from 1987 to 2002. As can be seen, the differences between the two rates are generally less than 50 basis points. According to actuaries, insurance companies typically place group annuity premiums in fixed-income investments that have a higher rate of return than 30-year Treasury bonds. Treasury rates are lower than rates for other fixed-income investments of the same maturity because Treasury bonds have a lower credit risk. The proximity of Treasury bond rates to group annuity purchase rates may vary with changes in investor attitudes about credit risk. During periods of financial uncertainty, for example, investors may have a sharply heightened desire for safety, often referred to as a “flight to quality,” which could cause Treasury rates to decline relative to rates for other securities. Some investment analysts believe that one such period began toward the end of the 1990s. Despite concerns that long-term Treasury bond rates may not track closely with group annuity purchase rates during periods of financial uncertainty, Treasury bond rates retain some characteristics that may continue to make them a desirable interest rate. The government constructs the rates, and they are based on trades in large, active, and highly visible markets. For example, debt securities markets have shifted to the 10-year Treasury note to serve some of the same long-term benchmark functions as the 30-year Treasury bond has served in the past. Various financial investment firms construct indices of interest rates for long-term, high-quality corporate bonds, which are debt securities with maturity of 10 years or more issued by companies with relatively low credit risk. Figure 3 compares interest rates for the highest-quality corporate debt (bonds rated Aaa by Moody’s Investor Services), high- quality corporate debt (bonds rated Aa), and 30-year Treasury bonds for the period 1987 to 2002. As can be seen, corporate bonds with a Aa rating have higher interest rates than corporate bonds with a Aaa rating and 30-year Treasury bonds. Several actuaries and plan sponsor groups have suggested using one or more indices for long-term, high-quality corporate bond rates as the basis of an interest rate, while others suggest that these indices require adjustments before they can be used. Because insurance companies tend to invest in long-term corporate debt, these rates may track changes in group annuity purchase rates. An industry representative said that an unadjusted average of the indices would reflect insurance company expenses and other group annuity pricing factors because insurance companies typically achieve a higher rate of return on investment than is indicated by high-quality corporate bond rates. For example, investing in lower-quality bonds and private loans might achieve a higher rate of return than investing in high-quality corporate bonds. According to some actuaries, however, the indices would need to be adjusted for insurance company expenses and other factors before they would reflect the level of group annuity purchase rates. For example, a study for the Society of Actuaries said that a long-term corporate bond index rate minus 70 basis points would reasonably approximate group annuity purchase rates. However, the ERISA Industry Committee recommended using an average of corporate bond indices published by four firms as the interest rate without such an adjustment. Some actuaries and other pension experts have suggested that rates on some corporate bond indices might also need to be adjusted to make allowances for certain options before the rates would reflect the level of group annuity purchase rates. For example, corporate bonds are typically “callable,” meaning that the issuer can recall a bond before its maturity date. Because this creates some uncertainty to the holder of a corporate bond, this may also increase corporate bond rates relative to group annuity purchase rates. Corporate bond indices have properties that make them difficult to manipulate, but the corporate bond market may not be as liquid and transparent as the Treasury bond market. While the investment-grade corporate bond market is very large overall, with over $700 billion in issuance in 2001 and an estimated $4 trillion in outstanding value as of the third quarter of 2002, the market is segmented by differences in credit quality and issuer characteristics and, therefore, is less liquid than a large unsegmented market such as the market for Treasury securities. Additionally, interest rates for specific corporate bonds are based on quotes by traders, who usually estimate the current trading value of a bond and quote a rate based on its spread versus a comparable Treasury security. However, information on which to base corporate bond quotes is expected to become more widely available through a National Association of Security Dealer’s reporting system, which was launched in July 2002 and reports many large recent transactions. The new system may not alleviate all transparency concerns. Some financial experts said that corporate bonds are not as highly traded as other debt securities, which means that recent trades are often not available to verify current market conditions and rates. Certain corporate bond indices also have unique characteristics and complexities that could affect their suitability as an interest rate. Corporate bond indices are put together by private financial companies, which then compute an interest rate for the index based on underlying interest rates of the component bonds. Financial companies differ in how publicly they share information on which bonds they include in an index, how they weight component interest rates, and other factors and calculations that influence the published rate. Further, the reliability of the corporate indices can be affected by the reliability of the data source— actual transactions, quotes, or estimates of values or yields—on which they are based. Thirty-year rates on securities issued by GSEs are rates on bonds used to finance home ownership and other public policy goals. GSEs are private corporations, such as Federal National Mortgage Association (also known as Fannie Mae), that have the implicit backing of the U.S. government. In 1998, Fannie Mae began issuing debt through its benchmark program, which is intended to be high-quality, noncallable, actively traded debt. Fannie Mae attempts to issue benchmark debt periodically and in large amounts, similar to how Treasury issued 30-year bonds in the past. Several pension experts have suggested using 30-year Fannie Mae bond rates as the basis for the interest rate. Because GSE securities have received a credit rating comparable to, or higher than, the credit rating of the insurance companies that offer group annuities, GSE rates may approximate group annuity purchase rates. GSE-issued debt is generally of the highest credit quality but not considered credit-risk free like Treasury securities. Therefore, GSE rates would typically be expected to fall between Treasury rates and high-quality corporate rates of comparable maturity. Fannie Mae benchmark 30-year bond rates have properties that indicate a low likelihood that interested parties could manipulate them, but the securities have a relatively small market and relatively low trading activity compared with the Treasury and corporate bond markets. Outstanding volume of 30-year Fannie Mae benchmark debt was $14.9 billion as of December 2002, which was significantly less than the $589 billion in outstanding Treasury bonds as of November 30, 2002, and $4 trillion in outstanding long-term corporate bonds. According to Federal Reserve data of market transactions by primary dealers, trading in long-term GSE debt, which includes securities besides Fannie Mae benchmark debt, has been approximately $1.1 billion per day in 2002, which is much less than long- term Treasury securities. According to some experts, GSE debt is expected to continue to grow. With regard to transparency, Fannie Mae has also recently increased the availability of information on trades underlying the rates on its securities, which should increase rate transparency. Thirty-year interest rate swap rates are fixed rates in a contract between two parties, one of whom agrees to make fixed interest payments based on a specified amount of money in exchange for interest payments based on variable short-term rates on the same specified amount of money for the duration of the contract. For example, one party might agree to pay a 5 percent annual fixed rate on $1 million every year for the next 30 years in exchange for receiving a published 3-month interest rate that changes periodically for the next 30 years on the same $1 million. The 30-year swap rate in this case would equal 5 percent, and the predominant 30-year swap rate should move up and down with the expected level of short-term interest rates over the next 30 years. The “notional” amount of money ($1 million in the example) does not typically change hands between the counter parties in a swaps contract, and unlike most other fixed-income markets, interest-rate swaps do not involve the issuance of debt. By entering into a swap contract, the party that agreed to make fixed interest rate payments can help offset potential risk from variable-rate debt that it issues by making fixed interest payments in exchange for variable-rate payments. The variable-rate payments that it receives under the agreement can then be used to pay its debt holders. If interest rates go up, the debt issuer pays higher debt service payments but also receives higher interest payments from the swap agreement. Several pension experts have considered using 30-year interest rate swap rates as the basis for current liability and lump-sum calculations. Interest- rate swaps contracts are generally perceived to contain low credit risk for two reasons. First, the two parties involved in the contract typically have high credit ratings. Second, swap contracts typically use the London Interbank Offer Rate (LIBOR) as the floating rate, and the LIBOR has a low credit risk. The overall credit quality underlying LIBOR-based, interest-rate swap rates is likely comparable to that of high-quality corporate bonds. However, unlike some corporate bonds, swaps are not callable, so their rates would not need to be adjusted for such options and typically would be expected to fall below those on high-quality corporate bonds of similar maturity. The credit rating of insurance companies in the group annuity market is generally Aa or better. Interest rate swaps might give an accurate indication of an insurance company’s cost of borrowing funds. The interest rate swap market has characteristics that likely protect rates from potential manipulation. The swap market is considered to be very active, although the trading volume and amount outstanding for longer maturity interest rate swaps are believed to be low, relative to shorter maturities. The Federal Reserve Board publishes 30-year interest rate swap rates daily based on a private survey of quotes on new contracts offered by 16 large swaps dealers, and quotes on swaps contracts are updated throughout the day and visible via subscription services. A unique advantage of using swaps as an interest rate is that swaps do not require the issuance of debt; rather, swap rates reflect contracts between two parties. Because new contracts are produced every day, it is easier to update 30-year swap rates than other rates involving the issuing of debt, which happens only periodically. The international swaps market represents the largest of the alternatives considered, with an outstanding dollar-denominated value of swaps contracts estimated at approximately $20 trillion, with many new transactions conducted between parties every day. However, some experts have expressed concern about using the 30-year interest rate swaps because the swaps market is relatively new and the outstanding trading volume of 30-year interest rate swaps is believed to be much lower than for shorter maturity contracts. Of all the alternative rates, PBGC’s interest rate factors have the most direct connection to group annuity purchase rates. Figure 4 shows that the proximity of PBGC interest rate factors to 30-year Treasury bond rates varied from 1987 through 2002. PBGC interest rate factors are based on surveys of insurance companies conducted by the American Council of Life Insurers (ACLI) for PBGC and IRS. The survey asks insurers to provide the net annuity price for annuity contracts for plan terminations. PBGC develops interest rate factors, similar to interest rates, from the survey results, which are adjusted to the end of the year using an average of the Moody’s Corporate Bond Indices for Aa and A-rated corporate bonds for the last 5 trading days of the month. The adjusted interest rate factors are published in mid-December for use in January. The interest rate factors are then further adjusted each subsequent month of the year on the basis of the average of the Moody’s bond indices. According to PBGC, the interest rate factors, when used along with the mortality table specified in PBGC regulations, reflect the rate at which pension sponsors could have settled their liabilities, not including administrative expenses, in the market for single-premium nonparticipating group annuities issued by private insurers. Although PBGC interest rate factors do not consider the insurers’ administrative expenses, a May 2000 American Academy of Actuaries study of the PBGC interest rate factors found that they overstated termination liability by a relatively small amount, averaging 3 percent to 4 percent. The study characterized PBGC factors as mildly conservative. Despite its seeming desirability as a statutory rate because of its direct connection to group annuity purchase rates, PBGC’s interest rate factors may be more vulnerable to manipulation than other alternatives because they are not based on interest rates determined by the credit market and are less transparent. The identity of insurance companies surveyed and included in PBGC factors is not known, raising ambiguity about the extent to which the PBGC interest rate factors reflect the current broad market for group annuities. Additionally, PBGC calculations are not reported or independently reviewed. However, an insurance company representative said that insurance companies participating in the survey would likely agree to have that participation reported, and a PBGC official said that PBGC would not object to an independent review of its methodology for developing the interest rates. If the alternative results immediately in a higher allowable interest rate, which is likely for the alternatives we reviewed, using the higher rate would generally decrease minimum allowable lump-sum amounts and increase the number of participants whose benefit could potentially be distributed as a lump sum without their consent, decrease minimum and maximum employer contributions, and decrease PBGC revenue. The present value of a participant's benefit and related contribution and premium requirements would decrease because a higher interest rate increases the value of today’s dollars, relative to future dollars, and therefore fewer of today’s dollars should be needed to pay benefits in the future. However, if the alternative produces a lower interest rate, plan participants would receive larger lump sums, employers would need to increase contributions to their plans, and PBGC may experience an increase in revenue. The magnitude of these effects on lump sums, plan funding, and PBGC premiums would depend on the characteristics of the plan and its participants and how the rate is specified in the law. Additionally, if the Congress specifies the interest rate differently for current liability and lump-sum calculations, as is currently the case, the magnitude of the impact on each could differ. Furthermore, the effect on current liability and lump-sum calculations could be phased in over a period of time. In 1994, for example, the law phased in the reduction in the upper limit on interest rates for current liability calculations from 110 percent to 105 percent over a 5-year period. Additionally, requiring the use of an updated mortality table for current liability calculations might partially offset the effect that a higher interest rate would have on current liability calculations. During the period from January 1994 to July 2002, the monthly long-term corporate bond rates, GSE rates, and 30-year interest rate swap rates, were generally greater than the 30-year Treasury bond rate; the PBGC estimated rate was below the 30-year Treasury bond rate in the mid-1990s but was higher than the 30-year Treasury bond rate after 1998. As shown in figure 5, each rate’s relationship to the 30-year Treasury rate has changed over time. Figure 6 shows that the effect of a change in the interest rate used to calculate lump sums is greater for participants further away from retirement than for participants near retirement. The figure shows, for example, that a 1-percentage point increase in the interest rate from 5 percent to 6 percent would result in an 8 percent decrease in the lump sums of participants expected to retire almost immediately. On the other hand, that same 1-percentage point increase in the interest rate would result in a 36 percent decrease in the lump sums of participants expected to retire in 40 years. Reducing the dollar amount of each lump-sum distribution by using a higher interest rate may affect the number of employers that offer a lump- sum distribution and the number of participants electing to take a lump- sum distribution. Many employers already offer a lump-sum provision in their plans; however, if the rate used to calculate lump-sum distribution amounts were to increase, reducing the amount of each distribution, more employers may adopt lump-sum provisions in their plans in order to reduce costs. However, fewer participants might elect a lump-sum distribution if the value of such payments were to decline relative to the participant’s annuity benefit. Reducing the calculated present value of each participant’s benefit would also increase the number of participants whose benefit may be distributed by the plan as a lump sum without their consent. An increase in the assumed interest rate would cause the present values of some benefits, which are currently above the $5,000 limit for nondiscretionary distribution as a lump sum, to be reduced to the point that they fall below that limit. Because a higher interest rate would make plans appear better funded relative to current liabilities than they were before, employer contributions and PBGC revenue may decrease. For each 1-percentage point change in the interest rate, estimated current liabilities of a pension plan would change by 12 percent to 15 percent. Such a change may lower or eliminate the minimum employer contribution, referred to as the deficit reduction contribution, required by the IRC. Therefore, plans with a typical distribution of participants would see their liabilities reduced by 12 percent to 15 percent from a 1-percentage point increase in the interest rate. Figure 7 shows plans that were 80 percent funded would become more than 90 percent funded and would no longer have to make a deficit reduction contribution. A higher interest rate would also decrease allowable employer contributions for plans at the full funding limit. The IRC imposes full funding limitations that limit tax-deductible contributions under certain circumstances in order to prevent employers from contributing more to their plan than is necessary to cover promised future benefits. The full funding limitations established in 1987 and 1994, also known respectively as the 150-percent current liability limitation and the 90-percent current liability limitation, are required to be computed using the 30-year Treasury rate. If the rate with which they are required to be computed were to increase, more plans would be subject to the full funding limitation and, therefore, fewer would be allowed to make additional contributions. Employer premium payments to PBGC would decrease with the use of a higher interest rate because their plans’ current liabilities would become better funded. Generally, ERISA requires plans with assets that are less than the value of their accrued vested benefits to pay an additional premium, termed the variable-rate premium. Assuming an increase in the interest rate, some plans would no longer be subject to the variable-rate premium because the reduction in their current liabilities would cause them to reach the full funding limit and therefore become exempt from the payment. Plans still subject to the variable-rate premium would pay less because their current liabilities would become better funded. The choice of an interest rate has important implications for federal revenue, employer cash flow, and participant retirement income. A single percentage point increase in the interest rate would reduce a typical pension plan’s current liabilities by 12 percent to 15 percent, depending on participant demographics. Rules for using current liability calculations to determine minimum contributions, full funding limits, and PBGC premiums are extremely complex. However, in general, with an increase in the interest rate, some under-funded plans would become adequately funded, some plans would reach full funding limits, and additional plans would avoid variable-rate premiums. Additionally, the minimum allowable value of the lump-sum equivalent of a participant’s annuity benefit would decline. The magnitude of the decline would depend on the participant’s age and proximity to the plan’s normal retirement age. Each alternative has characteristics that may make it more or less appropriate as an interest rate. To the extent that policymakers continue to want the interest rate tied to group annuity purchase rates, the PBGC interest rate factors have the most direct connection to the group annuity market. Other than the survey conducted for PBGC, no mechanism exists to collect information on actual group annuity purchase rates. Although the PBGC interest rate factors may track group annuity purchase rates more closely than other rates do, the PBGC interest rate factors are less transparent than market-determined alternatives. Long-term market rates, such as corporate bond indices, may track changes in group annuity rates over time, but they are less directly connected to group annuity rates and their proximity to group annuity rates is uncertain. In addition, an interest rate based on some long-term market rates, such as corporate bond indices, may need to be adjusted downward to better reflect the level of group annuity purchase rates. Finally, the suitability of any interest rate used is likely to change over time and, unless some entity is given the responsibility for monitoring its relationship to group annuity purchase rates, the Congress and pension plans regulatory agencies will have difficulty determining when changes are needed. The Congress has made several ad hoc adjustments to the mandatory interest rate for pension calculations and can continue to make changes to the rate through the legislative process. Given the significant technical issues associated with such decisions as well as the time it takes to enact such a legislative change, the Congress could decide to delegate this authority to the executive branch and establish a process to monitor the mandatory rate. This would provide an opportunity for needed adjustments to the rate to occur in a timelier manner. We are offering suggestions to the Congress on a possible process for adjusting the mandatory rate as well as a way to periodically monitor the rate over time. To improve the timeliness of adjustments to the mandatory interest rate for pension calculations, the Congress should consider establishing a process for regulatory adjustments of the rate. The Congress should consider providing the cognizant regulatory agencies—Labor, Treasury, and PBGC—the authority under ERISA to jointly adjust the rate within certain boundaries as specified under the law. This could be done by the Congress establishing an interagency committee to adjust, with the input of key stakeholders, including plan sponsors, labor unions, actuaries and others, the mandatory interest rate. This could be a transparent process consistent with the Administrative Procedures Act. Under this option, the Congress could either require that the Committee’s adjustments to the mandated interest rate obtain congressional approval and be enacted into law or it could provide for congressional review and disapproval. The disapproval role could be similar to the role the Congress provides for itself under the Congressional Review Act. Under the act, federal regulations are held for 60 days to give the Congress the opportunity to pass a resolution of disapproval. This process provides the advantages of allowing for more timely adjustments to the interest rate if needed and providing the Congress with the opportunity to intervene if it so chooses without requiring direct congressional involvement for the adjustments to take effect. Whether the Congress decides to maintain its current role in setting and adjusting the mandatory interest rate or delegates this authority to the executive branch, it should consider establishing a process to better monitor changes to the rate in relation to group annuity purchase rates. If the Congress selects one of the market-based rates as the new mandatory rate, it should consider amending ERISA to require the cognizant regulatory agencies to (1) periodically evaluate the relationship between the rate and the group annuity purchase rates and report to the Congress and (2) provide comments about how any changes to the mandated interest rate they would recommend would likely affect federal revenue, employer pension contributions, plan funding levels, and participants’ lump-sum benefits. This would provide the Congress and the regulatory agencies an opportunity to respond in a timely manner to changes that might affect the relationship between the market-based rate and the group annuity purchase rate. Alternatively, if the Congress decides to select the PBGC interest rate factors as the mandatory interest rate, it should consider requiring an independent review to validate PBGC’s methodology and calculations for developing the factors and require PBGC to publish its methodology, both before they are selected as the mandated interest rate and periodically thereafter. We provided a draft of this report to Labor, Treasury, and PBGC. The agencies jointly provided written comments, which appear in appendix III. They generally agreed with our findings and conclusions and noted that our report will help interested parties better evaluate possible alternatives to the 30-year Treasury rate. They also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, the Secretary of Commerce, and the Executive Director of the Pension Benefit Guaranty Corporation, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-7215 or George A. Scott at (202) 512-5932. Other major contributors include Daniel F. Alspaugh, Joseph Applebaum, Kenneth J. Bombara, Mark M. Glickman, Michael P. Morris, Corinna Nicolaou, John M. Schaefer, and Roger J. Thomas. To determine the characteristics of a suitable interest rate, we reviewed pension laws and their legislative history with respect to the calculation of current liability and lump-sum amounts. We also interviewed officials at the Pension Benefit Guaranty Corporation (PBGC) and other policymakers who played a role in assessing alternative interest rates. We obtained information about group annuity pricing, and the availability of information about group annuity purchase rates, from representatives of the American Academy of Actuaries, the American Council of Life Insurers, the National Association of Insurance Commissioners, and insurance companies. To identify and examine the advantages and disadvantages of potential alternative interest rates, we interviewed representatives and reviewed documents from a number of government, pension plan sponsor, and investment entities, including PBGC, the Department of the Treasury, and Department of Labor. We also compared rates and other market statistics for suggested alternative debt securities with rates for 30-year Treasury bonds from 1987 to 2002. We discussed transparency, rate construction, and liquidity issues for the alternatives with economists at the Department of the Treasury and the Federal Reserve and with financial experts at the Bond Market Association, Federal National Mortgage Association, and pension plan consultants. To determine how alternative rates might affect employers, plan participants, and PBGC, we created hypothetical examples in which we tested the effect of changes in rate levels on current liabilities and lump- sum payments. We designed the hypothetical examples based on discussions with several actuaries and pension consultants, including PBGC and the American Society of Pension Actuaries. Additionally, in order to better understand the possible effects of a rate change on employers and plan participants, we spoke with several organizations that represent their interests. In order to better understand the implications of a change in the interest rate on PBGC, we spoke with PBGC, Department of Labor, Internal Revenue Service, and the Department of the Treasury. Group annuity purchase rates would vary among plans depending on the pattern of each plan's projected cash flows over time and the yield curve at the time the plan is terminated. Figure 8 shows the projected cash flow over a 40-year period for a sample plan at termination. The figure shows that, in the early years, payments to inactive participants of the sample plan, primarily current retirees, constitute a majority of total cash flow. In later years, however, payments to active participants make up the majority of total cash flow as current employees retire. All else being equal, the projected cash flows of plans with a larger percentage of retirees at termination than the sample plan would be more heavily weighted toward the early years, and the cash flows of plans with a larger percentage of active participants at termination would be more heavily weighted toward the later years. Surveys of insurance company group annuity pricing practices performed as part of two studies for the Society of Actuaries indicate that insurance companies use different methods to price group annuity products. In general, these methods may be described with respect to yield curves, which may be constructed for various types of securities, including Treasury securities, corporate bonds, and mortgages. Figure 9 shows, for example, two of the better know yield curves, the yield curves for on-the- run Treasury securities and zero-coupon Treasury securities, as of February 6, 2003. The yield for on-the-run securities reflects interest rates for securities that make semiannual interest payments before they mature, followed by a final payment of interest and principal at maturity. The yield for zero-coupon securities reflects interest rates, called spot rates, for securities that make a single payment at maturity. In figure 9, interest rates for the on-the-run securities that make coupon payments are lower than rates for zero-coupon securities, at the same maturity. This reflects the fact that coupon yields are a blend of zero- coupon spot rates, and the term structure of spot rates on February 6, 2003, was upward sloping. To determine the present value of plan cash flows using a zero-coupon yield curve, the spot rates at various maturities may be used as the interest rates for calculating the present value of cash flows at the corresponding points in time. For example, the spot rate at a 10-year maturity might be used to calculate the present value of a cash flow at 10 years because the timing of the single payment from the security would match the timing of the cash flow by the plan. In using a yield curve based on securities that make payments prior to maturity, maturity is inadequate for deciding which interest rate should be used to calculate the present value of a given cash flow because the security's interim interest payments must be considered. In these cases, a concept called “duration” may be used to select a single interest rate for all cash flows in the present value calculation. Duration measures the average time that it takes for a security to make all interest and principal payments, or a pension plan to make all benefit payments, with the time until each payment weighted by its present value as a percentage of the total present value of all payments. The total present value of a security's payments is its market price and the total present value of a plan's benefit payments is its current liabilities. An interest rate is selected for plan present value calculations from the yield curve that results in the same duration for the security and plan's cash flow. Duration is a measure of the sensitivity of a security's price, a lump sum, or a pension plan's current liability to changes in the interest rates used to calculate them. For example, actuaries estimate that the duration of the liabilities for pension plans with a “typical” distribution of participants is between 12 years and 15 years. Durations of 12 years and 15 years indicate that a 1-percentage point increase in the interest rate used to calculate a plan's liabilities would decrease those liabilities by roughly 12 percent and 15 percent, respectively. In February 2003, the duration of the 30-year Treasury bond issued in February 2001 was about 15 years. | Employers with defined benefit plans have expressed concern that low interest rates were affecting the reasonableness of their pension calculations used to determine funding requirements under the Employee Retirement and Income Security Act of 1974 (ERISA). ERISA requires employers to use a variation of the 30-year Treasury bond rate for these calculations; however, in 2001 Treasury stopped issuing the 30-year bond. This report provides information on (1) what characteristics of an interest rate make it suitable for determining current liability and lump-sum amounts; (2) what alternatives to the current rate might be considered; and (3) how using an alternative rate might affect plan participants, employers, and the Pension Benefit Guaranty Corporation (PBGC). GAO analysis indicates the Congress intended that the interest rates used in current liability and lump-sum calculations should reflect the interest rate underlying group annuity prices and not be vulnerable to manipulation by interested parties. In 1987, 30-year Treasury bond rates appeared to have both of these characteristics. However, the Department of the Treasury stopped issuing new 30-year Treasury bonds in 2001. Actuaries and other pension experts have proposed a number of alternative interest rates, including alternatives based on interest rates set in various credit markets--including composite rates for long-term Treasury securities, long-term high-quality corporate bond indices, 30-year rates on securities issued by government-sponsored enterprises, such as Fannie Mae, 30-year interest rate swap rates--and PBGC interest rate factors based on surveys of insurance company group annuity purchase rates. Each alternative has attributes that may make it more or less suitable as an interest rate for the calculation of current liabilities, PBGC premiums, and lump-sum amounts. Additionally, the relationship of any interest rate to the underlying group annuity purchase rates may change over time and, unless the relationship is periodically evaluated, the Congress may be unable to appropriately respond to those changes. If the alternative interest rate selected to replace the current statutory rate immediately results in a higher interest rate level, which is likely, it would generally lower participant lump-sum amounts, lower minimum employer funding requirements, and reduce PBGC premium revenue. However, if the alternative interest rate produces a lower interest rate level, plan participants would generally receive larger lump sums, some employers would need to increase contributions to their plans, and PBGC may experience an increase in revenue. |
As authorized by Congress, SBA established the 504 loan program to foster economic development; create or preserve job opportunities; and stimulate the growth, expansion, and modernization of small businesses. The 504 loan program provides long-term, fixed-rate financing to new or growing small businesses for fixed assets such as owner-occupied real estate or long-term equipment and machinery. Small businesses may apply for 504 financing through a CDC serving the area where the 504 project is located. CDCs are generally nonprofit corporations that provide funding to small businesses in order to contribute to economic development within their communities. There are about 270 existing CDCs located throughout the United States and Puerto Rico. A CDC must obtain certification from SBA to operate in a designated state; however, a few CDCs offer 504 funding in contiguous states contingent upon approval from SBA. The 504 loan program is intended to serve small businesses that might otherwise not have access to privately financed credit. Similar to other SBA loan guarantee programs, the 504 program has a “credit elsewhere” requirement, which means that small business applicants must be unable to obtain credit on reasonable terms from a nonfederal source. In 1994, Congress authorized SBA to implement two programs to provide qualified CDCs with delegated authority to carry out certain functions associated with 504 loans that had previously been reserved for SBA. These two programs are the Accredited Lenders Program (ALP) and the Premier Certified Lenders Program. The two programs allow participating CDCs, in some cases, to unilaterally make decisions related to various loan activities. As discussed previously, the scope of this review does not include issues related to the Premier Certified Lenders Program. SBA may designate a CDC as having ALP authority if the CDC meets certain statutory and regulatory requirements. The ALP designation is for 2 years and can be renewed. CDCs with ALP authority assume responsibility for thorough borrower credit and loan eligibility analysis on initial 504 loan applications, which we discuss in more detail later in this report. For a typical 504 loan project, the financing is provided by three parties: a third-party lender, a CDC, and a small business borrower. A third-party lender, typically a commercial bank, provides financing totaling at least as much as the 504 loan, generally 50 percent or more of the total 504 project financing. A CDC provides up to 40 percent of the financing through a loan (the “504 loan”) that is backed by a debenture that is fully guaranteed by SBA. The maximum amount a CDC can loan a small business borrower is $5,000,000 or $5,500,000, depending on the circumstances. Finally, the small business borrower must contribute at least 10 percent of the project financing. Exposure to default risk is tiered in the 504 loan program. The third-party lender’s loan is collateralized by a first lien on the project property. The CDC’s 504 loan is subordinate to the bank’s first position on the debt. A 504 loan is approved but not funded by the sale of the debenture until project-related construction is completed. Prior to the sale of the debenture and funding of the 504 loan, the borrower may obtain interim financing from a third-party lender, usually the same lender that provided the loan covering 50 percent of the total 504 project financing. After project-related construction is completed, the 504 loan is closed, and the debenture is sold by SBA’s central servicing agent. The central servicing agent distributes the appropriate funds to the small business borrower on behalf of SBA and the CDC. SBA’s Office of Capital Access (OCA) is responsible for overseeing the 504 loan program and CDCs. The Office of Financial Assistance (OFA) is an office within OCA that is responsible for the implementation of the 504 loan program. OFA’s primary responsibilities include structuring the 504 loan application process and making necessary adjustments to application criteria based on feedback from program participants and data analysis. OFA also monitors and oversees the requirements and program protocols that determine SBA’s ability to extend capital to small businesses. The Office of Performance and Systems Management, also within OCA, analyzes relevant data to inform final 504 policy decisions and provides system oversight for the central servicing agent, among other responsibilities. The Office of Credit Risk Management (OCRM), another office within OCA, is responsible for managing all activities regarding lender and CDC oversight. Its duties include assigning risk ratings to CDCs, conducting reviews, and preparing written reports addressing CDC oversight. Finally, OCA’s Office of Financial Program Operations is responsible for the execution of the 504 program through loan processing and servicing and through liquidation of 504 loans and management of the loan portfolio. SBA also has district offices and processing and servicing centers that have a role in the 504 program. Staff in SBA’s 68 district offices provide local assistance to participating CDCs and occasionally offer 504 program training courses to lenders and CDCs. They also conduct annual reviews of CDCs’ annual reports. In addition, district office counsel review 504 loan closing documentation, among other things. The Sacramento Loan Processing Center (SLPC) evaluates and issues loan guarantee commitments to eligible and creditworthy 504 loan applicants. In addition, there are two servicing centers, located in Little Rock, Arkansas, and Fresno, California, that serve CDCs based on the CDC’s location. These two servicing centers collectively handle the entirety of SBA’s commercial loan servicing activities, including the liquidation of 504 loans. The Office of Financial Program Operations is responsible for managing SLPC and the two servicing centers. We analyzed 504 loan program data for fiscal years 2003 through 2013 (as of Mar. 31, 2013) to identify loans approved and disbursed. Based on our analysis of this subset of loans, SBA approved loans totaling the largest amounts in fiscal years 2006 and 2007 (see fig. 1). In fiscal years 2008 and 2009, the total number of 504 loans approved and disbursed declined slightly. Section 504 of the American Recovery and Reinvestment Act of 2009 and Section 1122 of the Small Business Jobs Act of 2010 (Jobs Act) expanded the 504 program to allow debt refinancing under certain circumstances, which could account for some of the increase after 2009. The temporary debt refinancing program authorized by the Jobs Act expired at the end of fiscal year 2012. Based on our analysis, the top four types of small businesses funded by 504 loans were hotels, restaurants, doctors’ offices, and dentists’ offices. Respectively, these business types made up 12 percent, 5 percent, 4 percent, and 3 percent of all approved 504 loan dollars from fiscal year 2003 through 2012. Also, 85 percent of approved loans and dollars went to existing small businesses, and 15 percent went to new small businesses. SBA has established lending standards and guidance that address program requirements and protect against default risk. However, the agency has not provided CDCs with specific guidance on compiling and supporting data on jobs created or retained as a result of 504 loans, which is a key economic development goal of the 504 loan program. SBA also has established performance indicators for the 504 program and analyzed 504 program data to measure loan performance. SBA has established lending standards and guidance for CDCs that address 504 program requirements and protect against default risk. Table 1 contains some of the key requirements of the 504 program. SBA has issued regulations implementing the program as well as SOPs that address program requirements and provide additional guidance to CDCs on how to implement the program. SOP 50 10 Subpart C addresses the 504 loan program. In addition to the noneconomic development-related requirements listed in table 1, SBA officials said that credit underwriting standards and reviews of borrowers’ character and credit history, required by regulation and discussed in the SOP, are important requirements that protect against default risk. The SOP lays out the credit underwriting standards that CDCs must comply with as part of the 504 loan approval process. It specifies that CDCs must analyze each loan application in a manner consistent with prudent lending standards and that the cash flow of the small business is the primary source of repayment. In addition, the SOP discusses the types of financial analyses CDCs must perform as part of determining the viability of the project. SBA officials added that the third-party lender also performs its own credit underwriting of the 504 project, which provides additional review of the project and also helps protect against default risk. The majority of CDCs (7 of 10) we spoke with thought SBA 504 lending standards were sufficient in addressing default risk. Three of the 10 CDCs noted that it is the CDC’s responsibility to make sure it is underwriting good loans. SBA also requires reviews of borrowers’ character and credit history. Specifically, SBA requires that any person with 20 percent or more ownership interest in the small business applying for the loan be of good character. SBA officials said that they consider the 504 financing structure to be another protection against default risk. As previously discussed, 504 loan applications are initially approved but are not funded until after project- related construction has been completed (see fig. 2). A third-party lender—typically, the bank that provides 50 percent of the 504 project cost—provides interim financing to cover the 504 loan portion of the project (typically 40 percent) prior to construction being completed. As no SBA-guaranteed funds are disbursed until key aspects of the project have been completed, this mitigates the risk of default due to problems with construction or other issues that may arise prior to project completion. SBA officials told us that the time between approval and closing varies depending on the extent of construction. The debenture must be sold to fund the 504 loan within at least 4 years of the initial approval of the 504 loan. After the project is completed, the 504 loan is closed in accordance with SBA processes (discussed later in this report) and the debenture is sold. SBA officials told us that it is rare for loans that were initially approved not to eventually be funded by the sale of a debenture. However, as discussed previously, the third-party lender typically holds a first-lien position on collateral provided under the 504 loan financing agreement, exposing SBA to potentially higher losses in the event of a default. SBA’s commercial loan servicing centers review and approve certain servicing actions that are not delegated to CDCs. For all CDCs, SBA must approve certain servicing requests, such as exceptions to policy, compromise of the principal loan balance, increase in a loan amount, litigation plans, acquisition of title to any property in SBA’s name, or any other loan action for which SBA’s prior written consent is required by another loan program requirement. For regular CDCs and CDCs with ALP authority, SBA must approve servicing requests such as liquidation plans, substantial alterations of the terms or conditions of any loan document, and the compromise of any portion of the loan balance. Otherwise, regular and ALP CDCs generally have unilateral authority (meaning they can take action without prior SBA approval) to take all necessary action to service and liquidate the 504 loans for which they are responsible, subject to SBA’s right to take over the servicing or liquidation of any loan. CDCs must provide the appropriate commercial loan servicing center with written notice of each substantive unilateral loan action taken on a 504 loan. SBA’s central servicing agent collects loan payments and reports delinquencies on its secure website. However, CDCs are responsible for pulling reports and reporting 60-day delinquencies to SBA. SBA can also pull reports for the 504 program from the central servicing agent’s website. In October 2013, SBA created SOP 50 55, which consolidated servicing and liquidation guidance specific to the 504 loan program. SBA officials told us that they did this in order to make the 504 servicing guidance more user-friendly. While SBA guidance addresses many of the program’s key requirements and default risk, SBA has not provided specific guidance to CDCs on how to compile and support data they report on jobs created or retained due to 504 lending. When applicable, SOP 50 10 requires that CDCs provide an estimate of jobs to be created or retained in the loan application and update the estimate 2 years after a loan is disbursed. The SOP also states that a job opportunity does not have to be at the project facility, but 75 percent of the jobs must be in the community where the project is located. In addition, it states that job retention may be used if the CDC can reasonably show how jobs would be lost to the community if the project was not done. However, the SOP does not provide any explicit guidance on which jobs within the community may count towards jobs supported, nor does it explain how CDCs should reasonably show that jobs would be lost without a 504-supported project. The SOP also does not discuss the types of supporting documentation that CDCs should collect as part of compiling jobs supported information. In the past, we have commented that reporting on jobs created and retained can be problematic without clear guidance. Federal internal control standards emphasize the need for federal agencies to have control activities in place to help ensure that program participants report information accurately. Control activities are policies, procedures, and methods (such as guidance) that enforce management directives. Without clear and specific guidance on compiling jobs supported data, SBA cannot ensure that CDCs are compiling and supporting this information consistently and in accordance with SBA’s expectations. SBA has established indicators to track program performance, including a measure to track a key economic development requirement (number of jobs created or retained). As shown in table 2, these indicators are loans approved, small businesses assisted, small businesses assisted in underserved markets, jobs supported, active lending partners, cost per small business assisted, and approved applications originated electronically. SBA’s indicators are consistent with our standards, which recommend the establishment of performance measures that include key output measures as well as cost information, such as the unit cost per output. In fiscal year 2012, SBA met or exceeded its targets for six of its seven performance indicators, which is an improvement from fiscal year 2011, during which SBA met only one of its targets. In most cases, SBA has a process in place to collect and validate the data used to report on its performance indicators. Data for several indicators—loans approved, small businesses assisted, and active lending partners—are captured using SBA’s loan application and accounting systems. With respect to the underserved markets indicator, there are two components. Data on underserved populations are captured in SBA’s loan application and accounting systems. Loans are also geographically coded based on their business address in SBA’s loan accounting system, from which SBA can determine if the borrower’s project is in an underserved place. According to SBA, both its loan application and loan accounting systems are subject to periodic audits of their completeness and accuracy, and these audits provide validation of the collected data. According to SBA officials, the agency uses a separate technique for calculating the cost per small business assisted by compiling employee-reported information from annual activity surveys on which SBA staff indicate what portion of their overall time is spent working on the 504 program. SBA officials stated that supervisors review each survey for accuracy and completeness prior to submission. SBA validates the percentage of applications originated electronically by verifying that the information in its data sets coincides with what is shown in the loan application system and other data from its loan processing centers. However, SBA does not have a process for validating the jobs supported indicator, which is based on data reported by CDCs. According to SBA guidance, CDCs are to estimate the number of jobs supported at the time of the loan application and determine the actual number 2 years after a 504 loan is disbursed, as previously discussed. When compiling data for this indicator, SBA states that it uses the data captured in SBA’s loan application system at the time of loan approval. SBA officials who are responsible for reporting on the performance indicators have stated that no process currently exists for reviewing jobs supported information that SBA receives from CDCs. SBA’s lack of a process for reviewing jobs supported information received from CDCs will be discussed in greater detail later in this report. SBA staff analyze 504 loan data on a weekly, monthly, quarterly, and annual basis and prepare reports at each of these intervals. These reports analyze various aspects of 504 program performance, including loan activity (amount of dollars approved), loan status (current, stressed, delinquent), and cash flows. SBA officials said that they have been issuing these reports in some form since 2002 and that senior management, including the Assistant Administrator and managers in OFA and OCRM, review these reports. They noted that the purposes of these reports include aiding senior officials in tracking program performance and identifying potential issues that may have an impact upon the program’s performance. For example, a report may show a decrease in 504 loan applications, which may indicate a need for increased education about the 504 loan program to the small business community. SBA officials will then be able to determine whether or not to further promote the program to the lending community. SBA officials also noted that these reports have helped OCRM make changes to its lender oversight policies. For example, based on their reviews of some of these reports, OCRM has begun to stratify and compartmentalize its measurement of lenders’ compliance based on delegated authority (ALP or regular), risk, and size. We analyzed SBA data on 504 loans approved from fiscal year 2003 through fiscal year 2013 (as of Mar. 31, 2013) and found that 504 loans followed trends in the U.S. economy. Of the loans we analyzed, 10.8 percent were paid in full, 72.9 percent were current, 4.0 percent were stressed, and 12.3 percent had their debentures purchased (i.e., defaulted loans). As seen in figure 3, 504 loans (loans issued by CDCs and backed by SBA’s 100 percent guarantee) approved during the economic expansion period from 2005 through 2007 experienced higher default rates than any other year during the period from 2003 through 2012. Specifically, 504 loans approved from fiscal year 2005 through fiscal year 2007 had the highest default rates, and loans approved from fiscal year 2006 through fiscal year 2008 had the highest 18-month default rates. The default rate (the number of 504 loans whose debentures were purchased divided by the total loans approved in that fiscal year) for loans approved in fiscal year 2006 was 24.0 percent, the highest default rate for the observed period. Loans approved in fiscal year 2007 experienced the highest 18-month default rate at 4.9 percent. According to SBA officials, the 18-month default rate is an indicator of default primarily due to poor underwriting. The 504 default rates followed trends in the U.S. economy during this period. A study on the U.S. financial crisis stated that the crisis was triggered by a dramatic weakening of underwriting for U.S. subprime mortgages, beginning in late 2004 and extending into early 2007, which was “symptomatic of a much broader erosion of market discipline on the standards and terms of loans to households and businesses.” Further, SBA officials told us that the 504 loan program—which primarily finances commercial real estate—was negatively impacted by declining commercial real estate values beginning in 2008. According to data from Moody’s/REAL Commercial Property Price Index for 2002 through 2010, commercial real estate values increased by more than 85 percent from 2002 to the market’s peak in October 2007, at which point these values steadily declined, leveling off around 2010. SBA officials noted that this rapid decline in real estate prices was associated with increased 504 loan defaults. Declining prices can make refinancing difficult for borrowers and thus lead to a higher rate of commercial real estate loan defaults. However, because this period also overlapped with a general economic recession, some of the defaults may have also been due to a lack of general business revenue. We compared 504 loan data to the Federal Deposit Insurance Corporation’s quarterly analysis of Federal Financial Institutions Examination Council call report data on the performance of loans issued by U.S.-chartered commercial banks and found similar patterns. We analyzed call report data on construction and development loans and real estate loans (“commercial loans”). As shown in figure 4, the percentage of defaulted 504 loans that were disbursed within the 2 previous years and the nonaccrual rates for commercial loans both peaked in the first quarter of 2010. (Loans in nonaccrual status are nonperforming loans on which payments are at least 90 days overdue. We used nonaccrual status as a trend comparison because it was the weakest category of loans and most similar to purchases made by SBA. However, while trends may be compared, levels of nonaccrual rates and SBA default rates may not be compared, as SBA data represent early defaults only and the call report data represent nonaccruals for total outstanding loans.) Since then, both of these rates have experienced steady declines. We also compared the performance of different types of 504 loans approved in fiscal years 2003 through fiscal year 2013 (as of Mar. 31, 2013). Certain aspects of the 504 program performed better than others with respect to defaults. ALP loans, for example, had a default rate of 11.0 percent, compared to a default rate of 14.9 percent for regular 504 loans. Further, the 18-month default rate for regular 504 loans was 2.5 percent, while the same rate for ALP loans was lower at 1.6 percent. We also compared default rates for 504 loans made to new small business borrowers versus those made to existing small businesses. We found that existing small businesses experienced a default rate of 10.9 percent and a 1.6 percent 18-month default rate, while new businesses experienced a higher default rate of 19.8 percent and a 4.0 percent 18-month default rate. In addition, we analyzed 504 loan performance based on the location of the CDCs making the loans. Figure 5 illustrates default rates and 18- month default rates by state. Mississippi, Puerto Rico, Nevada, West Virginia, Arizona, and Florida had the highest rates of total defaulted loans. Puerto Rico, Alabama, Maine, Kentucky, West Virginia, and Florida had the highest 18-month default rates. According to SBA analysis, 504 loan program cash flows have consistently been negative since 2008. In fiscal year 2012, SBA purchased $871.9 million in defaulted 504 loan debentures, resulting in an overall net cash flow of negative $555.3 million for the year. Costs of 504 loan defaults are offset by collected fees and any recoveries. Net cash flow is equal to the sum of all fees and recoveries minus purchases. In fiscal year 2011, SBA purchased $1.3 billion in defaulted 504 loan debentures, and the program had a negative cash flow of $1.1 billion. In fiscal year 2010, the program experienced an even greater negative cash flow with a deficit of $1.4 billion after purchasing $1.6 billion in defaulted 504 loan debentures that fiscal year. According to SBA, the effects of the economic recession and the 504 loan program fee reductions that went into place under the American Recovery and Reinvestment Act and the Small Business Jobs Act of 2010 played a large role in the substantial cash flow deficit for fiscal years 2010 through 2012. From fiscal year 2008 through fiscal year 2013 (as of April 2013), SBA charged off 6,888 504 loans for a total of $3.4 billion in charged-off dollars. Charged-off dollars are the remaining balance of the loan, after all recoveries (the amount of funding recovered from defaulted loans) are made, that SBA charges off its balance sheet. During this period, SBA recovered $353.5 million from defaulted loans and calculated a recovery rate of 9.3 percent. SBA officials stated that the 504 loan program has a low recovery rate due in part to the fact that the third-party lenders (which generally provide at least 50 percent of the financing on the 504 project) typically have the first lien on the assets funded by the 504 loan and receive any recoveries before SBA. SBA’s guarantee of the debenture lessens the risk exposure associated with bank lending compared with a conventional commercial loan; SBA’s second lien position further transfers risk to SBA. By taking on this risk, SBA’s guarantee and lien position can facilitate lending and economic development that may not occur otherwise. SBA has processes to review CDCs’ eligibility to participate in the 504 loan program but, as previously mentioned, does not require or examine support for CDC-reported data on jobs created or retained. SBA also does not require SBA staff to review CDC compliance with the retained- earnings requirement when reviewing CDC eligibility. SBA has multiple processes for reviewing 504 loan applications; however, SBA does not verify certifications made by CDCs with ALP authority at loan closing that the small business borrower has not suffered any adverse financial changes since the 504 loan was initially approved. SBA has established a process for approving CDCs to participate in the 504 loan program, which includes a probationary period. Institutions that are interested in participating in the 504 loan program must first apply and receive approval from SBA to become a CDC. To be eligible, an institution must, among other things, (1) be a nonprofit corporation, (2) be in good standing with, and in compliance with all laws in, the state in which the CDC is incorporated and in any other state in which the CDC conducts business, and (3) have at least 25 members who actively support economic development in the proposed area of operations. A CDC applicant must apply to the SBA district office serving the applicant’s proposed area of operations for certification. The applicant is required to submit several documents, including evidence of its nonprofit status and an operating budget. District office staff make their recommendation and send the application to headquarters for final approval. If their initial application is approved, CDCs are then on probation for 2 years, meaning they do not yet have permanent status as a CDC. At the end of the 2-year probation, the CDC must petition SBA for permanent CDC status or a year-long extension of probation. SBA will decide whether to give a CDC permanent status based, in part, on comments received from the applicable servicing center, the CDC’s compliance with 504 requirements, and the performance of the CDC’s 504 loan portfolio. SBA annually reviews current CDCs’ continuing eligibility to participate in the 504 loan program. A CDC must submit an annual report to its SBA district office within 180 days after the end of its fiscal year and include audited or reviewed financial statements, as applicable, and such interim reports as SBA may require. In its annual report, a CDC must also indicate the job opportunities actually or estimated to be provided by each project. In addition to an annual report, CDCs must also submit to SBA a statement of personal history for each new associate and staff, reports of involvement in any legal proceedings, changes in organizational status, changes in any condition that affects its eligibility to continue to participate in the 504 program, quarterly service reports on each loan in its portfolio which is 60 days or more past due, and other reports as required by SBA. District office staff use an annual report review template to review CDCs’ annual reports before forwarding the reports to SBA staff in headquarters. The CDC annual report review template covers the CDCs’ 504 activity (e.g., number of loans approved and closed and delinquencies), organization (e.g., staff changes), and financial capacity (e.g., consistency in revenues and expenses). SBA officials stated that they use a monthly management report to track the status of CDCs’ annual report submissions. The annual report review template does not require SBA staff to confirm CDC compliance with certain key 504 requirements. For example, while the template requires SBA staff to review the number of jobs created or retained included in the annual report, it does not require staff to request and review supporting documentation for the figures reported. As discussed previously, each CDC is required to create or retain one job in its community for every $65,000 of 504 loan funds (every $100,000 if the project involves a small manufacturer). This requirement is a key requirement of the 504 loan program that promotes economic development within CDCs’ communities. SBA officials we spoke with acknowledged that they do not regularly request and examine supporting documentation to review the data on jobs supported in CDCs’ annual reports. However, SBA officials stated they may request supporting documentation if information appears to be unrealistic based on their experience. All 10 CDCs we spoke with stated that SBA had not requested supporting documentation for the jobs-supported information that they reported in their annual reports. As discussed previously, SBA also uses CDC-reported jobs data to report on the status of the jobs- supported performance indicator. Federal internal control standards emphasize the need for federal agencies to have control activities in place to help ensure that program participants report information accurately. Control activities are the policies, procedures, and methods that enforce management directives. In addition, our guidance on data reliability recommends tracing a sample of data records to source documents to determine whether the data accurately and completely reflect the source documents. Finally, our guidance on performance measurement states that data used to report on performance indicators should be sufficiently complete, accurate, and consistent. Because SBA does not request and review at least some supporting documentation during its reviews of CDCs’ annual reports, it lacks assurance that jobs data are supported and that CDCs are meeting a key economic development goal. It also lacks assurance that data it uses to report on the jobs-supported performance indicator are supported. The annual report review template also does not require an assessment of whether CDCs are complying with the retained-earnings requirement, which is intended to help ensure that earnings are used to fund additional economic development activities. SBA 504 loan program regulations require that any funds generated from 504 loan activity remaining after payment of staff and overhead expenses be retained by the CDC as a reserve for future operations or for investment in other local economic development activity. SBA officials stated that they review whether CDCs are complying with this requirement as part of their review of the financial statements in CDCs’ annual reports. However, the annual report review template does not list an item requiring an assessment of compliance with this requirement. In February 2013, SBA published a proposed rule that would require, among other things, a CDC’s Board of Directors to approve all investments over $2,500 and the CDC manager to approve investments of $2,500 or less to help ensure that the investments constitute appropriate economic development activity and do not compromise the adequacy of the reserves. However, the proposed rule does not include a description of plans for SBA’s review of the Board of Directors and CDC manager’s approvals of these investments. As of December 2013, SBA had drafted a final rule and submitted it to the Office of Management and Budget for review. Federal internal control standards indicate that federal agencies should have the information necessary to determine compliance with laws and regulations. Because the annual report template does not require a review of compliance with the retained-earnings requirement, SBA cannot be assured that district office or other staff are consistently reviewing CDCs’ annual reports for this requirement or that CDCs are compliant with this requirement. SBA has an additional eligibility review process for CDCs with ALP authority. According to SOP 50 10, these CDCs are accountable for thorough credit and eligibility analysis on loan applications and on servicing actions. SBA relies on the CDC’s credit analyses in making the decision to guarantee the debenture and complete the documentation in a reduced time frame. CDCs with the ALP designation have increased authority to process and close 504 loans. For example, 504 loan applications from CDCs with ALP authority are to be processed within 3 business days (versus 6 business days for regular loans). To be eligible for ALP authority, a CDC must, among other things, (1) have permanent CDC status, (2) attain priority status (with a Designated Attorney and SBA-required insurance), (3) have at least 20 504 loan applications approved by SBA within the most recent 3 years, and (4) have a portfolio of at least 30 active 504 loans. The CDC also must have a record of complying with SBA’s 504 policies and procedures and of satisfactorily underwriting, closing, and servicing 504 loans. A CDC applies for ALP authority first through its SBA district office. As part of its application, the CDC must provide, among other things, information on the experience and qualifications of its staff, the size and performance of its 504 loan portfolio, and compliance with 504 requirements. The CDC reviews by SBA must be current (within the past 2 years, if applicable), and the CDC must have received an assessment of “Acceptable” or “Acceptable with Corrective Actions Required.” The district office reviews the ALP application and forwards its recommendation to SBA headquarters staff for their final determination. In fiscal year 2013, 83 CDCs had ALP authority. ALP status is generally provided to CDCs for a period of 2 years, and according to SBA officials, renewals usually occur every 1 to 2 years. Ninety days prior to the end of its ALP term, a CDC should apply for renewal of its status and submit certain information to SBA. As shown in figure 6, SBA performs multiple reviews of 504 loan application packages to assess whether loan applications comply with program requirements. First, SBA’s Sacramento Loan Processing Center (SLPC) reviews all loan application packages to determine whether borrowers meet the program’s eligibility and creditworthiness requirements. Second, it also reviews all application packages to assess their completeness. Third, SLPC conducts periodic reviews of loan applications submitted under its streamlined processing guidelines— called the Abridged Submission Method (ASM)—to help ensure that a CDC’s abbreviated application submitted to SLPC is consistent with the complete loan application maintained by the CDC. At the time of application, the small business must meet SBA’s eligibility requirements and with the exception of size, must continue to meet these requirements through the closing and disbursement of the loan. The applicant must be an operating business; be organized for profit; be located in the United States; be small; and demonstrate a need for the desired credit. CDCs must certify that credit is not available elsewhere on reasonable terms, and the applicant must show that funds are not available from alternative sources, including personal resources of the principals. CDCs must submit all 504 loan application packages to SLPC for processing. The loan application covers key 504 requirements, including the borrower’s capital injection and economic development goals (jobs- created and public policy goals), as well as financial summary information, analysis of debt to net worth ratio, and cash flow information. CDCs must submit certain documents with the loan application, including eligibility information, a credit memorandum, a personal history statement for each officer and director and individuals with 20 percent or more ownership of the small business, a personal financial statement that is current within 90 days for individuals with 20 percent or more ownership, a participating lender commitment letter, a balance sheet and income statement, and a cash flow analysis. According to SBA’s guidance, the credit memorandum should provide a clear representation of the loan proposal and a complete analysis of the business, including an analysis of management’s ability and the business’s financial capacity. The memorandum should also explain why the transaction completely satisfies SBA’s credit standards. This memorandum, along with the other documents, demonstrates the CDC’s basis for the applicant’s ability to repay the loan. For example, SBA requires that a CDC perform a financial analysis of the applicant’s repayment ability based on historical income statements, tax returns, and projections. The CDC must also analyze cash flow because cash flow of the small business applicant is the primary source of repayment, not the liquidation of collateral. According to SBA officials, two SLPC loan officers review all 504 loan application packages to determine whether applicants meet SBA’s eligibility and creditworthiness requirements. During these reviews, the loan officers analyze financial data to determine if the loan satisfies SBA’s credit standards and use a checklist to determine whether the project fulfills SBA’s eligibility requirements, such as loan eligibility, jobs created and retained, and economic development goals. Upon completion of its review, SLPC issues an authorization to the CDC if the applicant meets the eligibility requirements and is creditworthy. Staff may screen out applications if information is missing or they have questions about the application. In effect, screen outs are similar to declines if the CDC fails to respond with additional information to resolve the issue. SBA must decline a loan request if, for example, a CDC’s financial analysis demonstrates that the small business applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business. See table 3 for information on the number of loans SBA approved, screened out, and declined in recent years. As the table shows, the largest number of loans approved in the past 4 fiscal years was in 2012. SBA officials told us that most of the screen outs and declines stemmed primarily from failure to meet eligibility standards, poor credit quality, or incomplete application packages. The officials also told us that the agency experienced an increase in loan applications in fiscal year 2012 because of the debt refinancing program authorized by the Small Business Jobs Act, which expired in September 2012. During the processing of each 504 loan application, SLPC staff also evaluate the completeness of the package and assign a letter grade to each application package. This letter grade is later converted to a numeric calculation to derive a CDC’s loan package score based on the 25 most recent loans submitted to SLPC. According to SBA officials, the grading is not an indication of the credit quality of the applicant but is simply a measure of how complete the application is. The grades range from “A” to “E,” with “A” being the highest possible rating. SBA converts these grades to numeric scores ranging from “1” to “5,” with “1” corresponding to “A,” so that a lower score indicates a better rating. SLPC determines the rating by evaluating whether the CDC (1) submitted all necessary documents and data, (2) completely and accurately analyzed the eligibility of the transactions, and (3) produced a complete and thorough credit analysis. SBA uses the loan package score, among other things, to determine a CDC’s eligibility to participate in ASM, a streamlined loan application processing procedure. Under this process, eligible CDCs can submit fewer documents in order to expedite the application process but must collect and maintain all required documentation in their files. According to SBA officials, while it generally takes about 6 business days to process an application package submitted by a regular CDC, the application package processing time for a loan submitted under ASM is about 3 business days. The ASM process facilitates a faster review of application packages because loan officers have fewer documents to review. To participate in ASM, CDCs must have ALP or Premier Certified Lender Program authority or have submitted 10 complete loan packages during the preceding 12 months and earned a numeric equivalent average loan package score of no more than “2.0” among the 25 most recent loan applications submitted to SLPC. While SBA officials told us that they do not keep historical records of CDCs that have ASM status, they said 128 CDCs had this status as of September 2013. In addition to evaluating all application packages, SBA’s policy requires that SLPC conduct periodic reviews of loan applications submitted under the ASM processing guidelines. According to SOP 50 10, SBA is to review 1 out of every 10 loan applications annually for each CDC. Each CDC will have at least 1 but no more than 12 loans reviewed during a 12- month period. To accomplish this, SLPC randomly selects ASM files to review. The primary purpose of these ASM audits is to help ensure that the abridged application is consistent with the complete loan application file that is maintained by the CDCs and to monitor CDCs’ continued eligibility to use ASM. Using a checklist, SLPC staff review the files selected for the audit to determine, among other things, whether all documents that the CDC collected were appropriately signed and dated, the project costs were consistent with the cost stated on the abbreviated application, financial analysis such as cash flow was correctly determined, and the size analysis was correct. We reviewed the results of five ASM audits conducted between January 2011 and August 2013 (1,047 files were reviewed) to determine whether SLPC was performing these audits as required and what the results showed. We found that SBA graded the 1,047 files and reported that the one major exception of concern identified during the first four audits was resolved satisfactorily. SBA reported that the fiscal year 2013 audit identified some exceptions, which resulted in a 1-year suspension of two CDCs’ ASM status. According to SBA officials, when CDCs lose their ASM status, they generally do so because they cannot provide all loan application documentation they should retain in their files, or the documentation they submitted to SBA is not properly signed. According to SBA’s policy, a CDC will also lose its ASM status if its average loan package score for the most recent 25 applications submitted to SLPC exceeds 2.0. In addition, the SLPC center director or a designee may approve or remove ASM status at any time for good cause including, but not limited to, misrepresentation, quality of post approval actions, and findings of internal or external audits of the CDC. As noted previously, significant time (as much as 4 years) can pass between approval of the initial 504 loan application and loan closing. Therefore, CDCs must issue an opinion, prior to closing, that there has been no adverse change in the borrower’s ability to repay the loan prior to closing. Prior to closing, a CDC must issue a certification that to the best of its knowledge there has been no unremedied substantial adverse change in the borrower’s ability to repay the 504 loan since its submission of the loan application to SBA. Regular CDCs must provide their finding to SLPC along with copies of financial statements that are current within 120 days supporting the finding of no adverse change. If SBA disagrees with a CDC’s determination of no adverse change, the debenture will not close until SBA has been satisfied that any adverse change has been remedied. CDCs with ALP authority are required to conduct a review to determine no adverse change but are not required to submit the results of this review to SBA. Instead, CDCs with ALP authority retain in their files the finding and copies of the financial statements on which they relied. According to SBA officials, if a CDC with ALP authority is in good standing, SLPC accepts certification that there has been no adverse change and does not perform an additional check. If a CDC with ALP authority is not in good standing, SBA officials stated that the loan file would not be approved. According to SBA officials, SBA reviews CDCs’ ALP authority for renewal every 1 to 2 years. We found that the assessment form SBA uses when determining whether to renew ALP authority does not include a step verifying that CDCs with ALP authority can support their certification that there was no adverse change in a borrower’s ability to repay the loan after initial submission of the loan application. SBA officials confirmed that they have not reviewed CDCs with ALP authority for compliance with this requirement. They stated that CDCs were closely scrutinized before SBA granted them ALP authority and that any problems with certifying that there were no adverse changes would show up in loan performance data or in OCRM reviews of the CDC. However, federal internal control standards require that federal agencies have control activities in place, such as verification, to ensure compliance with key program requirements. Furthermore, annually since 2005, more 504 funds have been loaned using ALP authority than regular authority. In fiscal years 2010 through 2012, the dollar amount of 504 loans made with ALP authority was about twice the dollar amount of regular 504 loans. Without incorporating a step in its renewal process to assess compliance with this requirement, SBA cannot be assured that CDCs with ALP authority are meeting the requirement. SBA district office counsel conduct other reviews in conjunction with loan closing. CDCs and their attorneys are responsible for the 504 loan closing, including compliance with all SBA loan program requirements. The SBA district office counsel reviews the closing documents submitted by the CDC for legal sufficiency and issues a legal opinion on whether SBA may guarantee the debenture. The SBA officials we spoke with told us that the counsel also reviews SBA’s authorization and all modifications transmitted by SLPC. If the counsel determines that a loan was not closed properly, he or she notifies the CDC of the deficiencies in the package as well as changes needed to address the concern. If the CDC is unable to provide the information or otherwise alleviate the concern, the counsel will not submit the debenture for sale. According to SBA officials, SBA rarely declines to close a debenture. Usually, declines occur early in the loan approval process. SBA has made several changes to its processes used to monitor CDC compliance with 504 program requirements, including revising the areas to be reviewed and the types of reviews to be conducted. However, the processes have not been finalized, and review of certain key requirements is not yet documented. Further, SBA is updating its corrective action process to improve review of actions taken. According to the OCRM Director, SBA is finalizing a new process for monitoring CDCs and developing its first risk plan for 2014. According to SBA officials, the plan will be used to monitor CDC performance and enforce 504 program requirements. They noted that it will include the OCRM Director’s objectives for the year ahead; lender and loan portfolio stratifications; a description of the types of lender reviews OCRM will be undertaking; a proposed list of planned reviews; proposed supervisory and enforcement actions; and a section on matters internal to OCRM (e.g., policy updates, training, and staffing). OCRM expects to finalize this plan by March 31, 2014. As a part of its new process, OCRM is incorporating risk as a criterion for selecting CDCs for review. Based on data in its Loan and Lender Monitoring System, SBA assigns all CDCs a quarterly risk rating of 1 to 5. A rating of “1” reflects lower risk to SBA, and “5” reflects greater risk. In a November 2009 report, we recommended that SBA use its risk ratings to select CDCs for review. At that time, the agency targeted CDCs for review based on the size of their portfolios, focusing on CDCs with balances of at least $30 million. In fiscal year 2012, OCRM began incorporating risk ratings into its CDC selection criteria. OCRM placed emphasis on CDCs that were rated “4” or “5” (higher risk). In fiscal year 2013, SBA selected a number of CDCs for review and prioritized them based on risk ratings and other factors, such as portfolio size, time elapsed since last review, and last review assessment. The OCRM Director also told us that the agency is developing a new process for assessing CDCs that have been selected for review, but this process is not yet finalized. Draft guidance on this new process, known as SMART, shows that SBA has developed preliminary benchmarks to assess each CDC’s performance and compliance under five areas: Solvency and financial condition, Management and board governance, Asset quality and servicing, Regulatory compliance, and Technical issues and mission. Figure 7 illustrates the SMART components and examples of preliminary benchmarks that are to be used to assess CDCs’ activities. In February 2014, the OCRM Director told us that the agency expects to finalize these benchmarks by March 31, 2014. In general, once CDCs have been selected for review, the benchmarks and CDC risk ratings are to be used to determine the level of review. Under the new review process, SBA plans to conduct three types of risk- based reviews—select analytical reviews, targeted reviews, and full reviews (see fig. 8). A select analytical review will be OCRM’s initial review of a CDC’s operations and performance. A targeted review will examine specific components of SMART in more detail, and a full review will examine all components of SMART in more detail. Targeted and full reviews are only to be performed if the select analytical review indicates that they are warranted. For each CDC selected, OCRM plans to notify the CDC of the planned select analytical review and request documents such as a current organizational chart, interim financial statements, and credit policy manual. In addition, based on its draft guidance, OCRM plans to use a questionnaire to inquire about, among other things, any significant changes regarding delegations, responsibilities, and structure since the CDC’s last risk-based review or submission of its last annual report. The OCRM Director said OCRM also intends to solicit information about the CDC from SLPC, the commercial loan servicing center that works with the CDC, and SBA’s district office counsel. According to SBA officials, OCRM does not initially plan to request loan files in connection with select analytical reviews. However, they stated that OCRM could decide to review loan files in the future. To perform a select analytical review, OCRM plans to use a CDC profile assessment template to analyze and document review of a CDC’s activities aligned with each of the SMART components. Further, OCRM intends to summarize the findings of the review as well as the review assessment on a report summary template. Based on our review of draft guidance, each component of SMART is to receive one of three assessment scores—Preferred, Acceptable, or Less than Acceptable with Corrective Actions. In addition, CDCs are to receive one of four overall review assessments after their review is completed— Acceptable, Acceptable with Corrective Actions Required, Marginally Acceptable with Corrective Actions Required, or Less than Acceptable with Corrective Actions Required. Select analytical reviews are to be conducted remotely, and the results will determine whether a targeted or full review is necessary. They also are to be used to assess CDCs for renewal of their ALP authority. OCRM plans to align risk-based reviews with ALP renewals because during its risk-based reviews OCRM analyzes information similar to that reviewed during ALP renewals. In addition, OCRM has expanded the scope of the ALP renewal analysis to include a review of issues such as the structure of the organization, board-approved internal control policy, and industry concentrations. In fiscal year 2013, 83 CDCs had ALP authority. Of those CDCs with ALP authority, 65 were due for renewal in fiscal year 2013. SBA reported that they completed 15 of those renewals in fiscal year 2013. SBA officials commented that they are addressing the backlog by dividing the process by risk rating. They explained that most of the CDCs with a 4 or 5 risk rating are undergoing a SMART select analytical review before a longer- term ALP renewal is considered. OCRM provided lenders with risk ratings of 1, 2, and 3 with temporary extensions of their ALP status. SBA officials also noted that OCRM has devoted additional staff to reviewing and processing ALP renewals beginning in calendar year 2014. According to SBA’s draft guidance, if a select analytical review identifies risks, OCRM is to perform a targeted or full review. In a targeted review, OCRM would focus on the aspects of the CDC and its operations that warrant further attention, based on the SMART components. For example, the OCRM Director told us that OCRM may target areas such as loan originations, loan authorizations that may not have been funded, or financial statement matters. SBA officials told us that in deciding to conduct a targeted review, OCRM plans to consider a CDC’s risk rating and loan purchases and apply some judgment in addition to the results of the select analytical review. OCRM plans to conduct a full review when the select analytical review identifies issues that are critical or crucial in nature. A full review would involve examining all components of SMART. A targeted or full review may be conducted remotely or on-site. An on-site review is to be used if CDCs do not have technological capabilities for remote reviews or if OCRM needs to observe an activity as it is being performed. In 2013, OCRM initiated 20 select analytical reviews and 5 on-site reviews using the SMART protocol. According to the OCRM Director, the purpose of these reviews was to continue developing the new compliance processes, as well as providing oversight of CDCs. There were more total reviews in fiscal year 2013 than in previous years but fewer on-site reviews. In fiscal year 2011 and fiscal year 2012, SBA conducted 21 and 19 on-site risk-based reviews, respectively. Staff from various SBA offices and contractor staff hired to conduct risk-based reviews participated in the fiscal year 2013 reviews and will continue to do so. Previously, only contractors, not SBA staff, conducted on-site reviews. SBA officials told us that as part of SBA’s targeted and full risk-based reviews, OCRM has begun to request two samples of loan files— origination loan files and servicing loan files. OCRM currently uses two checklists to review individual loan files. One checklist primarily includes questions about loan origination and routine servicing such as whether the business was organized for profit, whether there was written evidence documenting that credit was not available elsewhere without the guarantee provided by SBA, and whether monitoring of continued creditworthiness is considered sufficient and describes the evidence in the file. The other checklist includes questions for defaulted loans in liquidation status on loan closing and servicing, such as whether evidence shows that all closing documents were legally sufficient and that the CDC engaged in intensive servicing activities when a loan became 60 days past due. OCRM plans to eventually merge the checklists as it refines the new process. According to SBA officials, prior to 2012 OCRM did not routinely examine a sample of servicing files. Instead, it performed reviews of CDCs’ servicing files on an ad hoc basis. SBA officials told us that servicing issues emerged in 2012 because there was a lag effect for real estate loans after the economic downturn. Many aspects of the new SMART process have not been finalized. For instance, the OCRM Director told us that the agency is assessing the results of a benchmark study, which will be used to finalize the benchmarks used to rate CDCs on the various SMART components. Also, OCRM has not yet finalized the assessment templates used for select analytical reviews or the checklist used for targeted and full reviews. According to the OCRM Director, these forms are evolving with OCRM’s review processes. In addition, OCRM is considering creating a composite CDC risk grade, similar to a bank’s CAMELS rating, to assess the overall condition of a CDC. These grades would help communicate to CDCs how they are doing with respect to the overall quality of their operations, compliance, and portfolio risks. According to the OCRM Director, SBA expects to fully implement SMART by June 1, 2014. As noted previously, OCRM currently uses two checklists to review loan files as a part of its risk-based reviews. One checklist primarily focuses on origination and routine servicing, while the other focuses on loan closing and servicing of problem loans. However, OCRM’s current compliance file review checklists do not require a review of documentation supporting the numbers reported by CDCs for jobs created or supported. SBA officials told us that in the past OCRM did not examine documentation supporting jobs data, but that such a review would be included under the SMART process. Based on our review of SBA’s draft SMART protocols, under the Asset quality and servicing component OCRM staff are expected to determine whether 504 projects meet specified economic development goals and job opportunity criteria. Furthermore, under the Technical issues and mission component, staff are expected to determine whether a CDC’s loan portfolio meets the required minimum job opportunity average. While some oversight has been built into the SMART guidance, the guidance does not call for a review of documentation supporting the jobs numbers. OCRM’s current compliance file review checklists also do not require the review of whether retained earnings were used in compliance with CDC eligibility requirements. SBA staff told us that in the past OCRM did not examine CDCs’ compliance with the requirement that CDCs retain excess funds generated from the 504 loan program as a reserve for future operations or for investment in other local economic development activity, but that assessing compliance with this requirement would be included under SMART. Based on our review of SBA’s draft SMART protocol, under the Solvency and financial condition component OCRM is expected to analyze whether the CDC has sufficient cash flow to support ongoing operations and the reserve requirement. However, there is no specific mention of verifying compliance with the retained-earnings requirement concerning how the reserves can be used. According to federal internal control standards, federal agencies should have control activities in place to help ensure compliance with key requirements. Without documenting in its examiner checklists or guidance that key requirements—such as the jobs-supported and retained-earnings requirements—should be reviewed, SBA cannot be assured that SBA and contractor staff are reviewing compliance. SBA is revising its corrective action process. According to the OCRM Director, if SBA identifies weaknesses in a CDC’s operations during its reviews, it may request that the CDC take corrective actions to address the deficiencies. For instance, if SBA determines that a CDC’s credit analysis is deficient, the CDC may be required to modify its process for performing credit analyses. OCRM documents its review findings in a report and notifies the CDC in writing if there is a need for corrective actions. In its September 2012 report, SBA’s Inspector General reported that SBA had closed out corrective actions related to the 7(a) program without verifying their implementation and effectiveness. The Inspector General recommended that SBA develop and implement a corrective action follow-up process to require analysts to monitor lender progress in implementing corrective actions and obtain and verify evidence from lenders to ensure corrective actions have been effectively implemented prior to close-out. While the Inspector General’s review pertained to the 7(a) loan program, the process in use at the time also was used for the 504 loan program. SBA officials told us they are in the process of developing a new corrective action process to capture more specific findings from reviews and to determine whether testing of a CDC’s corrective responses is needed prior to the CDC’s next review. See table 4 for information on the number of reviews that required corrective actions in recent years. From October 1, 2010, through March 31, 2012, SBA identified some frequently occurring findings, including inadequate verification of the borrower’s contribution prior to closing, failure to meet Internal Revenue Service tax transcript requirements prior to closing, and failure to assess creditworthiness periodically. According to the OCRM Director, SBA expects to complete the new processes for resolving corrective actions by March 31, 2014. SBA is developing new processes for monitoring 504 loan performance and CDCs’ compliance with 504 requirements. However, SBA’s current processes and planned improvements do not sufficiently address all program requirements. Creating and retaining jobs is a key economic development goal of the 504 program. While SBA has provided general guidance to CDCs and its staff on compliance with this requirement, it has not provided CDCs with specific guidance needed to consistently and accurately compile and support jobs information. Further, SBA’s current annual report review and risk-based review guidance do not require SBA staff to request and review supporting documentation for CDC-reported data on jobs supported or assess compliance with the requirement that CDCs invest retained earnings in local economic development. Federal internal control standards require agencies to establish control activities to ensure that program participants report information accurately and comply with requirements. Without developing guidance for CDCs and reviewing at least some documentation on jobs data and compliance with the retained-earnings requirement, SBA cannot be assured that self- reported information on jobs supported is consistent and accurate and that CDCs are following program requirements. In addition, while SBA has established multiple reviews for 504 loan applications, the agency does not verify certifications made by CDCs with ALP authority that borrowers are still able to repay a 504 loan at loan closing, which can take place years after the loan was initially approved. Again, federal internal control standards require agencies to have control activities in place, such as verifying compliance with key requirements. Annually since 2005, more 504 loans have been made using ALP authority than regular authority, making the need for some review of these certifications all the more important. Without verifying self-certifications made prior to loan closings, SBA lacks assurance these CDCs are in compliance with SBA credit analysis requirements established to help protect against default risk. To help ensure that CDCs are meeting the 504 loan program’s jobs- supported requirement, we recommend that the SBA Administrator take the following actions: Develop specific guidance on how CDCs should compile information on jobs created or retained and on the documentation CDCs should maintain to support these data. When reviewing CDCs’ annual reports, implement a process to assess the supporting documentation for a sample of the jobs data that CDCs report. When finalizing the agency’s risk-based review procedures, include in the checklists or guidance for examiners a requirement to review supporting documentation on the number of jobs created or retained by 504 loan projects. To help ensure that CDCs are meeting the 504 loan program’s requirement that CDCs invest retained earnings in local economic development, we recommend that the SBA Administrator take the following actions: When reviewing CDCs’ annual reports, add an item to its annual report review template requiring SBA staff to assess compliance with this requirement. When finalizing the agency’s risk-based review procedures, include in the checklists or guidance for examiners a requirement to review compliance with the retained-earnings requirement. To help ensure that CDCs with ALP authority are taking the necessary steps to determine whether there has been no adverse change to borrowers’ financial condition prior to loan closing, we recommend that the SBA Administrator include oversight of CDCs’ compliance with this requirement in the agency’s process for renewing ALP authority. We requested comments from SBA on a draft of this report, and the agency provided written comments that are presented in appendix II. SBA generally agreed with our recommendations and outlined steps it plans to take to address them. In response to our recommendations regarding the 504 loan program’s jobs-supported requirement, SBA stated that it will (1) work to provide guidance on the compilation of job creation and retention information and document maintenance requirements and (2) consider ways to phase in the implementation of jobs data sampling and review of supporting documentation in its annual report and risk-based reviews. In regard to our recommendations concerning the 504 loan program’s retained-earnings requirement, SBA stated that a final rule discussing 504 loan program updates (not yet finalized at the time of SBA’s comment letter) will require that a CDC’s annual report include a written report on the CDC’s investments in local economic development. SBA stated that after publication of the final rule, it plans to work to provide additional guidance on the retained-earnings requirement and consider ways to review compliance with this requirement in its annual report and risk- based reviews. In response to our recommendation regarding CDCs with ALP authority, SBA stated that it will consider ways to review compliance with the requirement to determine whether there has been an adverse change to borrowers’ financial condition prior to loan closing during SBA’s ALP renewal processes and risk-based reviews. As noted in the report, a 504 loan is not closed until after project-related construction is complete, which can be up to 4 years after initial approval. Given that a borrower’s financial condition can change over time, we reiterate the importance of assessing CDCs’ compliance with this requirement. SBA also provided several technical comments, which we incorporated as appropriate. In one technical comment regarding our discussion of the need for SBA to review some supporting documentation for jobs data during its review of CDCs’ annual reports, SBA’s Associate Administrator of the Office of Capital Access stated that validating job creation and retention data can only occur following loan disbursement and is a separate issue from the indicator on jobs supported that SBA includes in its performance report. As we discuss in the report, SBA uses the data captured in SBA’s loan application system at the time of loan approval (which are estimates) when compiling the jobs supported indicator. CDCs’ annual reports contain both estimated and actual jobs data for 504 loan projects. Therefore, adding reviews of supporting documentation for a sample of jobs data—both actual and estimated—during the annual report review process could also inform CDCs’ processes for compiling estimates for jobs created or retained in their loan applications, and provide better assurance that the data used for the jobs supported indicator are supported. 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 SBA and interested congressional committees. The report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact William B. Shear at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to examine (1) the lending standards and performance indicators that the Small Business Administration (SBA) has established to help ensure that loans meet key requirements, as well as 504 loan program performance, (2) the extent to which SBA has implemented procedures to help ensure that certified development companies (CDC) are eligible to participate in the program and that loan applications comply with program requirements, and (3) the extent to which SBA has implemented procedures to monitor CDC compliance with program requirements. To address these objectives, we reviewed relevant laws and regulations; GAO and SBA Inspector General reports; SBA guidance for the 504 loan program, including Standard Operating Procedures (SOP), the form used to apply for 504 loans, and checklists for different SBA processes; and internal SBA guidance for its staff and examiners. We interviewed relevant staff at SBA, the National Association of Development Companies (the trade association for the 504 loan program), and staff from 10 CDCs. We selected these CDCs to ensure a range of CDCs based on factors such as size and geographic location. Specifically, we selected one CDC from each of SBA’s 10 regions based on loan portfolio size. We used the five peer groups that SBA uses for monitoring purposes to establish which CDCs were large versus small. To ensure a mix of large and small CDCs and geographic locations, we selected 7 large CDCs from the regions with the largest 504 loan portfolios and 3 small CDCs from the regions with the smallest 504 loan portfolios. As a secondary measure, we considered the default rates, as calculated by GAO, of the selected CDCs to ensure that we selected CDCs that had a mix of default rates. Five of the 10 CDCs had default rates below 10 percent, and 5 had default rates of 12 percent or higher. Due to ongoing litigation related to a subset of CDCs known as Premier Certified Lenders, we did not assess loans made using the specific additional authority that SBA may provide to these lenders. To respond to our first objective, we reviewed relevant laws, regulations, and SOPs to identify SBA’s lending standards and servicing policies. We then compared SBA’s guidance on compiling data on jobs created and retained with 504 loan funds to federal internal control standards. We also reviewed SBA’s annual performance reports for fiscal years 2010 through 2012 to identify SBA’s performance measures for the 504 loan program and assessed whether they addressed the program’s economic development goals and were consistent with GAO standards for performance measurement. In addition, we reviewed documentation on SBA’s processes for reviewing and validating its performance indicators. We also analyzed 504 loan data for fiscal years 2003 through 2013 (as of Mar. 31, 2013) to determine the composition and performance of the current 504 loan portfolio. For example, we analyzed default rates (the number of 504 loans whose debentures were purchased divided by the total loans approved in that fiscal year) and 18-month default rates for loans approved in fiscal years 2003 through 2012. We only analyzed loans that were approved as of March 2013 and had been disbursed. According to SBA, the 18-month default rate is an indicator of default primarily due to poor underwriting. We also calculated default rates weighted by the approved values of loans and found the rates comparable to the rates discussed above. For context, we reviewed Moody’s/REAL Commercial Property Price Index data for 2002 through 2010 on commercial real estate values. We also compared 504 loan data to Federal Deposit Insurance Corporation quarterly analysis of Federal Financial Institutions Examination Council call report data on nonaccrual rates for commercial loans, specifically construction and development loans and real estate loans. We calculated the nonaccrual rate for commercial loans as the percentage of loan dollars in nonaccrual status. Loans in nonaccrual status are generally loans that are maintained on a cash basis because of the deterioration in the financial condition of the borrower and for which principal or interest has been in default for at least 90 days (unless the loan is in “the process of collection” and “well secured”) or payment in full is not expected. We divided the dollar value of loans in nonaccrual status by the total amount of outstanding loan dollars for the quarter of that calendar year. We used nonaccrual status as a trend comparison because it was the weakest category of loans and most similar to purchases made by SBA. In order to compare 504 loan data with this rate, we calculated the percentage of defaulted 504 loans that were disbursed within the past 2 years for each quarter of the calendar year. However, while trends may be compared, levels of nonaccrual rates and SBA default rates may not be compared as SBA data represent early defaults only and the call report data represent nonaccruals for total outstanding loans. We also compared 504 loan default rates and 18- month default rates by geographic location by analyzing these rates for loans based on the location of CDCs making the loans. This analysis covers all states with CDCs, the District of Columbia, and Puerto Rico. (There is no CDC located in Alaska.) To assess the reliability of the SBA loan-level data, we interviewed SBA representatives from the Office of Performance and Systems Management about how they collected the data and helped ensure data integrity. We also reviewed documentation about the sources of the data and performed electronic testing to detect errors in completeness and reasonableness. We determined that the data were sufficiently reliable for the purpose of reporting on portfolio composition and performance. To assess the reliability of the Moody’s/REAL Commercial Property Price Index and Federal Deposit Insurance Corporation quarterly analysis of call report data we used, we reviewed prior GAO assessments of the reliability of this data. We determined the data were sufficiently reliable for the purpose of comparing trends in related private sector loan program performance and SBA 504 loan program performance. To respond to our second objective, we identified SBA’s compliance processes for overseeing CDC eligibility and loan approval. To determine whether SBA had implemented compliance procedures to help ensure that CDCs are eligible and that loan applications comply with program requirements, we reviewed (1) checklists SBA uses to review CDCs’ eligibility and renew CDCs’ Accredited Lenders Program (ALP) authority, (2) the template used to review CDCs’ annual reports, (3) checklists used to review applicant eligibility and creditworthiness, and (4) checklists used to conduct Abridged Submission Method (ASM) audits. We also reviewed the data on these processes, including the results of SBA’s loan application review processes for fiscal years 2010 through 2013 and results of ASM audits performed between January 2011 and August 2013 to determine whether SBA was performing these audits as required and review their results. We assessed the reliability of the data on these processes by interviewing officials knowledgeable about the data and determined that they were sufficiently reliable for the purpose of discussing the results of SBA’s compliance processes. We also reviewed 504 loan data on the amounts of loans made with ALP authority versus regular authority from fiscal years 2003 through 2012. These data came from the same SBA data system as the set of 504 loan data discussed previously, which we found reliable for the purposes of this report. Finally, we assessed whether the above processes were consistent with federal internal control standards. To respond to our third objective, we assessed SBA’s monitoring of CDCs’ compliance with program requirements. To determine whether SBA implemented compliance procedures to monitor CDC compliance, we reviewed documentation on SBA’s (1) CDC risk-rating processes; (2) previous compliance processes as represented in relevant SOPs and other guidance; and (3) new preliminary “SMART” approach to monitoring CDCs, including risk-based review checklists, draft protocols, preliminary benchmarks, and CDC profile assessment templates. We also reviewed the data on these processes, including data on lender risk ratings as of September 2013 and the results of SBA’s risk-based reviews from fiscal years 2007 through 2012, to assess the extent to which SBA was implementing its compliance processes. We assessed the reliability of these data by interviewing officials knowledgeable about the data and, in some cases, reviewing documentation about the sources of the data. We determined that they were sufficiently reliable for the purpose of discussing the results of SBA’s compliance processes. Finally, we compared SBA compliance processes to federal internal control standards. We conducted this performance audit from January 2013 to March 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact above, Andrea (Paige) Smith (Assistant Director), Allison Abrams, Benjamin Bolitzer, Pamela Davidson, Rachel DeMarcus, Yola Lewis, Daniel McKenna, Marc Molino, Patricia Moye, and Jennifer Schwartz made key contributions to this report. | Title V of the Small Business Investment Act of 1958 established what is commonly referred to as the “504 loan program” to provide small businesses with financing for long-term fixed assets, such as land and buildings. SBA oversees the program, and about 270 CDCs issue “504 loans” that generally cover up to 40 percent of project costs. The program aims to encourage economic development primarily by enabling small businesses to create or retain jobs within their communities. This report examines (1) the lending standards and performance measures SBA has established to help ensure that loans meet key requirements, as well as 504 loan performance, and (2) SBA's processes for reviewing CDCs' eligibility to participate in the program, loan applications, and CDCs' compliance with program requirements. GAO analyzed SBA data, SBA's lending standards and compliance process documentation, and interviewed SBA officials and 10 CDCs selected based on factors such as size and location. The Small Business Administration (SBA) has established lending standards to protect against default and has measured program performance, but lacks guidance on determining the number of jobs supported by 504 program-funded projects. SBA's guidance for certified development companies (CDC)—nonprofits that provide funding to small businesses to promote local economic development in their communities and are certified by SBA—includes credit underwriting standards for determining ability to repay. SBA also has established performance indicators—such as the number of small businesses assisted and jobs supported—for the 504 loan program. However, SBA does not describe how CDCs should calculate jobs created and retained by 504 projects, a key program requirement. Federal internal control standards require control activities that help participants report information accurately. Without specific guidance, SBA cannot ensure that CDCs are calculating this information consistently or accurately. GAO's analysis of SBA data showed that 504 loans approved in fiscal years 2006 through 2008 had the highest 18-month default rates, which correlated with trends in the private sector for commercial real estate loans. SBA has processes to review (1) CDCs' eligibility to participate in the 504 program, (2) loan applications, and (3) CDCs' compliance with program requirements. The agency is revising some of these processes and expects to finalize the changes by June 2014. However, GAO identified two key areas where additional improvement is needed: Jobs supported and retained earnings . SBA has guidance for reviewing CDCs' annual reports (used to assess CDC eligibility) and for risk-based reviews of CDCs' compliance with program requirements. However, this guidance does not require SBA staff to review supporting documentation on jobs supported or assess whether CDCs are investing retained earnings in local economic development, as required by regulation. Federal internal control standards require control activities to ensure that program participants report information accurately and comply with requirements. Without reviewing CDCs' information on jobs data and compliance with the retained-earnings requirement, SBA cannot be assured that information on jobs supported is accurate and CDCs are supporting economic development activities as required. Certification by CDCs with delegated authority . SBA provides initial approval for a 504 loan upon application, but the 504 loan is not closed until after project-related construction is complete (which can be up to 4 years after initial approval). SBA has delegated to certain CDCs additional authority to close a 504 loan. For example, at closing CDCs with this delegated authority can certify that borrowers are still able to repay a 504 loan rather than submit documentation to SBA for approval, as regular CDCs are required to do. SBA renews delegated authority periodically but does not verify that CDCs can support these certifications. Federal internal control standards require agencies to verify compliance with requirements. Without verifying these certifications, SBA lacks assurance that CDCs with delegated authority are following program requirements. GAO recommends that SBA issue guidance on calculating jobs created and retained, expand its review of CDCs' annual reports and risk-based reviews of selected CDCs to include assessment of data on jobs supported and compliance with the retained- earnings requirement, and expand its process for renewing the delegated authority of certain CDCs to include a review of CDCs' certifications of borrowers' ability to repay made prior to loan closing. SBA generally agreed with the recommendations and outlined steps it plans to take in response. |
The Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-193), enacted in August 1996, overhauled the nation’s welfare system. Although some states were already implementing changes to their welfare programs before this legislation, the act abolished the federal Aid to Families With Dependent Children program and established TANF block grants, which imposed stronger work requirements for welfare recipients than its predecessor program. TANF provides benefits for a time-limited period and focuses on quickly putting individuals to work. The TANF block grants available to states totaled about $16.6 billion in fiscal year 1998—ranging from about $21.8 million in Wyoming to over $3.7 billion in California. To receive their TANF grants, states must maintain funding for needy families at specified levels tied to their historical expenditures on welfare programs. The Balanced Budget Act of 1997 authorized $3 billion for welfare-to-work grants to state (the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands) and local communities to move welfare recipients into jobs—$1.5 billion is available to be awarded by Labor each year in fiscal years 1998 and 1999. A small amount of the total grant money was set aside for special purposes: 1 percent for Native American tribes ($15 million for each year), 0.8 percent for evaluation ($12 million for each year), and $100 million in fiscal year 1999 for performance bonuses to states that successfully move welfare recipients into employment. After these set-asides, Labor allocated 75 percent (about $1.1 billion for fiscal year 1998) of the welfare-to-work funds to states on the basis of a formula that equally considers the shares of individuals with incomes below the poverty level and adult recipients of TANF assistance residing in the state. States must pledge one dollar of nonfederal funding to match every two dollars of federal funding provided under the formula; up to half of the match may consist of third-party in-kind contributions. The state welfare-to-work matching funds are in addition to the state funds that must be expended as required under TANF block grants. Funds not allocated by formula, which are nearly 25 percent of the welfare-to-work funds (over $368 million for fiscal year 1998), were available for Labor to award competitively to local organizations. These organizations—local governments, Private Industry Councils, and private organizations that apply in conjunction with a Private Industry Council or local government—submit applications to Labor describing how they plan to use welfare-to-work funds. In addition to giving special consideration to cities with large concentrations of poverty and to rural areas, Labor reviews applications and awards competitive grants using the following criteria: the relative need for assistance in the area proposed to be served; the extent to which the project proposes innovative strategies for moving welfare recipients into lasting work; the quality of the proposed outcomes of the project; the degree to which the project is coordinated with other services; and the demonstrated ability of the grant applicant. To receive its allocation of welfare-to-work formula funds, a state was required to submit a plan for the use and administration of the grant funds to Labor. The Secretary of Labor then determined whether the plan met the statutory requirements, including assurances that the plan was developed with coordination from appropriate entities in substate areas and that welfare-to-work programs and funds would be coordinated with programs funded through the TANF block grants. Using an allocation formula developed by the state, 85 percent of the state’s federal formula funds were to be passed to local Private Industry Councils. The Private Industry Councils have policy-making responsibility in these service delivery areas and administer the welfare-to-work programs at the local level unless the Secretary of Labor approves a governor’s request to use an alternative administering agency. The remaining 15 percent of the state’s formula allotment may be spent on welfare-to-work projects of the state’s choice, which is described in this report as the governor’s discretionary fund. States establish their own formula for allocating formula funds to Private Industry Councils for local service delivery areas but must give a minimum weight of 50 percent to the number of people in the area in excess of 7.5 percent of the population whose income is below the poverty level. States may also consider the local area’s proportion of the state’s long-term welfare population or the state’s unemployed population. Additionally, if the amount to be allocated by formula to a local service delivery area is less than $100,000, that money may be held by the state and added to the 15 percent governor’s discretionary funds. Labor was required to obligate the fiscal year 1998 formula grant funds by September 30, 1998; however, funds for the competitive grants were multiyear, and Labor could obligate those funds into fiscal year 1999. Both formula and competitive grants must be spent within 3 years of the grant award. Under the Balanced Budget Act, the welfare-to-work grants were initially legislated as multiyear allocations that could be awarded any time in fiscal years 1998 and 1999, but this law was amended to require that Labor award formula funds available for fiscal year 1998 by September 30, 1998. If at the end of any fiscal year states have not applied for or have applied for less than the maximum amount available for formula funds, the funds are to be transferred to the General Fund of the U.S. Treasury. Competitive grant funds, however, remain multiyear funds, and there is no requirement to obligate funds for fiscal year 1998 within the fiscal year. Grantees have flexibility in designing welfare-to-work strategies geared to the needs of their own local populations and labor markets. Overall, welfare-to-work program services help individuals get and keep unsubsidized employment. Allowable activities include job readiness and placement services financed through vouchers or contracts; community service or work experience; job creation through public sector or private sector employment wage subsidies; and on-the-job training, postemployment services financed through vouchers or contracts, and job retention and support services. Both formula and competitive grant funds are to be used for certain TANF families—recipients on long-term welfare assistance, TANF recipients with characteristics of long-term welfare dependence, and/or their noncustodial counterparts. These people are considered hard to employ and may have low educational attainment or poor work histories. The law requires that at least 70 percent of the funds be spent on the hardest to serve long-term welfare recipients with two of three specified barriers to successful employment. Up to 30 percent of the grant funds may be spent on individuals with characteristics of long-term welfare recipients; these characteristics could include dropping out of school, teenage pregnancy, or poor work history. Under either the 70- or 30-percent category, noncustodial parents with dependents receiving TANF assistance may qualify for welfare-to-work activities. (See table 1 for a summary of eligibility requirements for welfare-to-work services.) Labor awarded about $1 billion in formula grants for fiscal year 1998 to all but six states. The six states that chose not to participate in the formula grant program would have received about $71 million. Labor also awarded a total of almost $500 million in competitive grants using all of the approximately $368 million in competitive grant funds available for fiscal year 1998 and about a third of the competitive grant funds available for fiscal year 1999. Most states applied for and received their full allocation of formula grant funds. (See app. II for the amount of formula funds awarded, by state, for fiscal year 1998.) Of the states that applied for formula grant funding, Arizona was the only state that did not pledge sufficient matching funds to receive its maximum federal allocation. Of the states that declined to participate in the welfare-to-work program, four states did not submit a welfare-to-work plan to Labor and the remaining states informed Labor that they would not participate in the formula grant program. These six states chose not to participate for various reasons, including concerns about their ability to provide state matching funds. Arizona needed about $9 million in matching funds to obtain its full allocation of about $17 million in federal welfare-to-work funds; however, the state legislature was not willing to provide this amount in matching funds. Instead, the state assured a match of $4.5 million and obtained a formula grant for $9 million in fiscal year 1998. Initially, Arizona asked the local service delivery areas to determine whether they could raise the required matching funds; however, the local areas, while they wanted the welfare-to-work funding, did not believe they could raise the matching funds locally. Of the six states that declined to participate in the welfare-to-work formula program, four states—Idaho, Mississippi, South Dakota, and Wyoming—neither informed Labor they would not be participating in welfare-to-work, nor submitted a welfare-to-work plan to Labor; the remaining states—Ohio and Utah—informed Labor that they would not participate. Ohio initially applied for its welfare-to-work allocation, but the governor later decided the grant was too complex and burdensome, especially the match requirement. Since Ohio had excess, unobligated TANF funds, state officials believed the TANF funds should be used to move welfare recipients to work—especially because there were no matching requirements and the eligibility requirements were less restrictive. Utah sent a letter declining its allocation, listing two reasons for its decision—that the state believed the formula funding was too restrictive regarding participant eligibility and that it believed the welfare-to-work grants were too prescriptive and did not allow the state enough flexibility. A state official in Utah also said that, at the time the letter was sent, officials believed TANF funds were sufficient to serve the TANF population’s needs; furthermore, the funds required a state match, which did not seem feasible at the time. The states that did not apply for welfare-to-work funds had various reasons for not participating. For example, an official in Idaho noted that the state’s TANF caseload had dropped precipitously, consequently the state had adequate TANF funds to meet the employment and training needs of the remaining welfare recipients. The official also estimated that no more than about 350 of the state’s welfare recipients were eligible for welfare-to-work services—and perhaps as few as 100. A state official in Mississippi said that a significant amount of TANF funds had been budgeted for job skills development and job search. Additionally, the state had set aside 30 percent of enrollments in JTPA for welfare recipients and was having difficulty filling these slots. Consequently, in addition to concerns about the state’s ability to provide matching funds, the state decided against applying for welfare-to-work funds. The six states may still apply for fiscal year 1999 funds and have until March 1999 to do so. As of November 20, 1998, Labor had awarded a total of 126 competitive grants. On May 27, 1998, Labor announced the first round of competitive grants, which resulted in awards of about $200 million—approximately half of the fiscal year 1998 welfare-to-work competitive grant funds—to 51 local organizations. On November 20, 1998, Labor awarded the second round of competitive grants to 75 local organizations; these grants totaled about $273 million and represented combined competitive grant funds from the remainder of fiscal year 1998 funds and a portion of the fiscal year 1999 funds. (See apps. III and IV for a list of the first and second rounds of competitive grants awarded, by state.) Most states had at least one local service organization that received competitive grant funds. (See table 2 for the distribution of welfare-to-work competitive grants awarded by Labor.) Three states that we reviewed targeted a specific population for formula grant funds, while the other three states defined their welfare-to-work focus more broadly and did not emphasize a specific service strategy or targeted population. In the six states, local communities targeted populations and designed their welfare-to-work activities consistent with their state’s plan. Competitive grants focused more narrowly on a specific population and activity. Three of the six states we reviewed—Massachusetts, Michigan, and Wisconsin—specified populations to be served with formula grant funds, such as assistance to unemployed noncustodial parents or TANF recipients who are reaching their time limits on cash assistance. Plans for the other three states—Arizona, California, and New York—stated that the use of welfare-to-work funds would be determined by the local service delivery areas. (See apps. V through X for a brief description of the formula grant plans in each of the six states.) In the six states, the local plans we reviewed proposed a range of welfare-to-work activities for eligible participants. Three states planned a specific statewide focus for formula grant funds. For example, Michigan’s plan emphasized serving unemployed noncustodial parents who have child support payments in arrears and whose dependents are receiving TANF assistance. The goal was to increase payments by these noncustodial parents for child support. Not participating in the welfare-to-work program has serious consequences—incarceration—unless there is good cause for nonparticipation. Michigan required local service delivery areas to devote 50 percent of their welfare-to-work grant funds to assist noncustodial parents. Wisconsin’s plan also emphasized serving noncustodial parents, and because its TANF caseload is low, the state also proposed to assist individuals receiving only TANF child care subsidies. Massachusetts planned on serving TANF recipients who are reaching their 24-month limit for receiving cash assistance—about 7,000 were expected to lose cash assistance benefits on December 1, 1998. In contrast, three states defined their formula grant focus more broadly and did not emphasize a specific service strategy. California’s state plan noted that—given the diversity of the state’s local service delivery areas—no one service strategy could be effectively applied statewide. Arizona’s plan outlined the state’s support to local service delivery areas in their efforts to target welfare-to-work services to hard-to-serve TANF recipients, noncustodial parents, and other eligible individuals. New York’s plan provided a general welfare-to-work focus on improving the connection to work, although the state plan placed some emphasis on serving individuals with disabilities; many of these individuals have experienced long-term welfare dependency and had been exempt from work requirements under Aid to Families With Dependent Children but are no longer exempt under the state’s TANF program. The local plans we reviewed proposed a range of activities for their formula grant allocations. Because welfare-to-work programs are administered locally, state officials in the six states we reviewed said local entities have the ability to design welfare-to-work activities and target populations within the parameters of the state plan. For example, the New York state plan did not define, beyond the federal welfare-to-work eligibility requirements, the population to be served with formula funds, and state officials said that different local plans emphasized different activities, such as mentoring, case management, training to upgrade employment, literacy, and career ladder development. The officials also noted that local service delivery areas considered the services funded by TANF and proposed to focus formula grant funds on areas where services were lacking. In states with a focus on serving a targeted population with formula grant funds, local service delivery areas focused on these objectives in their welfare-to-work plans. For example, in Massachusetts, local service delivery areas, following the state’s direction, will provide services to TANF recipients facing time limits on cash assistance. Likewise, a service delivery area in Michigan will identify its welfare-to-work participants through the Family Independence Agency, which is the TANF agency, and the Friend of the Court, which refers noncustodial parents. However, focusing on the needs of its own local population, this service delivery area also plans to serve several other populations whose characteristics are associated with or predictive of long-term welfare dependency, such as rural isolation, substance abuse, homelessness, being a single parent, or being an offender. For states leaving more discretion to local service delivery areas in planning their strategies for the use of formula grant funds, some local areas designed their welfare-to-work activities to complement existing employment delivery systems. For example, in the San Diego, California, service delivery area, about 3,000 long-term welfare recipients will receive a package of services, for about 18 to 24 months, designed to meet their needs, which will include at least 16 hours a week of work activities and up to 16 hours a week of support services. These services are provided by competitively procured contractors, and each contract includes an incentive program to move participants into work expeditiously. Some local plans emphasized new approaches for moving welfare recipients to work. For example, local officials in Phoenix, Arizona, plan to use formula grant funds to develop new relationships with large businesses that will receive consulting services in exchange for hiring welfare recipients; the welfare-to-work participants will receive job readiness training as well as mentoring and job coaching after they are hired to improve their chances of job retention. Local officials we interviewed said service delivery areas planned to use formula grant funds particularly to provide postemployment services. For example, in New York’s Oneida-Herkimer-Madison service delivery area, the welfare-to-work program is based on using employment retention specialists who will provide 24-hour support service to participants. A third of the area’s formula funds will be spent on the 6-person employment retention staff; smaller amounts of the formula funds were allocated for services such as transportation and child care because the program hopes to use existing programs and resources for these services. Even with its focus on job retention services, the local service delivery area will maintain a menu of services so that it can provide all services to clients as needed. The welfare-to-work program for a local area in Massachusetts represents another example of providing postemployment services with formula grant funds. This welfare-to-work program planned to provide support after job placement for up to 6 months rather than the 30 to 60 days that other employment and training programs generally provide participants. At the time of our review, this program had placed about 10 of the 70 current participants in jobs, and these employed participants were receiving services such as mentoring and case management. A program official noted that, until a participant finds a job, the local career center provides most services; however, once the participant finds a job, the career center’s role diminishes, and participants primarily are served through the welfare-to-work program since it can provide postemployment services. The local area is still developing community resource teams to help TANF recipients manage their lives. The official explained that, once placed in jobs, welfare-to-work participants might fail to report to work if they are sick or if they cannot obtain child care. Ideally, the community resource teams would help individuals find resources to assist them with these situations without losing their jobs. The proposed use of the governor’s discretionary portion of state formula funds (up to 15 percent of the formula funds) generally followed the states’ welfare-to-work initiatives. States that targeted populations for welfare-to-work activities used discretionary funds for those individuals. For example, Michigan distributed its discretionary funds (about $6 million) to the local areas in order to provide more funding to serve noncustodial parents. In Wisconsin, the discretionary funds (about $2 million) will be used for a variety of purposes; however, the largest portion of the discretionary funds (about $1.1 million) will be allocated to the state’s Department of Corrections to provide employment assistance to noncustodial parents in correctional institutions, on parole, or on probation. In Massachusetts, which emphasized assistance to TANF recipients facing time limits on cash assistance, the state planned to allocate over half of its about $3 million in discretionary funding to the Department of Transitional Assistance to supplement its program of assessment and structured employment assistance. Massachusetts also planned to subsidize five local areas that were allocated the lowest amount of formula funds. The state used these funds to provide a minimum of $400,000 to each area because state officials believed that local areas needed this level of funding to have an effective welfare-to-work program. For states that had a broader focus for their formula funds, plans for the governor’s discretionary funds were analogous with those for local areas given wider discretion for the use of these funds. In California, the state distributed the governor’s discretionary funds (about $29 million) primarily through a competitive process—special consideration was given to a broad array of programs that addressed needs in rural areas; leveraged other resources; and demonstrated an innovative, coordinated approach to services. Of New York’s discretionary funds (over $14 million), the state planned to use about 70 percent to support varied services—also on a competitive basis—to move individuals into employment and provide postemployment services to help working participants continue to work and increase earnings. Finally, Arizona combined its discretionary funds (about $1.4 million) with allocations made to the local service delivery areas but did not emphasize service to a specific population as did Michigan. The plans for competitive grants we reviewed in the six states focused on specific populations and activities. The competitive grantees proposed a variety of different activities and targeted different populations under this program for innovative approaches. Some of the welfare-to-work competitive grants will be used to complement programs funded by local formula allocations, and others will function separately from the local formula grant but rely on the same systems as the formula grantees to verify welfare-to-work eligibility. Several competitive grants will complement formula grant programs. For example, Phoenix planned to use its formula funds to assist participants in gaining employment with large businesses, while its competitive grant will be used to link participants with small businesses. The same approach will be used for both programs. Using both formula and competitive grant funds, EARN, an acronym for Employment and Respect Now, will assess and screen participants for drug use, then enroll them in a 5-week job readiness program that includes some computer-based training. For the competitive grant, these participants will be placed in employment among 900 small businesses that receive tax credits for employing them. Throughout the participant’s work experience, EARN staff and volunteers will provide mentoring, job coaching, and other services for job retention. Similarly, Detroit’s competitive grant will be used to complement its basic program of assisting all individuals in obtaining employment by providing more intense services for the hardest-to-employ population. Transportation to work sites is often a critical problem for welfare-to-work participants, and a portion of the competitive grant will be used to fund a demonstration project called Easy Ride that will purchase several alternative fuel vehicles and employ a person to coordinate transportation schedules for welfare-to-work participants. Additionally, the competitive grant in Detroit will provide more intense job readiness training such as substance abuse counseling and classes for English-as-a-Second-Language. The Metropolitan Area Planning Commission in Boston also planned to use its competitive grant funds to complement the area’s formula grant programs by developing a transportation program to help individuals get to work. An “Access to Jobs” study found specific gaps in transportation services that hampered individuals from obtaining employment. The study found that people either had no available public transportation, had to make multiple trips to get from their residence to their work site, or simply did not know how to make the trip. The Commission will work to connect city residents to suburban jobs, and suburban residents to jobs in other suburbs or the city. The program will assist people served by the formula grant programs and will provide (1) information about transportation modes, schedules, and day care sites near transportation; (2) direct assistance, such as subsidies for public transportation; and (3) an emergency fund for unanticipated transportation needs, allocated on a case-by-case basis. For example, if someone is not served by public transportation but has a car in need of repairs, the fund could be used to keep this individual’s car in running order. Other competitive grants will function separately from the local formula grant but rely on the same systems to verify welfare-to-work eligibility as the formula grantees—the welfare offices or the court system. For example, Oakland, California, will use its competitive grant to expand its pilot program to train and place Head Start parents in jobs. The program staff hope to identify participants who are noncustodial parents or who have substance abuse problems, but, similar to the welfare-to-work eligibility determination for the local formula grant, the staff will also submit a list of interested Head Start parents to the county welfare agency to verify TANF status. The Private Industry Council of Milwaukee County will provide legal assistance to long-term welfare clients and noncustodial parents whose legal problems—combined with poor academic and work skills—are barriers to employment. For its competitive grant, the Private Industry Council plans to serve 200 long-term TANF recipients (primarily women) and 450 noncustodial parents (primarily men) identified by the welfare agency or the court system—this is the same way that the Private Industry Council will determine welfare-to-work eligibility for participants served by the local formula grant. The competitive grant will be used to provide legal advocacy and case management to participants, track individuals who drop out of the program and try to reintegrate them, and develop a process that will place a randomly selected group of noncustodial parents in unsubsidized or subsidized employment. This process will require that placement firms pay for the subsidized employment, thus providing the firms with incentives for finding jobs for their clients. In New York City, the Consortium for Worker Education will use its competitive grant to train and assist women to provide child care from their homes as satellites for private sector child care centers. The Consortium planned to build on its concept of both putting welfare recipients to work by providing child care in their homes and creating needed child care slots for workers in New York City. Recruitment for the program will be managed by two vendors who will advertise, hold presentations at community centers, and obtain referrals from the city welfare department. Once recruited, participants will be assessed and interviewed. For those selected for the program, their welfare-to-work eligibility will be determined by the city’s TANF agency, which is also the administrative entity for the city’s local formula grant. Those deemed eligible must then have their homes inspected for compliance with city building and health codes. Once accepted, the Consortium will enroll participants in a 2-week job readiness program followed by a 16-week Work Experience Program. Participants will spend 60 percent of their work experience working in a day care center and 40 percent in classroom training. When individuals have successfully completed their work experience, they will be hired by the parent company, Satellite Child Care, Inc. The provider’s home will then be opened as a satellite child care center, and the provider will receive a $4,000 kit containing various equipment, including a computer package that has software for children and distance learning capabilities so the provider can receive continued instruction. The providers will receive on-going supervision and home visits from the parent company. State and local officials in the six states we reviewed noted that a stronger partnership was developing between the workforce development agencies and other human service agencies assisting welfare recipients. They attributed this stronger relationship, at least in part, to their joint involvement in the welfare-to-work planning process. At the state level, each of the six states we reviewed had developed a partnership steering committee, task force, or work group to develop the states’ plans for formula grant funds and had identified ways to promote integration between the workforce development and human service agencies for welfare recipients at the local level. Furthermore, recipients of competitive grant funds also coordinated their plans with state and local officials. The six states we reviewed had developed mechanisms to coordinate welfare-to-work activities with services to the hard-to-employ population. For example, in Massachusetts, an intergovernmental state steering committee prepared the state plan for formula grant funds and continues to respond to technical questions raised by local service delivery areas regarding implementation of welfare-to-work programs. The welfare-to-work stakeholders included representatives from the Department of Labor and Workforce Development; the Corporation for Business, Work and Learning; the Executive Office of Health and Human Services; the Department of Transitional Assistance, which is the state TANF agency; the Regional Employment Board Association; the Service Delivery Area Association; the Career Center Office; and the Division of Employment and Training. By planning and working together, this group shares information in order to minimize duplication of effort between state agencies and with the local service delivery areas. In California, planning for formula grant funds and coordination between the California Employment Development Department and the state’s Department of Social Services began as soon as the welfare-to-work program was introduced by Labor. Both departments are within California’s Health and Welfare Agency, and, even before welfare-to-work legislation, these departments had formed a coordination committee—CalWORKS—to discuss issues regarding the state’s effort to move welfare recipients into employment. At the state level, California has an interdepartmental work group that includes representatives of agencies responsible for education, transportation, housing, community services, mental health, and job services. In all, the work group includes 15 state departments responsible for 20 different programs. The state had also implemented one-stop career centers and had adopted a policy that would make the county welfare departments part of the one-stop system. The state further emphasized collaboration by holding five public hearings on the draft state plan to elicit comments from local service delivery areas and by posting its plan on the Internet to obtain public comment. The formula grant plans for the six states we reviewed required coordination between the workforce development and welfare agencies at the local level. For example, California required that local plans for formula funds also be approved by the county welfare department. In New York, state officials developed guidelines for local formula grant proposals that required the Private Industry Councils and area social services districts to develop a written welfare-to-work operational agreement to detail respective roles, responsibilities, and procedures within the service delivery area. At the local level, partnerships were formed to coordinate welfare-to-work activities provided by the local workforce development agencies with other human services for welfare recipients. For example, a community task force in Flagstaff, Arizona, was formed with representation from 64 state and local agencies in the service delivery area that were involved with moving individuals from welfare to work. Together, these stakeholders developed a matrix, listing each organization and the services offered to welfare recipients, to leverage resources and minimize duplication of effort. In Michigan, an official representing a local service delivery area noted that because the TANF population is the hardest to employ, she relies heavily on the expertise of the Michigan Rehabilitation Services for assistance regarding participants with more serious impediments to employment, such as substance abuse or mental illness. Additionally, because local service providers in Michigan focus on noncustodial parents, collaborative efforts with the court system are vital for identifying this population; the Family Independence Agency, which is the TANF agency, is also an important welfare-to-work partner in identifying TANF-eligible recipients. According to officials in Wisconsin, implementation of formula grant programs at the local level is a joint project between the local workforce development agency and the local TANF offices. This coordination allows the welfare-to-work funds to be used to expand on services provided by TANF funds, thus avoiding duplication of effort in service delivery. For the welfare-to-work competitive grants we reviewed, competitive grantees also coordinated their plans with state and local officials. For example, the competitive grant awarded in Merced, California, is planned for use in assisting welfare-to-work participants in becoming self-employed, and a strong aspect of this program is its collaboration with various partners. The program, which primarily targets noncustodial parents and public housing residents, has a coalition of partners including the Merced County Community Action Agency, Employment Development Department of Merced County, Merced County Private Industry Council/Private Industry Training Department, Merced County Human Services Agency, Housing Authority of the County of Merced, and chambers of commerce throughout the county. In several states we reviewed, the competitive grants were awarded to the same or similar entities that received a formula grant; consequently, the competitive grant linked significantly with the welfare-to-work program established under the formula grant. In these cases, the competitive grant funds were generally used to provide the more intensive services needed to help welfare recipients get and keep jobs. We provided a draft of this report to the Department of Labor for comment. Labor provided technical comments, which we incorporated in the report where appropriate. We are sending copies of this report to the Secretary of Labor and other interested parties. Copies also will be made available to others upon request. If you have any questions about this report, please contact me at (202) 512-7014. Major contributors to this report include Sigurd R. Nilsen, Betty S. Clark, and Carolyn D. Hall. To address the request, we reviewed the legislation authorizing welfare-to-work grants and the implementing regulations. We met with Labor officials who administer the grants and obtained information on the formula grants Labor awarded for welfare-to-work funds available for fiscal year 1998. We also obtained information about the competitive grants Labor awarded on May 27, 1998, and November 20, 1998, with welfare-to-work funds available for fiscal years 1998 and 1999. We interviewed state and local officials in six states—Arizona, California, Massachusetts, Michigan, New York, and Wisconsin—to obtain information on their plans for the welfare-to-work grant funding. We selected four of these states to take advantage of site visits made and information collected for a concurrent GAO study on states’ experiences in providing employment and training assistance to TANF clients. For this report, we conducted field visits in states that were early implementers of welfare reform and of workforce development program consolidation. Additionally, we included two other states—California and New York—in our study because they have the largest welfare caseloads. For each of the six states, we reviewed the state welfare-to-work plan, interviewed program officials for at least two selected local service delivery areas receiving allocations of the states’ formula grant funds, and interviewed one grantee that was awarded competitive grant funds. We also telephoned officials in the states that declined or did not apply for welfare-to-work grants to obtain information on the reasons for these decisions. We performed our work from May 1998 to December 1998 in accordance with generally accepted government auditing standards. Percentage of total 1998 federal welfare-to-work funds awarded1998 federal welfare-to-work funds declined (continued) Percentage of total 1998 federal welfare-to-work funds awarded1998 federal welfare-to-work funds declined (Table notes on next page) Totals may not add because of rounding. This amount is based on the full, available amount of fiscal year 1998 federal formula funding, $1,104,750,000. According to a Labor official, $78,962,342 of this amount was not awarded and was returned to the U.S. Treasury by Labor. United Way of Central Alabama City of Phoenix Human Services Department, Employment and Training Division The City of Little Rock Los Angeles Private Industry Council Private Industry Council of San Francisco, Inc. Housing Authority of the City of Los Angeles Merced Self-Employment and Job Opportunity Coalition City of Oakland, Office of Aging Riverside County Economic Development Agency Rocky Mountain Service/Jobs for Progress, Inc. The WorkPlace, Inc. Washington, D.C. Mayor’s Office of Citizens Employment and Training, Atlanta Goodwill Industries of Middle Georgia (continued) City of Chicago, the Chicago Workforce Board River Valley Resources, Inc. Madison Louisville and Jefferson County Private Industry Council City of Detroit Employment and Training Department City of Kalamazoo - Metro Transit System Catholic Social Services of Albuquerque, Inc. The Corporation for Ohio Appalachian Development Private Industry Council of Philadelphia, Inc. Resources for Human Development, Inc. Goodwill Industries of San Antonio Hampton University Career Advancement Resiliency Total Action Against Poverty, Inc. AK, MO, OH, and OR (continued) Nine Star Enterprises, Inc. City of Long Beach Department of Community Development Goodwill Industries of Southern California Catholic Charities of Los Angeles San Diego Workforce Partnership, Inc. County of Tulare Private Industry Council, Inc. United Cerebral Palsy of Colorado City and County of Denver Community Action Agency of New Haven, Inc. The Access Agency, Inc. Washington, D.C. Goodwill Industries of North Florida, Inc. Latin Chamber of Commerce of USA DeKalb Economic Opportunity Authority, Inc. Hawaii County Economic Opportunity Council Community and Economic Development Association of Cook County, Inc. City of Gary, Department of Health and Human Services (continued) Labor Institute for Workforce Development The Baltimore City Office of Employment Development Prince Georges Private Industry Council Boston Technology Venture Center, Inc. Action for Boston Community Development Inc. Advent Enterprises, Inc. Full Employment Council, Inc. S & K Holding Company, Inc. Southwestern Community Services, Inc. Mercer County Office of Training and Employment Santa Fe SER/Jobs for Progress, Inc. New York City Partnership and Chamber of Commerce City of New York Human Resources Administration Wildcat Service Corporation New York Buffalo and Erie Private Industry Council Private Industry Council of Columbus and Franklin County, Inc. (continued) Eastern Workforce Development Board, Inc. District 1199C Training and Upgrading Fund of the National Union of Hospital and Healthcare Employers Centro de Capacitacion y Asesoramiento Nashville/Davidson County Private Industry Council Dallas County Local Workforce Development Board Tarrant County Workforce Development Board Five County Association of Governments Central Vermont Community Action Council Alexandria Redevelopment and Housing Authority Washington State Labor Council (AFL-CIO) MA, MN, NJ, and PA (continued) In Arizona, the Department of Economic Security is the welfare-to-work federal grant recipient and state administering entity. Arizona submitted its welfare-to-work plan on August 5, 1998. On August 20, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $9,000,000. Although Arizona was eligible for about $17,418,000 in federal welfare-to-work funds, the state did not identify matching funds sufficient to receive its maximum federal allocation. Instead, Arizona assured $4,500,000 in state matching funds over the 3-year grant period. According to a state official, the state match appropriated by the state legislature was $1.5 million for 1998; state officials anticipate the legislature will appropriate the remaining $3 million in 1999. Arizona required its 16 Private Industry Councils to amend their JTPA plans with descriptions of how formula grant funds would be expended and to submit these amended plans for state review and approval, rather than submitting formal welfare-to-work plans. According to a state official, local plans were reviewed in November 1998, and the Private Industry Councils planned to implement their welfare-to-work formula grant programs between November 1998 and January 1999. The Arizona state plan outlined the full range of federally allowable welfare-to-work activities and targeting strategies from which the local service delivery areas may specify the target population and mix of services most appropriate for their local needs. According to the state plan, service delivery areas will determine the target group(s) to be served, and potential welfare-to-work clients may be directly referred to the service delivery areas by the state welfare recipient employment and training program, the Division of Child Support Enforcement, or the superior court through court order. A local official said that since the approval of the state plan, the Arizona Department of Economic Security has urged service delivery areas to recruit participants through direct referrals from the state welfare service system’s employment and training program, rather than design their own recruiting programs. The Arizona state plan provided local areas with guidance on the provision of local activities and services. Specifically, the plan outlined four categories of job readiness, each of which includes a specific mix of services based on the participant’s characteristics: Not Ready, Almost Ready, Ready, and Post Placement. However, local service delivery areas may determine the target population and mix of services most appropriate for their area’s needs. Arizona allocated all of the $9,000,000 federal formula grant to the local service delivery areas using the following formula: 50-percent weight was given to the number of people under poverty in excess of 7.5 percent of the service delivery area population, and 50-percent weight was given to the number of welfare recipients in the service delivery area having received assistance for at least 30 months. Three of the service delivery areas—Apache, Graham, and Greenlee Counties—received no federal funds because their formula allocations of the $9 million federal grant fell below the required minimum of $100,000; however, as shown in table V.1, Arizona allocated state matching funds to each of these service delivery areas. Arizona planned to use 15 percent of the state match for state welfare-to-work administration, and the balance of the state match was allocated to the service delivery areas using the same formula applied to the federal funds. Local service delivery areas must limit welfare-to-work administrative costs to 15 percent of their formula grant award. Although Arizona assured $4.5 million in matching funds for the full $9 million federal welfare-to-work award, the state legislature appropriated $1.5 million of the match during 1998. Arizona has an official state document, referenced in the federal grant agreement, that controls the disbursement of funds according to the amount of state match provided. According to a state official, until additional matching funds are appropriated, service delivery areas are only entitled to their allocations of the $3 million in federal funds that have been matched with $1.5 million in state funds. Allocations based on the current and full state match are included in table V.1. Arizona allocated 100 percent of the federal formula grant funds to the local service delivery areas. The state retained none of the allowable 15 percent governor’s discretionary funds ($1,350,000) at the state level. Of the participants enrolled in welfare-to-work programs, the state planned to place 56 percent of participants in unsubsidized jobs; of those placed, the goal is that 56 percent will still be working after 6 months and have a 1-percent increase in earnings over this time. In California, the Employment Development Department is the welfare-to-work federal grant recipient and state administering entity. California submitted its welfare-to-work plan to Labor on June 30, 1998. On July 20, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $190,417,247. The state assured $95,208,624 in state matching funds over the 3-year grant period. According to a state official, the state match was appropriated by the legislature, and $10 million was budgeted for 1998. This state match was appropriated to the California Department of Social Services, to be allocated among the state’s county welfare departments for welfare-to-work activities. The welfare departments, in collaboration with service delivery areas, locally elected officials, and other local stakeholders, will determine how to use the state matching funds to meet the welfare-to-work needs of their communities. California’s 52 local service delivery areas were required to submit welfare-to-work plans for state review and approval. California believed it was important for local areas to exhibit a sense of program direction before receiving welfare-to-work funding and wanted to ensure that workforce development agencies had coordinated their proposed welfare-to-work activities with the state’s 58 county welfare departments. The state legislature passed a law allowing the local areas to prepare joint plans; consequently, there are a total of 41 local plans. For example, the eight local service delivery areas in Los Angeles County prepared one plan for the entire county. According to a state official, as of September 30, 1998, 22 individuals were enrolled in welfare-to-work formula grant programs statewide. In California, the local service delivery areas are responsible for developing welfare-to-work programs to meet their communities’ demographic and workforce needs. California’s state plan noted that given the diversity of the state’s local service delivery areas, no one service strategy could be effectively applied statewide. A state official explained that urban areas with many employment opportunities may choose to focus heavily on work experiences in the private sector. On the other hand, rural areas, with fewer employers, may rely heavily on community service work experiences in their welfare-to-work programs. California allocated 85 percent, or $161,854,660, of the federal formula grant to the local service delivery areas using the following formula: 55-percent weight was given to the number of people with incomes below the poverty level in excess of 7.5 percent of the service delivery area population; 15-percent weight was given to the number of unemployed people in the service delivery area; and 30-percent weight was given to the number of adults receiving welfare for at least 30 months in the service delivery area. This formula was developed to ensure that all local areas would receive the $100,000 federally required minimum allocation. California limited local service delivery areas to an administrative cost cap of 13 percent. The governor’s welfare-to-work discretionary funds, 15 percent of the formula funds, totaled $28,562,587. With $23 million of these funds, as shown in table VI.2, the state funded 24 projects throughout the state that were selected on a competitive basis. The state required that the proposed use of these discretionary funds be coordinated with local workforce preparation and welfare reform partners, and applicants were encouraged to develop linkages with businesses, economic development practitioners, and supportive service agencies. Consequently, the grantees will use the funds in conjunction with other local resources to support a mix of the federally allowable welfare-to-work employment activities and services as determined by the local community. Asian American Drug Abuse Program, Inc. Community Career Development, Inc. Contra Costa County Social Service Department Martinez El Dorado County Department of Social Services Fresno County Economic Opportunities Commission Goodwill Industries of Southern California Housing Authority of San Bernardino County Human Resources Agency of Santa Cruz County Joint Efforts, Inc. Labor’s Community Services Agency Learning Center of Tehama County Mendocino County Social Services Department Ukiah North Santa Clara Valley Job Training Consortium Pacific Asian Consortium in Employment Rubicon Programs, Inc. Sacramento County Department of Human Assistance San Joaquin County Private Industry Council South Bay Center for Counseling Vietnamese Community of Orange County Youth Employment Partnership, Inc. An additional $1.5 million of the governor’s discretionary funds was awarded through a competitive process to six regional collaboratives to promote and encourage education and leadership through a cooperative process. The six award recipients included Humboldt County, Ventura County, San Joaquin County, East Bay Works, Los Angeles County Collaborative, and the Inland Empire. The remaining $4,062,587 in governor’s welfare-to-work discretionary funds will be used by the state for welfare-to-work administration. Recognizing that local performance goals may differ somewhat from those in the state plan, California set three performance goals for the welfare-to-work program as benchmarks to assist the state in providing technical assistance to local areas. California’s initial formula grant program performance goals for the first year include (1) a placement rate, (2) a follow-up employment rate, and (3) a follow-up increase in earnings goal. In 1997, California had an average caseload of about 830,000, some of whom will be provided assistance under welfare-to-work. The state goals for welfare-to-work are to place a minimum of 45 percent of welfare-to-work program participants in unsubsidized employment; of those placed, a minimum of 70 percent should be employed 6 months after placement, and their average weekly wage at a 6-month follow-up should increase by 10 percent over the average weekly wage at placement. The state required that local plans describe local performance goals for placements, job retention, and increased earnings. In Massachusetts, the Department of Labor and Workforce Development is the welfare-to-work federal grant recipient and its quasi-public subentity, the Corporation for Business, Work and Learning, is the state welfare-to-work administering entity. Massachusetts submitted its welfare-to-work plan on January 7, 1998. On February 25, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $20,692,295. The state assured $10,346,148 in state matching funds over the 3-year grant period, specifically assuring $5 million for 1998. According to a state official, this match is from funds previously appropriated by the state legislature for adult basic education and child care programs; the matching funds will be used to serve welfare-to-work-eligible participants through these programs. In Massachusetts, each of the 16 Regional Employment Boards was required to submit a “preplan” proposing local welfare-to-work strategies, and these plans were incorporated into the state welfare-to-work plan. Once Labor awarded the formula grant, the state required the Regional Employment Boards to submit final plans containing additional details such as local performance goals. According to a state official, the state had approved all of the local plans by April 1998 and, as of September 30, 1998, 434 individuals were enrolled in welfare-to-work formula grant programs statewide out of the target population of 7,000 likely to lose cash benefits by December 1, 1998. The state planned to use welfare-to-work funds to target and assist welfare recipients facing the most significant barriers to employment. The state’s welfare-to-work program focused on serving welfare recipients nearing the state-imposed 24-month deadline for cash assistance. A state official said that about 7,000 welfare recipients in Massachusetts were expected to lose cash assistance benefits as of December 1, 1998. Within the state focus, the local service delivery areas may further specify the target population and choose the mix of services most appropriate for their area’s needs. The state plans to spend at least 70 percent of formula funds on the hardest-to-employ long-term welfare recipients as required by law and up to 30 percent of the grant funds on individuals with characteristics of long-term welfare recipients. According to a state official, Massachusetts’ welfare-to-work program staff are finding it easier to initially enroll all participants under the 30-percent expenditure category (long-term welfare recipient). In order to enroll participants under the 70-percent expenditure category (those determined to be the hardest to employ), additional testing is necessary to verify eligibility characteristics. Although state and local officials are confident that there are enough people with the necessary characteristics to satisfy the 70-percent requirement, they note that the additional assessment needed for their eligibility determination is expensive and time consuming. Massachusetts allocated 85 percent of the federal formula grant, or $17,588,452, to the local service delivery areas using the following formula: 50-percent weight was given to the number of people with incomes below the poverty level in excess of 7.5 percent of the service delivery area population; 10-percent weight was given to the number of unemployed people in the service delivery area; and 40-percent weight was given to the number of long-term welfare recipients in the service delivery area having received assistance for at least 30 months. By the substate formula, all of the areas received more than the required $100,000 minimum; however, the state decided to allot a minimum of $400,000 to each local area. Consequently, as shown in table VII.1, $524,808 of the governor’s welfare-to-work discretionary funds were used to increase the allocations for five local service delivery areas to this level. According to a state official, the Regional Employment Boards may use no more than 12.23 percent of their grants for welfare-to-work administrative purposes. N/A = not applicable. The governor’s welfare-to-work discretionary funds, 15 percent of the formula funds, totaled $3,103,843. The state planned to use these funds for the following purposes: $524,808 to subsidize the five service delivery areas allocated the lowest amount of welfare-to-work formula funding; $165,000 to the Corporation for Business, Work and Learning to provide an information system technology upgrade capable of handling interagency welfare-to-work data; $718,562 for state welfare-to-work administration; and $1,695,473 for the Department of Transitional Assistance to supplement its program of assessment and structured employment assistance. Although specific, numeric performance goals were not included in the state plan, the state proposed to serve 3,979 welfare-to-work participants and will measure placement in private sector employment, placement in any employment, the duration of placement, and increases in earnings. The state required each local service delivery area to specify performance goals based on these measurements. In Michigan, the Michigan Jobs Commission is the welfare-to-work federal grant recipient and state administering entity. Michigan submitted its welfare-to-work plan on December 11, 1997. On January 29, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $42,226,331. The state assured $21,113,166 in matching funds over the 3-year grant period. According to a state official, this match was appropriated by the state legislature, and $10 million was appropriated through September 30, 1998. Michigan required its 25 local service delivery areas to submit two local plans for state review and approval: one for the federal formula grant funds and another for state matching funds appropriated by the state legislature. According to a state official, all of the local plans were approved by September 4, 1998, and, as of September 30, 1998, about 340 individuals were enrolled in welfare-to-work formula grant programs statewide. The state planned to use welfare-to-work funds primarily to serve noncustodial parents. On July 1, 1998, Michigan instituted a statewide noncustodial parent program and, depending on their eligibility, these parents may be served with welfare-to-work funds. To increase child support payments, Michigan’s state plan emphasized serving unemployed noncustodial parents who have child support payments in arrears and whose dependents are receiving TANF assistance; the failure of noncustodial parents to participate in the welfare-to-work program without good cause could lead to their incarceration. Local service delivery areas must devote 50 percent of their welfare-to-work grant funds to assist this population. Michigan distributed its governor’s discretionary formula funds to the local areas, providing them with more funding to meet their noncustodial parent expenditure goal. Furthermore, the courts will identify and refer eligible participants to welfare-to-work programs. Within this state focus on noncustodial parents, the local service delivery areas designed their own strategies for the use of welfare-to-work funds, including services to the hardest-to-employ TANF clients referred to welfare-to-work programs by the state welfare agency. For all welfare-to-work participants, the state plan emphasized vigorous case management during the first 90 days of employment to ensure employment retention. Michigan allocated all of the $42,226,331 federal formula grant to the local service delivery areas using the following formula: 50-percent weight was given to the number of people with incomes below the poverty level in excess of 7.5 percent of the service delivery area population, and 50-percent weight was given to the number of welfare recipients in the service delivery area who had received assistance for at least 30 months. Along with the federal formula funds, Michigan obligated $19,212,981 in state matching funds to the local service delivery areas, for a total of $61,439,312, using the same formula applied to the federal funds. Although two local service delivery areas were allocated less than $100,000 by formula, as shown in table VIII.1, the state provided them with their formula allocations of both federal and state welfare-to-work funds. Michigan planned to use 9 percent ($1,900,185) of the state matching funds for welfare-to-work administration; service delivery areas may spend up to 15 percent of their allocations on welfare-to-work administration. Eastern U.P. Western U.P. Michigan allocated 100 percent of the federal formula grant funds to the local service delivery areas. The state retained none of the allowable 15 percent governor’s discretionary funds ($6,333,950) at the state level. Performance goals were not included in the state plan, but Michigan planned to measure duration of placement into unsubsidized employment, increased child support collection, and earnings, measured after 90 days of employment and other times throughout the year. In New York, the Department of Labor is the welfare-to-work federal grant recipient and state administering entity. New York submitted its welfare-to-work plan on June 29, 1998. On September 11, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $96,886,094. The state assured $48,443,047 in state matching funds over the 3-year grant period. According to a state official, the state provided half of the state match through a legislative appropriation and required local service delivery areas to provide the remaining half of the state match through in-kind or cash contributions. New York requested that an alternate agency be designated to administer the welfare-to-work program in 2 of its 33 service delivery areas. The Secretary of Labor granted waivers for these two areas, and the welfare-to-work program is administered by the human services agencies for New York City and the Syracuse/Onondaga area. The state required these two human services agencies and the remaining 31 Private Industry Councils to submit plans proposing local welfare-to-work strategies and incorporated these plans in the New York State welfare-to-work plan. As of September 30, 1998, a state official said that most of the local areas were designing their welfare-to-work eligibility determination processes in conjunction with the local social services departments, but none of the local areas had reported enrollments of welfare-to-work participants in the formula grant program. New York’s state plan for formula funds proposed a general focus on improving the connection to work, providing postemployment assistance, and serving the needs and requirements of employers. The state plan emphasized serving individuals with disabilities, many of whom have experienced long-term welfare dependency but are no longer exempt from work requirements. Within these state initiatives, the local service delivery areas may further specify the target population and choose the mix of services most appropriate for their area needs. New York allocated 85 percent, or $82,353,180, of the federal formula grant to the local service delivery areas using the following formula: 50-percent weight was given to the number of people with incomes below the poverty level in excess of 7.5 percent of the service delivery area population, 25-percent weight was given to the number of long-term welfare recipients in the service delivery area having received assistance for at least 30 months, and 25-percent weight was given to the number of unemployed people in the service delivery area. By using this formula, as shown in table IX.1, all of the service delivery areas in New York qualified for more than $100,000 in formula funds. Local areas can use up to 15 percent of their funding for administrative costs. Total funds available for welfare-to-work (continued) Numbers may not add because of rounding. New York planned to use the governor’s discretionary funds, 15 percent of the formula funds or $14,532,914, for several purposes, awarding grants to a variety of organizations—some to supplement allocations to service delivery areas, others to independent organizations. The largest amount of funding, $8.5 million, was allocated to a multiagency effort called the New York Works Employment Retention and Advancement program for innovative projects to serve “work-limited” individuals, such as people with mental illness, substance abusers, and people with disabilities. Through this program, the state will fund, on a competitive selection basis, as many projects as possible, with awards ranging from a $50,000 minimum to an $850,000 maximum. These projects will provide specific services to move clients into employment and provide postemployment services to help working participants keep their jobs and increase their earnings. New York also planned to use $2,229,000 of the governor’s funds for grants to two local service delivery areas. Although all of the local service delivery areas in the state had the opportunity to obtain additional welfare-to-work moneys from the governor’s discretionary funds, only two applied. New York City and Sullivan County, the service delivery areas with the highest and lowest formula grants, received $2,168,000 and $61,000, respectively. New York’s client information campaign received $3,271,000 of the funds for projects designed to help clients make informed employment choices while transitioning off welfare. These projects include an update of the state’s resource guide, a faith-based initiative, a CD-ROM, teleconferences, and an agreement with the state’s Department of Transportation print shop for printed materials. Finally, about $500,000 was designated for the Office of Alcohol and Substance Abuse Services to provide services for welfare-to-work-eligible substance abusers. The state planned to place 38 percent of the those who receive assistance through the welfare-to-work grant program in unsubsidized jobs; furthermore, the state planned that of those placed, 46 percent are to continue to be employed after 6 months and to have an increase in earnings of $214 over this time period. In Wisconsin, the Department of Workforce Development is the welfare-to-work federal grant recipient and state administering entity. Wisconsin submitted its welfare-to-work plan on April 13, 1998. On June 15, 1998, Labor awarded fiscal year 1998 formula grant funds to the state totaling $12,885,951. Collectively, the state and local service delivery areas assured $6,442,976 in state matching funds over the 3-year grant period. According to a state official, local service delivery areas were required to match their federal allocations, and recipients of the governor’s discretionary funds matched their allocations. Wisconsin required its 11 local administrative entities to submit local welfare-to-work plans for state review and approval. One local service delivery area chose not to submit a plan. According to a state official, as of September 30, 1998, no welfare-to-work participants had been enrolled statewide in formula grant programs. Wisconsin planned to target noncustodial parents with its formula grant funds and, because its TANF caseload is low, the state also proposed to assist individuals receiving TANF child care subsidies rather than cash assistance. A state official explained that for working families, child care subsidies are considered TANF payments, making recipients eligible for welfare-to-work as long-term TANF recipients. Within the state’s focus, the local service delivery areas may further specify the target population and choose the mix of services most appropriate for their area’s needs. 50-percent weight was given to the number of long-term welfare recipients in the service delivery area having received assistance for at least 30 months. Since one service delivery area could not obtain matching funds for its allocation of $174,741 and chose not to participate in the welfare-to-work program, Wisconsin deducted this amount from the total substate funds available and allocated $10,778,317 of the federal funds among the remaining delivery areas, as shown in table X.1. Two local service delivery areas, Waukesha-Ozaukee-Washington and Marathon County, qualified for less than the $100,000 federally required minimum; consequently, their allocations reverted to the governor’s discretionary funds before being issued to the two local areas. Local service delivery areas may use up to 15 percent of their welfare-to-work funds for administrative costs. Fox Valley (Northern Lake Winnebago and Winne-Fond-Lake) South Central (Dane County and South Central) Bay Area (Northeastern and Lake Michigan) Southwest (Southwest and Rock County) United Migrant Opportunity Services for projects serving migrants and seasonal farmworkers in rural areas; $180,000 to be allocated among 8 projects serving Southeast Asian immigrants; $100,000 to the state’s Division of Economic Support to modify its data support system; $100,000 to the Division of Workforce Excellence for welfare-to-work administration; and $189,934 to the Division of Economic Support to hire research analysts. Additionally, the allocations for the two local service delivery areas that received under $100,000 were temporarily added to the governor’s discretionary funds and were reallocated to the two local areas. A state official said that Wisconsin did not include specific, numeric performance goals in its state plan, but the service delivery areas have local goals that are similar to their JTPA performance measures. Wisconsin had approximately 30,000 TANF recipients in 1997, some of whom will receive assistance from welfare-to-work. Of those who receive assistance from welfare-to-work, the goal is for a significant percentage to obtain unsubsidized employment, ranging from 40 percent in Milwaukee to 80 percent in other areas of the state; of those placed in unsubsidized employment, duration goals range from 40 percent of participants remaining employed after 3 months in Milwaukee to 70 percent remaining employed after 12 months in areas with lower unemployment; and for wage increases, the goal is that participants will experience a countable increase in earnings, such as the goal of a 40-percent wage increase over previous wage levels in Milwaukee, with starting wages as high as $7.75 an hour. Welfare Reform: Implementing DOT’s Access to Jobs Program (GAO/RCED-99-36, Dec. 8, 1998). Welfare Reform: Early Fiscal Effects of the TANF Block Grant (GAO/AIMD-98-137, Aug. 18, 1998). Welfare Reform: States Are Restructuring Programs to Reduce Welfare Dependence (GAO/HEHS-98-109, June 18, 1998). Welfare Reform: Transportation’s Role in Moving From Welfare to Work (GAO/RCED-98-161, May 29, 1998). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information about: (1) welfare-to-work formula and competitive grants awarded to, or declined by, states for fiscal year (FY) 1998; (2) how selected grantees are planning to use these funds; and (3) how selected grantees plan to meet welfare-to-work requirements to better integrate the states' workforce development services with other human services for welfare recipients. GAO noted that: (1) The Department of Labor (DOL) awarded formula grants to 44 states plus the District of Columbia, Guam, Puerto Rico, and the Virgin Islands with welfare-to-work funding available for FY 1998, and, as of November 20, 1998, it had awarded competitive grants to 126 organizations with combined welfare-to-work funding available for fiscal years 1998 and 1999; (2) six states--Idaho, Mississippi, Ohio, South Dakota, Utah, and Wyoming--did not participate in the welfare-to-work formula grant program; (3) these states, which would have received a total of about $71 million, chose not to participate for various reasons, including concerns about their ability to provide state matching funds; (4) Arizona was the only state that applied for formula grant funds but did not pledge sufficient matching funds to receive its maximum federal allocation; (5) the competitive grant funds Labor awarded represented all welfare-to-work funds available for FY 1998 and about a third of the FY 1999 funds; (6) most states had at least one local service organization that received competitive grant funds; (7) three of the six states GAO reviewed--Massachusetts, Michigan, and Wisconsin--outlined very specific uses for formula funds, while plans for the other three states--Arizona, California, and New York--indicated that the use of these funds would be determined by the local service delivery areas; (8) Michigan's and Wisconsin's plans emphasized assistance to unemployed noncustodial parents--these parents, mostly fathers, often have child support payments in arrears and dependents who are receiving welfare cash assistance; (9) Massachusetts focused on serving Temporary Assistance for Needy Families recipients who are reaching their time limits on cash assistance; (10) in contrast, California's plan did not emphasize a specific welfare-to-work service strategy because state officials believed that no one service strategy could be applied effectively throughout the state; (11) similarly, Arizona and New York allowed local service delivery areas to decide on strategies for using formula grant funds; (12) state and local officials in the six states GAO reviewed noted that a stronger partnership was developing between the workforce development agencies and other human service agencies assisting welfare recipients, in part because of their joint involvement in the welfare-to-work planning process; and (13) the welfare-to-work competitive grantees also coordinated their plans with state and local officials. |
To describe the availability, use, and affordability of manufactured housing, we reviewed and analyzed data from the U.S. Census Bureau’s Manufactured Homes Survey (MHS) from 2000 to 2013 and 2011 American Housing Survey (AHS) on the production and location of manufactured housing and the characteristics of owners. We also compared the costs to occupants of manufactured homes with the costs of other housing choices, using available 2012 data—the most recent data available—from the Home Mortgage Disclosure Act (HMDA) database. By assessing related documentation, we found these data to be sufficiently reliable for the purposes of describing manufactured housing production trends and the affordability and financing of manufactured homes. Additionally, we visited large and small manufactured housing plants in Indiana and Pennsylvania, selected for their size and proximity to our offices, where we obtained information on factors affecting the cost of manufactured home sales. To assess whether the HUD Manufactured Housing Program was meeting the Act’s intent for establishing a consensus process for developing, revising, and interpreting standards, we reviewed: Federal Register Notices from HUD, from 2002 until 2013, to understand the creation of the MHCC; MHCC documents, such as available meeting minutes and voting ballots from 2002 until 2013 to assess the timing and topics of MHCC recommendations to HUD; proposed and final rules from 2002 until 2013 to assess the status of documentation of HUD’s efforts to ensure the operation of the MHCC and rulemaking process, such as the contract for the administering organization and related documents; and HUD’s staffing and other resources allocated to the program. We also interviewed HUD officials, six manufacturers in Indiana and Pennsylvania, industry representatives, and MHCC officials to obtain their views on the process for updating the standards. We compared this process with similar processes for establishing widely accepted industry construction standards for residences and interviewed officials from the International Code Council (ICC), the private standard-setting organization that develops model building codes for homes other than HUD manufactured homes. To assess HUD’s efforts to facilitate the availability of affordable manufactured homes, we collected and analyzed fiscal year 2012 data from Federal Housing Administration (FHA) loan programs. By assessing related documentation and interviewing agency officials, we found these data to be sufficiently reliable for the purposes of this report. By reviewing the number of purchase loans reported we were able to examine the extent to which these programs supported loans for manufactured homes and compared FHA’s support for manufactured and site-built homes, using 2012 HMDA data. Because 2012 HMDA data do not distinguish between the types of loans made for manufactured homes (such as chattel or personal property loans, which are often used for manufactured homes, and mortgage loans), we were not able to assess the characteristics of different types of loans. We also collected and reviewed research on manufactured housing from HUD and other organizations on the affordability of manufactured homes. We interviewed HUD officials from the Office of Manufactured Housing Programs and the Office of Policy Development and Research (PD&R) to assess HUD’s efforts and plans to promote the availability of these homes. Additionally, we obtained information from consumer organizations and interviewed four of the largest lenders, based on HMDA data, which provided loans to owners of manufactured homes, to understand the availability of financing for manufactured homes and to obtain the lenders’ perspective on any challenges involved in financing these homes. To assess the HUD Manufactured Housing Program’s ability to oversee enforcement of the HUD Code, we collected audits from HUD’s monitoring contractor from August 2011 to August 2012 to determine whether audits for all plants had been completed as required and evaluated how HUD had used the information from the audits. We also reviewed HUD’s policies, procedures, and mechanisms for enforcing the HUD Code. Finally, we obtained information from program officials and state administrative agencies, interviewed officials of manufacturers that we visited representing large and small manufacturing facilities, and discussed enforcement issues with manufactured housing trade associations. To examine funding for the Manufactured Housing Program, we reviewed programmatic data found in HUD’s operating plans for the program for fiscal years 2009 through 2013. We reviewed annual appropriations, yearly program obligations, program carryover balances, and revenues raised from the collection of label fees during that period and checked these figures against those stated in both HUD’s yearly budget justifications and congressional appropriations acts. We obtained agency data on the use of program obligations and interviewed officials from HUD’s Offices of Manufactured Housing Programs and Budget to understand the agency’s goals and strategies for maintaining the program and the Manufactured Housing Fees Trust Fund, and efforts to assess the appropriate level of label fees and the feasibility of instituting other authorized user fees. We compared these practices with those found in our user fee guide and previous GAO reports. Finally, we interviewed manufactured home manufacturers to obtain industry views on the potential effects of any label fee increases and reviewed statutory and regulatory guidance related to the collection and use of user fees. We conducted this performance audit from January 2013 through May 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. HUD is responsible for enforcing the federal manufactured home construction and safety standards that it established under the National Manufactured Housing Construction and Safety Standards Act of 1974 (1974 Act). The 1974 Act authorized HUD to develop construction and safety standards for manufactured homes and to oversee the enforcement of the standards through inspections and reviews of building plans. HUD developed the Manufactured Housing Construction and Safety Standards, commonly known as the HUD Code, basing them in substantial part on the National Fire Protection Association (NFPA) standards for manufactured homes (NFPA 501). The HUD Code was implemented in 1976, and replaced the state-by-state patchwork of regulations that existed prior to 1976 with one set of rules that all manufactured home builders must meet. The HUD Code is applied nationwide and preempts state and local codes. As a result, state and local building authorities may not apply their own codes to manufactured homes for components covered by the HUD Code. Unlike site-built homes, which are constructed at their permanent locations, manufactured homes are constructed in factories and must have a permanent chassis that allows them to be moved to retailers and consumers in different states and localities. Manufactured homes can be single-section or multi-sectional units with two or more sections (as shown in fig. 1). Manufactured homes can be placed on temporary or permanent foundations (see fig. 2). Manufactured homes also differ from modular homes, which are another type of prefabricated home and are often designed and constructed by the same manufacturers on the same production lines as manufactured homes. Like other site-built homes, modular homes are categorized as real property and are built to state and local building codes, most commonly the International Residential Code (IRC). Unlike manufactured homes that are towed to the sites on their own permanent chassis, modular home sections, or modules, are transported on truck beds and assembled on site. For the purposes of this report, we include modular homes under our definition of site-built homes. Unlike site-built homes, which are titled as real property and usually financed through a mortgage, a manufactured home may be financed as either personal or real property. When a home buyer purchases a manufactured home without tying the purchase to land, the home is generally considered personal property, or chattel—that is, it is a movable, “personal” possession, much like an automobile. Manufactured homes are sometimes grouped together in communities where residents may either own or lease the home, but lease the land. However, according to Manufactured Homes Survey (MHS) data, in 2013 70.2 percent of manufactured homes were placed on leased or owned land outside of manufactured home communities. One lender we interviewed told us that homeowners in rural areas often placed manufactured homes on real property owned by a relative but did not want to place a lien on the land to purchase the manufactured home. When a manufactured home is attached to the underlying land by a permanent foundation and the home and the land are treated as a single real estate title under state law, the home is considered real property. In such instances, the borrowers can obtain a conventional real estate loan or a government-guaranteed mortgage through traditional mortgage lenders. According to the MHS, 13.7 percent of manufactured homes that were placed in service in 2013 were titled as real estate, 78 percent were titled as personal property, and the remainder (8.3 percent) were not titled. The National Manufactured Housing Construction and Safety Standards Act of 1974 was amended by the Manufactured Housing Improvement Act of 2000 (2000 Act) to create a balanced consensus process for establishing and revising manufactured home building standards. The 2000 Act created the Manufactured Housing Consensus Committee (MHCC), a Federal Advisory Committee charged with providing recommendations to the Secretary on the revision and interpretation of HUD Code and related procedural and enforcement regulations. HUD’s Office of Manufactured Housing Programs is responsible for carrying out certain provisions of the 2000 Act. Under the law, the HUD Secretary is directed to establish appropriate federal manufactured home construction and safety standards as well as model standards for the installation of manufactured homes. The Office of Manufactured Housing Programs is tasked with regularly updating the standards based on careful analysis of MHCC’s recommendations, the manufactured housing industry, and consumers. The Office of Manufactured Housing Programs is also tasked with approving certain state agencies and private third- party entities that inspect manufactured housing plants to determine whether manufacturers are complying with the HUD Code. Each manufacturer contracts with two types of third-party entities, a Design Approval Primary Inspection Agency (DAPIA) and a Production Inspection Primary Inspection Agency (IPIA). Generally, DAPIAs review and approve all manufactured home designs, design changes, and quality assurance manuals. IPIAs are responsible for assuring that the manufacturing plant follows the quality assurance manual and inspecting each home at some stage of production in the plant. IPIAs also issue the HUD Certification Label that is attached to each section of the home upon completion (see fig. 3 below). The 1974 Act also established the preemptive status of the HUD Code, as it stipulated that if a home is built to the HUD Code, state and local building authorities may not apply their own codes that are applicable to the same element of performance. The 2000 Act stated that the federal preemptive authority was to be “broadly and liberally construed.” For instance, a state or local municipality cannot require that the distances between a HUD home’s air intake and exhaust vents be greater than the 3-foot minimum currently stipulated in the HUD Code. One particular entity that relies heavily on the preemptive status of the HUD Code is the Federal Emergency Management Agency (FEMA). FEMA is a large purchaser of manufactured homes, which are utilized as temporary housing units under its emergency management operations across different states. To help ensure that all manufactured homes comply with the HUD Code, HUD has entered into cooperative agreements with 37 state governments that participate as state administrative agencies (SAA) to conduct periodic checks of plant records and to oversee the handling of consumer complaints. HUD’s staff is responsible for carrying out these same functions in the 13 states without SAAs and the District of Columbia (see fig. 4). Annual shipment of new manufactured homes has declined substantially in recent years. According to the MHS, about 250,500 manufactured homes were shipped to retailers in the United States in 2000. In 2012 the number of manufactured homes shipped fell to 54,900 (see fig. 5). According to the MHS, manufactured homes shipments increased to about 60,000 in 2013. Despite the decline in new shipments in past years, in 2013 approximately 5.9 million HUD Code compliant manufactured homes were in use in the United States, accounting for 5.1 percent of total occupied housing units. However, the concentration of manufactured homes varies across regions. The southern United States, for instance, has the highest concentration, with manufactured homes making up approximately 8 percent of the region’s total occupied homes (see fig. 6). In addition, the majority of manufactured homes are located in non- metropolitan areas, in part because of land constraints or barriers such as zoning laws in metropolitan areas. According to data from the 2011 American Housing Survey (AHS), over half of manufactured homes (52.4 percent) were located in non-metro areas in that year, compared to about 25 percent of single family homes and 11 percent of rented apartments.13, 14 As with other single family homes, manufactured homes tend to be occupied by their owners rather than rented to others. In 2011, about 81 percent of the manufactured homes built after 1975 in the U.S. were owner occupied, and 16 percent were rented for cash. In comparison, about 85 percent of all single family homes were owner occupied in 2011 (see fig. 7). Our analysis also showed that owners of manufactured homes tended to have lower incomes than other homeowners. In 2011, about 75 percent of owners of manufactured homes had household incomes of less than $50,000, compared with about 77 percent of apartment renters, about 41 percent of owners of single family homes, and about 52 percent of owners of one story single family homes (see fig.8). Our analysis also showed similar income characteristics for manufactured home owners located in non-metropolitan areas. In 2011, about 76 percent of owners of manufactured homes had household incomes of less than $50,000, as compared with about 90 percent of apartment renters, 51 percent of owners of single family homes, and about 62 percent of owners of one story single family homes (see fig. 9). Our analysis of the 2012 MHS and 2011 AHS data also showed that manufactured homes were an affordable housing option in terms of their relatively low sales prices and monthly costs. In 2012, single-section manufactured homes were priced, on average, at $41,175 and multi- section manufactured homes at $75,525. Manufacturers we interviewed said that these homes cost less to build than site-built homes, including modular homes, primarily because on-site construction and transportation costs for manufactured homes are less than those associated with modular homes and other site-built homes. Manufactured homes also typically had lower monthly costs, including loan payments, taxes, rent, utilities, and other fees, than site-built homes. In 2011, around 16 percent of owners of manufactured homes paid $1,000 or more in monthly costs, compared with 55 percent of owners of single family site-built homes. Around 45 percent of manufactured home owners paid less than $500 in monthly costs, while 19 percent of owners of single family site-built homes paid less than $500 each month (see fig. 10). Owners of manufactured homes also had lower monthly costs than renters. According to the AHS data, the median monthly cost of owning a manufactured home in 2011 was approximately $550, while the median monthly costs for apartment renters that same year were $800. Although manufactured homes generally cost less to purchase than other homes and have lower monthly costs, owners of manufactured homes are more likely to have higher-priced financing than owners of site-built homes. According to 2012 HMDA data, manufactured home loans accounted for about 2.5 percent of all one-to-four family purchase loans. However, according to the HMDA data, they comprise 34 percent of all high-priced purchase loans. Moreover, 74 percent of conventional purchase loans for manufactured homes were identified as high-priced loans, compared with 24 percent of purchase loans supported by FHA, the U.S. Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). Private lenders, such as national consumer finance companies, also provide financing for purchasing manufactured homes. Loans generally take the form of home-only or chattel loans rather than real estate mortgages. According to some lenders we interviewed and one consumer organization, these loans typically have higher interest rates and shorter terms (15-20 years versus 30) than home mortgages. HUD has encountered challenges in meeting key purposes of the 2000 Act, as seen by, among other things, delays and backlogs in its rulemaking process, limited assessment of financing alternatives, and incomplete documentation of enforcement-related activities. The purposes of the 2000 Act include (1) establishing a consensus-based process to update and interpret manufactured housing safety and construction standards and regulations for enforcing them; (2) facilitating the availability of affordable manufactured housing; and (3) ensuring uniform and effective enforcement of manufactured housing standards and protecting consumers. More specifically, the 2000 Act requires HUD to establish the MHCC to submit proposed standards within each 2-year period from the time its members are appointed. The MHCC must submit the standards in the form of a proposed rule, and include an economic analysis, for each proposal.set of proposals within 30 days of submittal and respond to each set within a 1-year period. Further, it directs HUD to review the programs for FHA manufactured home loans, develop any changes that would promote the affordability of manufactured homes, and encourage the government- sponsored enterprises (GSE) to develop and implement secondary market securitization programs for these loans. Finally, the Act requires that HUD ensure uniform and effective enforcement of the HUD Code. HUD has met the requirements for the initial establishment of both the MHCC and a process for updating the HUD Code. In 2001, HUD entered into a contract with an administering organization for the MHCC and continued to work with the contractor through June 2013, when the contract expired. HUD rebid the contract in July 2013 but as of the release of this draft to HUD in May 2014 had not awarded the contract to a new administering organization. This organization is a private-sector standard-setting body with specific experience in developing building codes. It is responsible for managing the MHCC—for example, recommending new members—and for administering the processes for developing new standards. As required by the Act, the MHCC consists of 21 members, who are all appointed volunteers. They represent three groups: producers and retailers, consumers, and general interest and public officers, including regulatory organizations. The administering organization first appointed members to the MHCC in August 2002. HUD last updated the roster of MHCC members in February 2013. HUD has also put in place a process for updating the standards. First, MHCC reviews proposals submitted by its members, HUD, or the public. As required by the Act, if two-thirds of the MHCC members approve a proposal, the committee finalizes it and recommends it to HUD in the form of a proposed rule with an economic analysis. HUD is required to publish the proposed rule within 30 days of receiving the MHCC’s proposals. According to HUD officials, if the MHCC does not prepare a proposed rule with an economic analysis, HUD develops the proposed rule and the economic analysis. After this step, the proposal follows the typical rulemaking process, including an Office of Management and Budget (OMB) review, publication in the Federal Register, and a public comment period. After reviewing the public comments and possibly revising the recommendations, HUD adopts, modifies, or rejects the recommendation and publishes the decisions in a Final Rule (see fig. 11). HUD also submits the rule to its congressional authorizing committees for 15 days before publication of the proposed rules. For the most part, the MHCC has met the requirements for submitting proposed standards within each 2-year period. The MHCC last submitted recommendations for changes in the standards in January 2012 and January 2013, when it recommended approval of 9 proposals. However, HUD officials stated that because the former administering organization did not formally submit these last 9 proposed MHCC recommendations from January 2012 and January 2013, the agency will not begin to consider them until it receives them from a new administering organization. We found that from its inception in 2003 to January 2013, the committee submitted 174 recommendations. As we have seen, the 2000 Act requires that not later than 12 months after receiving a MHCC recommendation to the HUD Code, HUD must either adopt and publish the recommendation as a final rule, reject the recommendation and publish the reasons for the rejection, or publish a modified version and provide for a comment period. However, we observed that HUD had not accepted, rejected, or modified any of the MHCC recommendations for updating the HUD Code within 1 year of their submission. According to HUD officials, the relevant procedural requirements and timelines for acting on MHCC’s recommendations were not triggered because the MHCC did not submit the recommendations in the form of proposed rules that included relevant economic analyses, as required by the 2000 Act. HUD officials said that the administering organization was responsible for providing technical support to the MHCC in developing proposed rules and economic analyses. For example, the contract for fiscal year 2013 required the administering organization to ensure the availability of subject-matter expertise necessary to support the satisfactory performance of the MHCC, including activities related to the federal rulemaking process. However, one official from the former administering organization told us that both it and the MHCC lacked the expertise and resources to draft proposed rules and conduct economic analyses. HUD and the administering organization have acknowledged that the MHCC does not have the expertise or resources to conduct economic analyses. According to HUD officials, because the MHCC and the administering organization had not been able to develop proposed rules with adequate economic analyses, none of the submissions from the MHCC had been complete, and the 1-year statutory requirement for adopting, modifying, or rejecting MHCC proposals has never been triggered. HUD officials also said that because of the lack of adequate proposed rules with economic analyses from the MHCC or its administrative agent, HUD staff have developed rules and done the analyses, delaying the rulemaking process. In fact, HUD’s revisions to the Code have taken substantially longer than the timeframes specified in the 2000 Act. HUD has updated the Code twice (in 2005 and 2013). According to HUD officials, in November 2005 (in its first update of the Code), HUD published a final rule in the Federal Register that contained 36 MHCC recommendations submitted in February 2003 and July 2004, most of which were adopted without any further modifications by it. The second update of the Code consisted of 49 recommendations also proposed by MHCC in 2003. While at least some of these recommendations were the subject of further discussions between HUD and MHCC, HUD did not publish a proposed rule in the Federal Register containing these recommendations until July 2010 and did not publish a final rule until December 2013. As of May 2014, HUD was still considering 35 recommendations that the MHCC submitted in 2009 and 2010. As stated earlier, according to HUD officials, because the administering organization did not formally submit an additional 9 recommendations in 2012 and 2013, HUD will not consider these recommendations until it receives them from a new administering organization (see fig. 12 for a depiction of the timelines for five examples of manufactured housing construction and safety standards for which HUD had completed final rules). According to HUD officials, this additional workload posed by the tasks of developing proposed rules and economic analyses has further strained existing staff resources. Further, HUD officials voiced concerns over other administrative and legislative impediments to producing more timely updates to the HUD Code. These include the Act’s requirement that HUD publish a proposed rule within 30 days of receiving the MHCC’s recommendations, the requirement for a 15 day pre-publication review by Congress, a 30-60 day public comment period, as well as allowing sufficient time for other administrative reviews, including review by OMB. HUD requested increased staffing for fiscal year 2005 to better meet the 1-year requirement for updating the standards, but staff levels have not increased. Also, the position of Administrator of the Office of Manufactured Housing Programs remained vacant from 2010 until March 2014. Other than the earlier attempt at increasing staff levels, and facing ongoing challenges, HUD has no plan for ensuring more timely updates to the construction and safety standards. Standards for internal control emphasize the need for federal agencies to establish plans to help ensure goals and objectives can be met, including compliance with applicable laws and regulations. As we previously found, the lack of updates to the HUD Code has delayed implementation of important safety devices, reducing the effectiveness of the standards and, over time, creating discrepancies between the HUD Code and other commonly accepted residential building standards, which are updated every 3 years. pending recommendations include requirements for carbon monoxide detectors, which are now incorporated in industry standards. Safety concerns have led some states and localities to begin requiring certain safety features for homes in their jurisdictions. For instance, Pennsylvania state officials told us that at least one locality required that manufactured homes have anti-scalding devices in showers before the HUD Code included them in December 2013. The HUD Code did not address this area of performance and therefore, according to HUD, a jurisdiction could have imposed such a requirement without conflicting with the preemptive HUD Code. However, the costs to purchasers of a manufactured home could be significant if the manufacturer had not already installed such a device. That is, a homeowner might be required by the locality to install such devices at a cost of hundreds of dollars. Further, according to officials from the State of Pennsylvania, this modification of the homes’ plumbing might void the manufacturers’ plumbing warranty. As mentioned earlier, the MHCC recommended anti- scalding devices in February 2003 and the HUD Code will require these devices beginning in June 2014. GAO, Manufactured Housing Standards: Testing and Performance Evaluation Could Better Ensure Safe Indoor Air Quality, GAO-13-52 (Washington, D.C.: Oct. 24, 2012). Carbon monoxide detectors are not intended to be used as a measure of, or to test for, adequate indoor air quality but are a safety device to warn occupants in the event of a dangerous build-up of carbon monoxide gasses in the air. Conditioning Engineers have required carbon monoxide detectors for all residential site-built and modular homes since 2009 and 2010, respectively. While the MHCC recommended in 2009 that this standard be required for all new manufactured homes, HUD has not yet adopted this proposal. According to HUD officials, as of May 2014 HUD is considering the proposal to require carbon monoxide detectors. Until HUD works its way through its backlog of proposals, purchasers of manufactured homes could face increased costs and, in some cases, potential safety hazards. HUD offers two loan insurance programs that provide financing for manufactured homes, FHA Title I and Title II. Both programs are intended to insure lenders against losses in the event of a default. Homebuyers and homeowners may finance the purchase of or refinance their manufactured home, lot, or both through the FHA Title I program, which insures both chattel and mortgage loans. Manufactured homes titled as personal property are financed through chattel loans and would be eligible for Title I. Home buyers and homeowners may also finance the purchase or refinancing of their home through the Title II program, which insures mortgages for all types of single family homes, including manufactured homes that are classified as real estate. Manufactured homes titled as real estate and installed on a permanent foundation would be eligible for Title II. Considering both its Title I and Title II loan programs, FHA plays a smaller role in the financing of manufactured homes than in the financing of other single family homes, according to HMDA data. Specifically, 2012 HMDA data, which include both chattel and real property manufactured housing loans, showed that FHA programs made up 17.5 percent of all loans for the purchase of manufactured homes, but 27 percent of loans for the purchase of one-to-four family homes. Although the Title I program is intended in part to serve the needs of the manufactured housing market, owners of manufactured homes use it less often than Title II. In 2012, FHA insured a total of 654 Title I manufactured home loans and 12,301 Title II manufactured home loans. According to data from the MHS, in that same year nearly 41,000 newly placed manufactured homes were titled as personal property, while 8,000 newly placed manufactured homes were titled as real estate. FHA officials stated that they were not aware of specific barriers that consumers faced in obtaining Title I loans, but noted that two nationwide lenders participated in the program. Ginnie Mae securitizes FHA Title I manufactured home loans and works with these lenders. One Ginnie Mae official explained that although the agency had experienced losses from manufactured housing products in the past, the agency had conducted ongoing outreach with lenders to increase participation in the Ginnie Mae program. FHA arranged a meeting between Ginnie Mae officials and several manufactured housing stakeholders to discuss requirements for participating in the Ginnie Mae program. Industry representatives requested less stringent eligibility criteria for those wanting to issue Ginnie Mae-guaranteed securities backed by Title I loans. At present, Ginnie Mae requires that such issuers have a minimum net worth of $10,000,000. In contrast, issuers of securities backed by Title II mortgages must have a minimum net worth of $2,500,000. According to one HUD official, issuers of securities backed by Title I loans bore greater risk that necessitated the higher net worth requirement. A number of factors contribute to the increased risk, including higher losses because of greater frequency of default and lower insurance coverage. According to one Ginnie Mae official, Ginnie Mae had invited the industry to provide additional data to demonstrate the performance of their manufactured home loans, but had yet to receive a response. According to a Ginnie Mae official, it has continued to engage with lenders and industry representatives, but have so far received no data demonstrating the performance of these loans. Further, Fannie Mae and Freddie Mac, which guarantee and purchase loans from mortgage lenders, play less of a role in providing liquidity to lenders of manufactured home loans than they do in providing liquidity to lenders of loans on other single family properties. HMDA data indicated that of conventional loans for manufactured homes, 7 percent were sold to Fannie Mae and Freddie Mac, compared to 41 percent of conventional loans for site-built homes. One lender of manufactured home loans cited certain underwriting constraints that limited their participation in Fannie Mae and Freddie Mac programs. For example, Fannie Mae requires an appraisal of the manufactured home with comparable local manufactured homes titled as real estate, a requirement that can be challenging, particularly in rural areas with relatively few homes and where many manufactured homes are titled as personal property. Fannie Mae and Freddie Mac do not purchase loans for manufactured homes titled as personal property. Because of these constraints, most financing for manufactured homes, whether chattel or real property, is provided through private lenders. According to industry representatives and one lender, lenders often hold these loans in their portfolios and do not sell them on the secondary market. Some lenders we spoke with indicated that they declined to work with the FHA loan products because of the administrative burden. These lenders also stated that they believed Fannie Mae and Freddie Mac should buy chattel loans in addition to real estate loans. According to testimony given by the Manufactured Housing Institute during a House of Representatives field hearing on November 29, 2011, the lack of a viable secondary market for manufactured home loans has led to higher financing costs. The institute noted that the lack of liquidity in the manufactured housing market restricted buyers’ access to low-cost loans and that the available loans sometimes carried higher interest rates than loans for site-built homes. As stated previously, loans for manufactured homes are more likely to be higher priced than loans for site-built homes. Although some of these differences may be due to differences in credit strength, the generally higher interest rate associated with financing a manufactured home diminishes, in part, because of some of the affordability benefits that we discussed earlier. Recognizing the impact that a lack of low-cost financing could have on the affordability of manufactured homes, Congress directed HUD in the 2000 Act to review the FHA programs for manufactured home loans. The Act required that HUD develop any changes in, among other things, loan terms, amortization periods, regulations, and procedures that might promote the affordability of manufactured homes. However, HUD has not yet examined or researched the effectiveness of these loan programs because its research has focused on other priorities. HUD’s most recent study on manufactured housing focused on state and local regulatory barriers to placing manufactured homes in urban communities. Other research that PD&R has coordinated includes aspects of manufactured housing as they relate to energy efficiency and the environment. PD&R’s Research Roadmap for fiscal years 2014 through 2018 proposed researching the manufactured housing market and the effect of financing on manufactured housing demand. However, HUD did not select this proposal for its fiscal year 2015 Budget Request and, according to one HUD official, it was not among the highest priorities. Additionally, the FHA Manufactured Housing Loan Modernization Act of 2008 required HUD to revise FHA’s Title I program. See Pub. L. 110-289, Division B §§ 2141-2150. HUD revised Title I to increase loan amount limits and amend credit underwriting requirements, among other changes. See Title I letters TI 481 and TI 484. Also, in response to the FHA Modernization Act, Pub. L. 110-289, Division B, §§ 2101 – 2133, HUD made manufactured homes eligible for Title II insurance if treated as real estate by the local authority, even if not treated as real estate for purposes of state taxation, as well as individual manufactured housing units in condominium projects. See Mortgagee Letter 2009-16. guaranteed loans on manufactured homes with permanent foundations perform worse than all RHS single family guaranteed loans. However, this analysis did not control for other factors that might explain these differences, such as borrower and property characteristics. FHA collects such data, which should permit a more rigorous analysis of loan performance. Further, FHA officials stated that they evaluate Title I manufactured housing loan performance and the Title I insurance fund to ensure that premiums are sufficient to cover program expenses, as required by the Housing Economic Recovery Act 2008 (HERA). However, FHA has not analyzed the performance of Title I and Title II manufactured housing loans to understand the different participation levels in the programs and lacks a plan for doing so. As noted earlier, standards for internal control emphasize the need for federal agencies to establish plans to help ensure goals and objectives can be met, including compliance with applicable laws and regulations. Such research could further HUD’s understanding of the relationship between loan performance and property type, providing information that it could potentially use to encourage lenders to participate in the federal program. The Act also requires HUD to conduct research and make other efforts to encourage the enterprises and Ginnie Mae to actively develop and implement secondary market securitization programs for federally insured loans for manufactured homes, as well as those of other loan programs, in order to promote the availability of affordable manufactured homes. As we have seen, industry officials have cited the lack of a viable secondary market for manufactured housing loans as a factor in higher financing costs, especially for chattel loans. However, HUD was unable to identify any efforts, other than the discussions with Ginnie Mae, which it had undertaken to encourage the enterprise to do more to help securitize additional manufactured home loans. A Ginnie Mae official pointed to their prior experience in working with issuers of securities backed by manufactured home loans insured under the FHA Title I program. Specifically, he cited experience with lenders that were unable to fulfill their commitments, requiring Ginnie Mae to pick up servicing of their portfolios. The official also noted that lenders might not want to securitize their loans through Ginnie Mae because they had other sources of funding and wished to keep these loans in their portfolio. The official noted that one of the largest such lenders met the net worth requirement for Ginnie Mae and was an approved issuer of Ginnie Mae securities backed by Title I loans. Nonetheless, it is not clear that HUD has conducted research and other efforts to encourage the enterprises and Ginnie Mae to actively develop and implement secondary market securitization programs for FHA manufactured home loans or loans guaranteed by other federal programs. Further, it remains uncertain that the enterprises would enter the market for securitizing loans on manufactured homes that are titled as personal property. Under HERA, which resulted in the enterprises being placed under conservatorship by the Federal Home Finance Administration (FHFA), Congress also directed the enterprises to serve specified underserved markets, including manufactured housing. HERA provided that in determining whether the enterprises had adequately served the manufactured housing market, FHFA could consider loans secured by both real and personal property. However, in 2010 FHFA published a proposed rule that would establish a method for evaluating and rating the Fannie Mae and Freddie Mac’s performance in underserved markets. The proposed rule also excluded loans for manufactured homes titled as personal property from consideration for securitization because, as FHFA stated, these loans would require substantial efforts by the Fannie Mae and Freddie Mac “to ensure safe and sound operations and sustainable homeownership for families.” Another purpose of the 2000 Act is to help ensure uniform and effective enforcement of federal construction and safety standards for manufactured homes. To do this, HUD uses a monitoring contractor that reviews the activities of organizations that inspect manufactured home design and production activities. However, HUD could not demonstrate that it has consistently taken actions in response to the monitoring contractor’s “Recommendations for HUD Follow-Up.” These recommendations highlighted items that HUD should follow-up on based on the contractor’s review of IPIA and DAPIA inspections in manufacturing plants. For example, in some cases the HUD monitoring contractor noted that an IPIA was not performing inspections as required in certain plants and recommended that HUD take action to ensure that the appropriate corrective measures had been taken. HUD officials maintained that they did conduct follow up actions such as phone calls and provided us with emails showing follow-up on some of the findings we inquired about, but did not provide documentation showing that the agency consistently acted on all the monitoring contractor’s findings or the outcome of follow-up actions taken. HUD officials also said that they had not been able to devote further attention to monitoring and following up on findings from the monitoring contractor because of resource issues and time limitations. Standards for federal internal controls suggest that, among other things, monitoring activities should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. Without consistent documentation of the outcome of these follow-up efforts, HUD has limited assurance that issues identified during the enforcement process are being resolved and that federal construction and safety standards for manufactured homes are uniformly and effectively applied. HUD acknowledged that the monitoring contractor did not provide a deliverable from a recently completed monitoring contract period (July 2011 through July 2012). The missing item was a transition plan that would have documented activities tied to the monitoring contract in the event that HUD decided to assume the activities in the contract or hire a new contractor. The transition plan was intended to provide a plan for transferring all data and property associated with the contract to the government and/or a new contractor should HUD decide to assume the activities of the contract or transfer them to another contractor. Such information could aid HUD in exploring other options for conducting the work called for in the monitoring contract. Overall, such a condition raises questions and uncertainties about HUD’s oversight of its monitoring contract as well as whether the data that were not delivered in a transition plan represents significant noncompliance under the contract. Among other things, the Federal Acquisition Regulations (FAR) state that contracting offices are responsible for ensuring that nonconformances are identified, and establishing the significance of a nonconformance when considering the acceptability of supplies or services which do not meet contract requirements. FAR 46.103(e). HUD also oversees a complaint process that is intended to help with the goal of ensuring uniform application of manufactured housing standards. In part, HUD relies upon the 37 state administrative agencies (SAA) that respond to consumer complaints and periodically review manufacturer facilities. However, HUD did little to assess the content of complaints. For example, HUD does not maintain a consolidated complaint log to evaluate in a systematic fashion the nature and resolution of complaints involving manufactured housing, or the entities involved. HUD’s website directs consumers to individual SAAs where they may file complaints. There are 13 states where no SAA exists, thus making HUD the primary focal point for complaints in those states. However, even for the complaints it does receive, HUD does not maintain a consolidated complaint log or record to identify their extent and nature. The complaint process has the potential to play an important role in quantifying the extent of complaints tied to homes built under the HUD Code, understanding the nature of complaints, and ensuring that the safety standards are followed. Standards for federal internal controls suggest that organizations, among other things, establish monitoring activities to assess the quality of performance over time, including identifying and correcting deficiencies within established time frames, which a comprehensive complaint system would help accomplish. Looking ahead, we also noted that on-site construction activities pose new challenges for HUD’s inspection efforts on manufactured homes. HUD’s testing and inspection activities of manufactured homes are focused within the plant itself. However, some construction activities occur on-site. One of the most common building layouts to surface over time has been the construction of manufactured homes in two or more factory-built units, or sections (see fig. 13). For example, a manufactured home may consist of two complete sections that are joined together on- site to create a multi-section manufactured home. Consequently, other construction activities, such as the completion of siding and joining roofs, are occurring on-site, outside of the factory. Since we sent a draft of this report to the agency for comment, HUD has accepted a transition plan from its monitoring contractor, which was the same entity that served as the monitoring contractor for the contract that ended July 2012. GAO-13-52. HUD is authorized to collect fees from builders of manufactured homes to offset the expenses it incurs in carrying out its responsibilities under the Manufactured Housing Program. HUD currently assesses a $39 label certification fee per transportable manufactured housing unit produced by manufacturers. HUD set the level of the label certification fee in 2002 and has not increased it, although declining sales of manufactured homes mean that fee collections no longer cover the program’s annual costs. Under the 2000 Act, all HUD label certification fee collections from HUD transportable units are deposited into the Manufactured Housing Fees Trust Fund and are available for use to the extent provided in annual appropriations acts. The 2000 Act also stipulated that the amount HUD charges for label fees may only be modified as specifically authorized in advance in an annual appropriations act and pursuant to a rulemaking. In addition, the 2000 Act specifies the activities for which the Office of Manufactured Housing Programs may use the funds appropriated from the Manufactured Housing Fees Trust Fund. HUD can use the label fees to cover contractual costs, carry out inspections, or monitor aspects of the program in the 13 states and the District of Columbia that do not have SAAs. HUD can also use them to pay the 37 SAAs that enforce the HUD Code and handle consumer complaint activities on HUD’s behalf to offset the costs they incur. Fees and appropriations from the general fund are held in the Manufactured Housing Fees Trust Fund. The Fund may have reserves that are carried over from one fiscal year to the next, helping the Office of Manufactured Housing Programs make payments at the beginning of each fiscal year. As the production and sale of manufactured homes generally declined after 2002, revenue collections from HUD certification label fees also fell, dropping to historically low levels in 2011. As we have seen, sales of transportable units fell from approximately 325,000 in fiscal year 2002 to around 90,000 in fiscal year 2013. This decline in sales, reflecting a decline in production, in turn, significantly reduced HUD’s revenue from label fees, which fell from around $12,000,000 in 2002 to less than $3,000,000 by 2011 (see fig. 14). At the same time, obligations for the Manufactured Housing Program have increased. According to HUD, until 2009, the number of manufactured homes built and sold generated enough in label fee revenue to cover the costs of the HUD Manufactured Housing Program. Beginning in fiscal year 2009, however, the revenue that label fees generated was insufficient to cover the program’s obligations. According to data that HUD officials provided to us, the Manufactured Housing Program’s obligations were $6.62 million in 2009, when HUD generated $3.3 million in label fees. In each of the following years, HUD generated less revenue in label fees than it incurred in obligations. For the most recently completed fiscal year, fiscal year 2013, HUD had $10.1 million in obligations, while generating only $3.5 million in label fees. For fiscal year 2014, HUD estimates that program obligations will total roughly $10.0 million but the program will only collect $6.53 million in label fees. According to officials, these obligations include expenses associated with office staff and program administration (including payments to SAAs), as well as costs related to MHCC activities—monitoring contractors, administration, and planning meetings. The officials said that payments to SAAs were a major programmatic cost and noted that the payments made to each SAA varied from year to year, depending on the activities the states undertook. For fiscal year 2014, HUD projected that the costs of annual SAA payments and the contract for monitoring inspection agencies of the Office of Manufactured Housing would total $7.3 million, or 73 percent of the program’s projected obligations. HUD officials noted that in recent years SAAs had been taking a more active role in HUD Code monitoring and enforcement and, as a result, HUD’s payments to them and the monitoring contractor had increased. In order to meet its increasing budget obligations, the program has relied on congressional appropriations from the U.S. Department of Treasury’s general fund. From 2009 through 2013, the program took in approximately $16.1 million in label fees and had programmatic obligations of around $38.3 million. During this same period, the program received $22.2 million in congressional general fund appropriations to make up the gap between its program costs and label fee revenue. Furthermore, the program’s year-end carryover balances in recent years have been higher as a direct result of general fund appropriations that are available until expended (see fig. 15). In fiscal year 2014, HUD’s budget justification called for a total of $7.53 million in budget authority, including up to $6.53 million in estimated label fees and $1 million in general fund appropriations. In its fiscal year 2014 budget justification, the agency projected that the number of transportable units for which label fees are paid was not expected to significantly increase, and proposed an increase to the certification label fee of up to $100 in order to increase label fee revenue. HUD’s budget justification for fiscal year 2015 also calls for an increase in label fees from $39 to $100. HUD’s Office of Manufactured Housing Programs currently projects a gradual increase in transportable unit sales through the end of fiscal year 2015 and estimates that fee collections in 2015 will be approximately $10 million dollars. The agency also stated in its 2015 congressional budget justification that its projected label fee revenue, combined with small amounts of unobligated balances from prior years, would be sufficient to fully fund the program’s operating requirements in 2015. The HUD Office of Manufactured Housing Programs has stated its intent to raise label fees in previous HUD budget justifications dating back to fiscal 2009 and, as a result, had anticipated higher label fee collections in previous years. However, total user fee collections have fallen short of projections of the Office of Manufactured Housing Programs because it did not raise its label fees or seek other additional user fee income (see fig. 16). Despite its stated intent for several years to raise label fees, HUD did not take the necessary actions to implement these label fee increases. Standards for federal internal controls suggest that organizations, among other things, establish plans to achieve their objectives, including effective and efficient operations using the entity’s resources.Housing Program officials stated that at the end of 2013 they had begun working with HUD’s Office of General Counsel on a proposed rule designed to raise label fees. At present, HUD officials stated their intent to have a final rule permitting this label fee increase ready to be implemented at the end of 2014. However, as of April 2014, the agency Manufactured had not issued any notices of proposed rules regarding label fee increases. Since fiscal year 2009, HUD has proposed increases to the label certification fee in all but one of its congressional budget justifications. The Chief Financial Officers (CFO) Act and OMB Circular A-25 provide for biennial fee reviews that include recommendations about adjustments to fees, as appropriate. While HUD Manufactured Housing Program officials told us that they have not conducted any such biennial reviews of their HUD label fees, program officials told us they have completed analysis of label fees in previous years. The label fee analysis that HUD officials provided to GAO was based on manufactured home production estimates, the amount of direct appropriations the program receives, the amount of carryover the program has from the previous year, and the anticipated program office activity and expense levels for the upcoming year. We previously concluded that whether fee rates are set by the agency in regulation or by Congress in statute, agencies must substantively review and report on all cost-based fees regularly to better ensure decision makers have complete information about program costs and activities. Agencies should provide program information to agencies, stakeholders, and Congress. These reviews can improve transparency, help ensure that fees remain aligned with program costs and activities, increase awareness of the costs of the federal program, and therefore increase incentives to reduce costs where possible. We previously found that user fee design and review should address how the user fees will be linked to a program’s fixed and variable costs and whether or not user fees are set at a rate that enables the program to respond to spikes and surges in demand for the good or service upon which they are collected. Agencies should also seek to identify which factors drive fee revenue instability, and whether or not a particular program has other sources of funding which may mitigate initial revenue shortfalls. In order to identify and manage revenue instability, decision makers need regular information and analysis to understand potential vulnerabilities in the context of the specific fee design.The appropriate analysis can help an agency obtain a thorough understanding of factors such as cost drivers and elements that influence collections. Without regular comprehensive reviews, agencies and Congress may miss opportunities to make improvements to a fee’s design which, if left unaddressed, could contribute to inefficient use of government resources. For example, fee reviews could help ensure that fees are properly set to cover the total costs of those activities that are intended to be fully fee-funded, thus eliminating the need for direct appropriations for those activities. Furthermore, not reviewing fees regularly can create costly challenges for user fee programs and agencies, such as larger fee increases, when fees are ultimately increased. Regular fee reviews can help ensure that Congress, stakeholders, and agencies have complete information about changing costs and whether a fee needs to be changed, help identify opportunities to revise fees in ways that enhance user funding of goods or services above and beyond what is normally available to the public, and can be a useful step towards examining whether the activities themselves are duplicative or overlapping. Since fiscal year 2009, Congress has authorized the HUD Manufactured Housing Program to collect additional user fees in the form of installation fees and dispute resolution fees in states where HUD operates installation and dispute resolution programs. The 2000 Act required HUD to establish and implement a manufactured home installation program for states that chose not to operate their own installation programs. According to HUD, the federal installation program ensures the inspection of over 7,000 manufactured home installations annually, as well as the training and licensing of over 2,000 installers in the 19 states that do not have such programs. Additionally, the 2000 Act requires HUD to establish and implement a manufactured home dispute resolution program for states that choose not to operate their own dispute resolution programs. The program provides for the timely resolution of disputes between manufacturers, retailers, and installers regarding responsibility for the repair of defects in manufactured homes. HUD maintains a dispute resolution program in the 23 states that have no such program. Any dispute resolution and installation fees that HUD collects are to be deposited into the Manufactured Housing Fees Trust Fund and used to offset the costs of the Manufactured Housing Program. For fiscal years 2009 through 2012, the Office of Manufactured Housing Programs stated that it intended to collect a total of $11.2 million in fees from its dispute resolution and installation programs. However, HUD officials told us that the agency had not collected any of these fees, citing reasons such as the insufficient resources to implement such fees and the considerable administrative and logistical burden the agency would face. Under the authority granted in section 620 of the 2000 Act allows the Office of Manufactured Housing Programs to use HUD label fees to help pay for other aspects of the program, such as the dispute resolution and installation programs. However, as we have seen, because HUD has not increased label fees it has not generated sufficient fee revenue to meet the program’s costs. Despite this shortfall in fee revenue, HUD has not assessed how it might put in place a program for assessing and collecting installation and dispute resolution fees, nor has it assessed the costs and benefits that such a program might realize. HUD officials also stated that they have yet to develop any specific program goals that would help in establishing a minimum or maximum amount of reserve funding for the Manufactured Housing Fees Trust Fund or the appropriate levels of program carryover balances for the Manufactured Housing Program. Officials stated that the program’s carryover balances vary from year to year; are based on label fees collected, general fund appropriations, and program obligations; and are capped each year by the budgetary authority granted to the Office of Manufactured Housing Programs in each year’s congressional appropriations act. HUD officials stated that each fiscal year’s carryover balance is established by the remaining amount of funding available once all program obligations had been paid, and consequently they saw little need to examine the costs or benefits of establishing longer or shorter goals for the Manufactured Housing Fees Trust Fund. Regardless of the authority under which a user fee reserve is created, setting clear goals for the reserve and clarifying how those reserves will be used helps ensure accountability and transparency both to Congress and users of fee-based programs. Agencies may wish to use a reserve to help ensure long-term financial stability, to position the agency to respond to varying economic conditions, to smooth expected fluctuations in costs or collections, or to build capital for necessary infrastructure improvements or mitigate unforeseen and unavoidable revenue shortfall. To further ensure accountability and adherence to any reserve fund goals, establishing minimum and maximum reserve levels, justified by program data and risk management considerations, may be advisable. Longstanding unresolved issues in implementing reforms to the HUD Manufactured Housing Program limit the potential for achieving key purposes specified in the 2000 Act. Although the 2000 Act mandates that HUD act on proposed changes to the HUD Code within a 1-year period of the proposal being approved by the MHCC, this requirement has not been effective in accelerating the rulemaking process. HUD has not considered any of the proposals made by the MHCC to be subject to the 1-year deadline because the MHCC has not submitted recommendations in the form of proposed rules with adequate economic analyses, as required by the Act. Because the MHCC and the previous administering organization lacked the expertise to develop recommendations in the proper form, HUD’s staff has developed the proposed rules and conducted the economic analyses with limited staff resources. Despite these longstanding shortcomings, known resource limitations, and other administrative and legal impediments it faces, HUD has not identified how it might ensure more timely updates of the standards in achieving the purposes of the Act. As a result, it took over 10 years after receipt of a proposal from the MHCC for HUD to make some of the recent updates to the HUD Code. In contrast, building codes for use in site-built (including modular) homes are updated on a recurring basis every 3 years raising questions about HUD’s effectiveness in establishing meaningful and timely standards for manufactured housing. Ultimately, delays in updating the standards can result in families seeking an affordable housing option bearing additional costs when they must retrofit their homes to meet local and state standards that have outpaced the scope of the HUD Code, or being denied the benefit of safety and other standards that the consensus committee has recommended. Although the higher cost of financing manufactured homes can limit their potential affordability, HUD has done little to implement the Act’s requirements for reviewing FHA programs for providing manufactured home loans and developing any changes that might further promote the affordability of manufactured homes, or for conducting research and other efforts to determine the potential for the enterprises and Ginnie Mae to actively develop and implement better secondary market securitization programs for manufactured home loans. Although HUD PD&R proposed a study on the financing of manufactured homes for its 2014 to 2018 Research Roadmap, HUD selected other research projects over this proposal and does not yet plan to conduct this study. Without analysis and research into the contribution financing might make toward the affordability of manufactured housing, HUD has little assurance that its loan programs and securitization programs of Ginnie Mae and the enterprises are appropriately promoting the availability of affordable manufactured homes. HUD’s efforts to ensure compliance with the HUD Code rely on actions of others, including the monitoring contractor that reviews the activities of inspectors of manufacturers. However, we found that HUD lacked consistent documentation of actions it had taken in response to significant audit findings of the monitoring contractor. Further, HUD has no mechanism to catalogue complaints received by HUD and the SAAs. Without such documentation and transparency, HUD cannot determine the nature and content of complaints and whether any patterns might suggest further analysis or action. Ultimately, these weaknesses limit the potential for the enforcement process to ensure that federal safety and construction standards for manufactured homes are having their intended effect. Given its limited resources, HUD will likely face continued challenges in ensuring its standards are followed and needs to make the most efficient use of the resources it does have to enforce those standards. In recent years, the HUD Manufactured Housing Program has relied on general fund appropriations to bridge the gap between its declining label fee revenue and its higher programmatic obligations. The current fee structure, which is based on per unit fees charged for labels indicating that units have been built in accordance with the HUD Code, is at its present amount not sufficient to fully fund the program. However, HUD had not put in place the increased label fees that it had proposed in 5 of the last 6 fiscal years. Nor has HUD taken steps to rigorously assess the feasibility of establishing inspection and dispute resolution fees that Congress has authorized. The 1990 CFO Act and OMB guidance provide for biennial fee reviews that include recommendations about adjustments to the fees, as appropriate. A rigorous analysis of user fees can help an agency obtain a thorough understanding of factors such as cost drivers and elements that influence collections. HUD cited a number of reasons for not increasing label fees or considering other fees, including political pressure, the presence of large carryover balances that grew after receiving general fund appropriations, and challenges in implementing new user fees. Given manufactured home production levels in recent years and the constrained resource environment that the federal government faces, it is important for HUD’s Office of Manufactured Housing Programs to consider all revenue streams at its disposal including higher label fees and the potential for others fees already authorized by Congress. Further, delaying increases in user fees has the potential to require even higher fee increases when they are ultimately made—increasing any potential disruption to the manufactured housing market. Finally, the HUD Office of Manufactured Housing Programs has not established any programmatic goals for the Manufactured Housing Fees Trust Fund, or established recommended minimum and maximum reserve levels. Due to a lack of analysis, HUD may be unaware of the optimum levels of trust fund reserves or yearly carryover balances needed to maximize the Manufactured Housing Program’s operational efficiency. GAO best practices state that unobligated balances in fee programs may represent a reserve intended to manage the effects of revenue instability. Setting clear goals for a program’s user fee reserves and clarifying how those reserves will be used can help ensure both accountability and transparency to Congress and users of fee-based programs. To further ensure accountability and adherence to any reserve fund goals, establishing minimum and maximum reserve levels, justified by program data and risk management considerations, may also be advisable. However if agencies and Congress are not deliberate in their design of a reserve fund to effectively manage an agency’s user fee program, any unobligated funds built up may be rendered ineffective as a reserve fund. In an era of limited resources, these steps will help HUD provide the most reliable information to Congress as it considers program funding and the sufficiency of fund reserves. To better ensure the viability and safety of manufactured housing produced in accordance with the HUD Code, the Secretary of the Department of Housing and Urban Development should take the following three actions: Develop and implement a plan for updating construction and safety standards for manufactured homes on a timely, recurring basis to include: addressing unresolved issues related to defining and developing sufficient economic analyses tied to proposed changes to the construction and safety standards; and ensuring sufficient resources and capacity within HUD and the MHCC and its administering organization; or if such a plan cannot be devised and implemented, identify and report to Congress on alternative methods of ensuring the quality, durability, safety, and affordability of manufactured homes, including the possibility of relying more extensively on existing industry standards. Develop a plan to assess how FHA financing might further promote the affordability of manufactured homes and identify the potential for better securitization of manufactured housing financing. Strengthen the oversight of inspections and enforcement-related consistently documenting actions taken to resolve recommendations from completed audits and the outcome of such actions, completing a Transition Plan for the monitoring contractor activity, and exploring the feasibility of developing a cost-effective systematic process for collecting and evaluating information on the content of complaints. To better ensure that Congress, stakeholders, and agencies have complete information about changing costs and whether a fee needs to be changed, HUD should: Complete the necessary rulemaking changes to allow the Office of Manufactured Housing Programs to adjust its label fees from the $39 per label toward levels up to the congressionally authorized level that better reflect the current levels of manufactured home production, while considering the impact that such fees may have on the industry; put in place a process for regular fee reviews to determine whether the fees currently being charged will allow the program to respond to spikes and surges in label fee revenue and to identify any factors that may drive label fee revenue instability; and identify any additional sources of funding that may mitigate initial revenue shortfalls and the program’s fixed and variable costs. Assess the feasibility, including an analysis of the benefits and costs, of putting in place user fees for its dispute resolution and installation programs. Establish the goals for use of reserves of the Manufactured Housing Fees Trust Fund, and the minimum and maximum thresholds for the reserves appropriate for meeting these goals. We provided a draft of this report to HUD for review and comment. HUD provided written comments that are discussed below and presented in Appendix I. HUD agreed with two recommendations, partially agreed with two recommendations, and stated its intent to consider the remaining two recommendations. HUD also described actions it planned to take or had taken in response after receiving the draft report. We reiterate the importance of HUD addressing fundamental program weaknesses and that it efficiently use the resources it has and take advantage of all potential sources of revenue. We therefore continue to recommend that HUD act on the report’s recommendations. HUD also provided technical comments that were incorporated as appropriate. HUD agreed with our first recommendation to develop a plan to accelerate future updating of the construction and safety standards on a timely, recurring basis. Specifically, this plan would address, among other things, unresolved issues related to the economic analyses that must accompany proposed rules and ensuring that MHCC has sufficient resources to perform its duties. However, HUD said that implementing such a plan would be contingent upon its appropriations levels. As we stated in our report, HUD will likely face continued financial challenges in ensuring that its standards are followed and will need to make the most efficient use of available resources to enforce them. However, as stated in the report, we found that the lack of updates to the HUD Code had delayed implementation of important safety devices, reducing the effectiveness of the standards and, over time, creating discrepancies between the HUD Code and other commonly accepted residential building standards, which are updated every 3 years. For example, several states require carbon monoxide detectors, which are not addressed by the HUD Code. The IRC and the American Society of Heating, Refrigerating, and Air-Conditioning Engineers have required carbon monoxide detectors for all residential site-built and modular homes since 2009 and 2010, respectively. Until HUD addresses the backlog of MHCC proposals, purchasers of manufactured homes could face increased costs due to a need to retrofit these homes and, in some cases, potential safety hazards. We also recommended that if HUD cannot devise and implement a plan for more timely HUD Code updates and improve its workforce planning efforts and budget submissions, it should identify and report to Congress alternative methods of ensuring the quality, durability, safety, and affordability of manufactured homes, such as relying more extensively on existing industry standards. HUD partially agreed with our second recommendation. HUD stated that Ginnie Mae agreed to develop a plan to identify the potential for better securitization of manufactured housing financing and that FHA would coordinate with Ginnie Mae as needed. However, HUD did not agree to develop a plan to assess how FHA financing might further promote the affordability of manufactured homes. HUD responded that FHA continuously monitors its programs to ensure that affordable credit is available. HUD added that FHA manufactured home policies and information on FHA Title I loans is to be included in HUD’s Single Family Policy Handbook, which is under development. Consolidating such program guidance may help lenders better understand FHA programs, but there is more that FHA could do to systematically assess how FHA financing might further promote the affordability of manufactured homes. The first step is to plan for such an assessment, as we recommend. As we state in our report, owners of manufactured homes use the Title I program, which was intended in part to serve the needs of the manufactured housing market, less often than Title II. FHA officials were not aware of barriers that might have precluded homeowners from applying for Title I loans. Recognizing the impact that a lack of low-cost financing could have on the affordability of manufactured homes, Congress directed HUD to review the FHA loan programs. However, as noted in the report, HUD has not taken action to fully address this requirement. As such, we recommended that HUD first develop a plan to formulate its actions to help ensure that the goals and objectives of these loan programs can be met. Without an analysis of and research into the contribution financing might make toward the affordability of manufactured housing, HUD has little assurance that its loan programs are appropriately promoting the availability of affordable manufactured homes. Thus, we continue to believe HUD should take action to fully implement this recommendation. HUD agreed with our third recommendation to strengthen oversight of inspections and enforcement-related activities. For example, HUD stated that it will consistently document actions taken to resolve recommendations from completed audits and their outcomes. In addition, after the agency received our draft report, HUD accepted a completed transition plan for the new monitoring contract. This action is consistent with our recommendation. Finally, HUD agreed to explore the feasibility of establishing a cost-effective systematic process for collecting and evaluating information on the contents of complaints. For example, HUD stated it would evaluate monitoring contractor findings resulting from manufacturer records during in-plant record reviews and from information collected by IPIAs resulting from their expanded requirements to review manufacturer service records at least monthly. HUD stated the process will include the establishment of a complaint log that the agency could use to regularly review complaints it received to determine whether investigations were warranted under HUD’s enforcement regulations. We note in the draft that such a log would help assure that safety standards are followed. HUD partially agreed with our fourth recommendation about implementing the necessary rulemaking changes to raise the label fee and putting in place a process for regular fee reviews. HUD reported that it had published a proposed rule in the Federal Register to increase the label fee from $39 to around $100 (as we provided the draft report for review and comment). Therefore, we revised the recommendation to direct HUD to complete the necessary rulemaking changes to allow for the label fee to be increased. HUD stated that it already had a process in place to regularly review user fees and that it was considering seeking authority to allow it to change the fee by Notice, rather than under full rulemaking procedures to better address possible revenue fluctuations in the future. However, as we noted in the report, the current user fee analysis provided by HUD was based on production estimates, appropriations, the amount of carryover from the previous year, and anticipated expenses. We noted that best practices for user fee reviews, such as examining the fixed and variable programmatic costs in relation to the user fees charged, and additional sources of funding that may mitigate initial revenue shortfalls or instability in the future, should be performed in maintaining the Manufactured Housing Fees Trust Fund. As a result, HUD continues to risk being unable to properly manage future revenue shortfalls if user fees are insufficient. Thus, we continue to believe HUD should take action to fully implement this recommendation. HUD agreed to consider our fifth recommendation that it assess the feasibility of putting in place user fees for dispute resolution and installation programs, but stated that its ability to do so is dependent upon appropriations levels. As we noted in the report, future user fee reviews must take into account additional sources of funding that could help prevent shortfalls, such as user fees from dispute resolution and installation programs. As discussed in the report, HUD has not collected such fees as authorized by Congress citing reasons such as insufficient resources. HUD officials explained that HUD label fees are to be used to pay for dispute resolution and installation programs. However, we found that because HUD had not increased label fees that it had not generated sufficient revenue to meet the program’s costs. As such, we believe that HUD should assess how it might put in place a program for assessing and collecting installation and dispute resolution feeds to strive to align these fees with costs in order to actively manage revenue instability. Thus, we continue to believe HUD should take action to fully implement this recommendation. HUD stated it would consider our sixth recommendation to establish goals for the use of reserve funds and the minimum and maximum thresholds for the reserves appropriate for meeting those goals. HUD stated that it is interested in obtaining more information on best practices for trust fund reserves for evaluating future fee amount changes. HUD also noted that by fiscal year 2015 it expects to operate solely on fee income after fiscal 2015 and does not foresee any remaining carryover balances at that time. However, as stated in the report, agencies may wish to use a reserve to help ensure the long-term financial stability of a user fee-funded program, to position the agency to respond to varying economic conditions, to smooth expected fluctuations in costs or collections, or to build capital for necessary infrastructure improvements or mitigate unforeseen and unavoidable revenue shortfall. To further ensure accountability and adherence to any reserve fund goals, establishing minimum and maximum reserve levels, justified by program data and risk management considerations levels, may be advisable. Thus, we continue to believe HUD should take action to fully implement this recommendation. In other comments, HUD officials voiced concerns over the manner in which we characterized efforts to update the HUD Code. Specifically, HUD officials took issue with a summary statement that it had not completed actions on recommendations from the MHCC within one year of their submission. We clarified the statement to specify that HUD had not accepted, modified, or rejected MHCC recommendations within one year of submission. HUD pointed to its position, already included in the draft report, that the one-year time period has never been triggered because HUD has never received recommendations with the proper economic analysis or format for rulemaking. In other comments HUD listed a series of administrative and legislative impediments to producing more timely updates to the standards. For example, HUD said that a requirement to publish a proposed rule within the 30-day time frame stipulated in the 2000 Act is unrealistic. In response, we further describe these concerns in the report. The challenges HUD faces in addressing these longstanding issues underscores the need for HUD to develop and implement a plan for updating construction and safety standards for manufactured homes on a timely, recurring basis, as we recommended. Further, as we recommended, if such a plan cannot be devised and implemented, HUD should identify and report to the Congress alternative methods of ensuring the quality, durability, safety, and affordability of manufactured homes, including the possibility of relying more extensively on existing industry standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Housing and Urban Development and interested congressional committees. 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) 512-8678 or sciremj@gao.gov. 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, Andy Finkel (Assistant Director), Barry Kirby (Analyst in Charge), Tim Bober, Stephen Brown, Tarik Carter, Emily Chalmers, Pamela Davidson, Alexandra Edwards, Juliann Gorse, Felicia Lopez, John McGrail, Marc Molino, Ruben Montes de Oca, Dae Park, Nadine Garrick Raidbard, Katherine Trimble, and James Vitarello made key contributions to this report. | Manufactured housing traditionally has been a low-cost option in the U.S. housing market. For nearly 40 years, HUD has provided standards for the manufactured housing industry by developing and updating the HUD Code. The 2000 Act was intended, among other things, to establish a balanced consensus process for updating the standards and regulations for enforcing them and to encourage manufactured housing as an affordable option. GAO was asked to study HUD’s implementation of the 2000 Act. This report addresses, among other things, the extent to which HUD has met key purposes of the 2000 Act and assesses whether user fees cover program costs. GAO interviewed and collected data for 2000-2013 from HUD, other agencies, and industry groups. GAO also visited large and small plants that built manufactured housing to solicit industry perspectives. HUD has established a process for updating the preemptive building standardsfor manufactured homes known as the HUD Code but has not fully met key purposes of the 2000 Manufactured Housing Improvement Act (2000 Act). Key purposes of the Act include: Establish a balanced, consensus-based process to update manufactured housing construction and safety standards. HUD has not accepted, rejected, or modified any of the Manufactured Housing Consensus Committee’s recommendations for updating the HUD Code within 1 year of their submission. The 2000 Act requires HUD to act on the committee’s recommended standards within 1 year if they were submitted in the form of a proposed rule with an economic analysis. According to HUD, because the committee did not include economic analyses in the proposals, HUD staff performed this task. They also stated because the proposals lacked the analyses, the Act’s 1-year timeline was not triggered. In some cases, HUD has not decided on recommendations made more than a decade ago and lacks a plan to address the backlog. Meanwhile, some states’ and localities’ residential building codes require standards not in the HUD Code, resulting in post-production upgrades that may increase costs to homeowners. Not updating the HUD Code delays its intended benefit—to improve the quality, durability, safety, and affordability of manufactured homes. Facilitate the availability of affordable manufactured homes. Owners of manufactured homes have lower monthly housing costs than site-built owners and apartment renters, but high financing costs often keep these homes from being even more affordable. HUD’s Federal Housing Administration (FHA) has two insurance programs for manufactured home loans. Although most manufactured homes are titled or owned as personal property, HUD’s programs primarily insure loans on manufactured homes financed as real estate. Additionally, owners of manufactured homes are more likely to have higher-priced financing than owners of site-built homes. The 2000 Act required HUD to review the effectiveness of the FHA programs, but HUD has not developed a plan to do so. Such research would help HUD determine whether and how it might further facilitate the availability of affordable manufactured homes. The 2000 Act establishes HUD’s authority to collect fees for certification labels on manufactured homes built to the HUD Code. The fees are placed in the Manufactured Housing Fees Trust Fund that provides annual appropriations to fund the expenses of the Manufactured Housing Program. The current fee rate does not produce sufficient collections to fully fund the program’s expenses and must be supplemented by annual appropriations from Treasury’s General Fund. HUD has indicated its intent to raise the label fee, which currently stands at $39. As we provided a draft of this report, HUD issued a proposed rule to increase the label fee, but has not yet completed the rulemaking process. It has also not fully assessed the feasibility and benefits of putting in place other fees authorized by recent appropriation acts, in part, because it has carryover balances from past years. Without more fee revenue, however, the program will continue to require Treasury’s General Fund appropriations. GAO makes several recommendations, including that HUD develop and implement a plan for updating construction and safety standards in a timely fashion; develop a plan to assess how FHA financing might further manufactured home affordability; complete label fee rule-making; and assess the need for other user fees. Of these, HUD agreed with the first recommendation and partially agreed with the next two because it believes it has already taken actions. HUD stated it would consider the last recommendation. GAO continues to believe these recommendations remain valid as discussed in the report. |
The Bureau’s $11.3 billion life-cycle cost estimate for the 2010 Census lacks timely and complete supporting data. The supporting data of the estimate is not timely because it does not contain the most current information from testing and evaluation. Also, the supporting data of the estimate is not complete because it does not provide sufficient information on the how changing assumptions could affect cost. In January 2004, we reported that the Bureau’s cost projections for the 2010 decennial census continue an escalating trend. As noted above, the Bureau now estimates the 2010 Census will cost $11.3 billion, making it the most expensive in history, even after adjusting for inflation. Although some cost growth can be expected, in part because the number of housing units—and hence the Bureau’s workload—has become larger, the cost growth has far exceeded the increase in the number of housing units. The Bureau estimates that the number of housing units for the 2010 Census will increase by 10 percent over 2000 Census levels. At the same time, as shown in figure 1, the average cost per housing unit for 2010 is expected to increase by approximately 29 percent from 2000 levels (from $56 per housing unit to $72 per housing unit in 2000 inflation-adjusted dollars). The risk exists that the actual, final cost of the census could be considerably higher. Indeed, the Bureau’s initial cost projections for previous censuses proved to be too low because of such factors as unforeseen operational problems or changes to the fundamental design. For example, the Bureau estimated that the 2000 Census would cost around $4 billion if sampling was used, and a traditional census without sampling would cost around $5 billion. However, the final price tag for the 2000 Census (without sampling) was over $6.5 billion, a 30 percent increase in cost. Today’s climate of large federal deficits and other fiscal challenges requires holding the decennial’s costs as low as possible, while promoting an accurate, timely census. Despite a history of cost increases, the Bureau’s most recent cost estimate is not based on timely and complete information. Table 1 shows the Bureau’s latest revised estimate that was released in September 2005. Based on this table, the bulk of the funds will be spent between fiscal years 2007 through 2013. As we stated in our January 2004 report, in June 2001, the Bureau derived its 2010 cost estimate by using the actual cost of the 2000 Census combined with assumptions about cost drivers, such as (1) staffing needs, (2) enumerator productivity, (3) pay rates for census workers, (4) the nonresponse rate for mailing back the questionnaires, and (5) inflation. However, the most recent life-cycle cost estimate does not incorporate current information about those 2001 assumptions. One key assumption, that has not been updated pertains to the use of a new technology— specifically, new hand-held, GPS-enabled mobile computing devices (MCDs)—that would be important to the success of the 2010 census by automating and streamlining address canvassing, nonresponse follow-up, coverage measurement, and payroll operations. The Bureau anticipated that the use of MCDs would facilitate reductions in administrative and support costs in the Bureau’s field offices, including a 50 percent reduction in clerical and administrative local census office staff costs and a 50 percent reduction in space at each local census office. However, the Bureau’s existing assumptions about the use and reliability of the MCD were not updated to reflect information from the 2004 test, which showed that assumptions about staffing and space associated with the new technology had changed since the June 2001 estimate. The Bureau’s evaluations about those test results indicate that more help desk staff at the local census office were needed to support the use of the MCD, and additional storage space was needed for the devices. However, the Bureau did not use this information when revising its cost estimate in 2005 because, according to Bureau officials, they conduct field tests for operational purposes only—not to inform the cost estimates. In our view, revising cost estimates on the most recent information—including test results that are pertinent to cost assumptions—can assist the Bureau and external decision makers to oversee costs and make necessary resource allocations to help ensure a successful, cost-effective, census. The Bureau’s cost estimate lacked complete information, such as a sensitivity analysis regarding assumptions that could affect cost drivers. OMB Circular A-94 provides guidelines for cost-benefit analysis of federal programs and recommends that agencies develop a sensitivity analysis for major projects with significant uncertainty, like the decennial census. The circular provides a method for determining how sensitive outcomes are to changes in assumptions. In January 2004, we reported that the Bureau could provide more robust information on the likelihood that the values the Bureau assigned to key cost drivers could differ from those initially assumed and be timelier—previously the life-cycle cost estimate had been provided at 2-year intervals. The Bureau’s latest life-cycle cost document does not contain a sensitivity analysis on assumptions that impact cost; it did, however, indicate that the life-cycle cost would be updated annually. Having transparent information about cost estimates is especially important because decennial costs are sensitive to many key assumptions. In fact, for the 2000 Census, the Bureau’s supplemental funding request for $1.7 billion in fiscal year 2000 primarily involved changes in assumptions related to increased workload, reduced employee productivity, and increased advertising. Given the cost of the census in an era of serious national fiscal challenges, it would be beneficial for the Bureau and Congress to have sensitivity information about the likelihood—high, medium, or low—that certain assumptions would drive costs. By providing this information, the Bureau would better enable Congress to consider funding levels in this uncertain environment. Our January 2004 report also highlighted the challenge that the Bureau would have in containing the cost of the 2010 Census. To increase the transparency of the census’ life-cycle costs for Congress, we recommended that Office of Management and Budget (OMB) establish triggers that would signal when the annual 2010 Census costs and/or life- cycle 2010 Census costs exceeded some predetermined amount. We also recommended, among other things, that OMB ensure the Bureau analyzes the sensitivity of the cost figures to specific assumptions. However, OMB disagreed with our recommendation, because it said it already has internal procedures within its budget reviews to monitor 2010 Census costs. OMB shared our view that the costs and risks associated with the 2010 Census must be carefully monitored and evaluated throughout the decade. OMB also agreed that it is essential to understand the key cost drivers and said that it is working with the Bureau to ensure that the Bureau develops high- quality, transparent life-cycle cost estimates. In addition, we recommended in our 2004 report that the Bureau develop a comprehensive project plan that would be updated as needed to (1) include milestones for completing key activities; (2) itemize the estimated cost of each component; (3) articulate a clear system of coordination among project components; and (4) translate key goals into measurable, operational terms to provide meaningful guidance for planning and measuring progress. Some, but not all, of this information is available in various documents, and to be useful, it would need to be pieced together. As a result, we recommended that the Bureau combine this information into a single, comprehensive document. The Bureau disagreed with our recommendation, although it said it would develop such a plan nonetheless and provide it to GAO, Congress, and other stakeholders. The Bureau has not yet issued such a document. Since 2000, the Bureau has reengineered the decennial census and has begun to implement new initiatives. These include (1) using a short-form- only census questionnaire; (2) automating field operations; and (3) using a targeted second mailing to households that fail to respond to the initial census questionnaire, instead of sending an enumerator to visit houses that have not responded. These initiatives could reduce the workload and cost of nonresponse follow-up. While these initiatives show promise, the Bureau will need to address technological challenges with the MCD that will be used to collect data for nonresponse follow-up. The Bureau is finding it increasingly difficult to locate people and get them counted in the census. As in previous censuses, the major cost for the 2010 Census is what the Bureau calls “field data collection and support systems,” accounting for over half of the life-cycle costs of the decennial census. First, the Bureau plans to contain the cost of nonresponse follow-up by increasing mail response through a short-form-only census. The overall mail response rate has been declining steadily since 1970. In the 1980 Census, the mail response rate was 75 percent, 3 percentage points lower than it was in the 1970 Census. In the 1990 census, the mail response rate dropped to 65 percent and, in 2000, appeared to be leveling off at about 64 percent. Contributing to this decline is the public’s unwillingness to complete the long form. Specifically, the response rates in 1990 and 2000 to the short form have been higher than the response rate to the long form. Bureau data suggest a 1 percent increase in the mail response rate would result from conducting a short-form-only census. Secondly, by using the MCD, the Bureau plans to automate field data collection to contain the cost of nonresponse follow-up. The MCD allows the Bureau to automate operations and eliminate the need to print millions of paper questionnaires and maps used by census workers to conduct address canvassing and nonresponse follow-up, as well as managing field staff’s payroll. As stated above, the benefits of using the MCD have been tested in the 2004 and 2006 tests. For example, during the 2004 Census Test, the MCD allowed the Bureau to successfully remove over 7,000 late mail returns from enumerators’ assignments, reducing the total nonresponse follow-up workload by nearly 6 percent. The ability to remove late mail returns from the Bureau’s nonresponse follow-up workload reduces costs, because census workers no longer need to make expensive follow-up visits to households that return their questionnaire late, after the mail-back deadline. If the Bureau had possessed this capability during the 2000 Census, it could have eliminated the need to visit nearly 773,000 late-responding households and saved an estimated $22 million (based on our estimate that a 1 percentage point increase in workload could add at least $34 million in direct salary, benefits, and travel costs to the price tag of nonresponse follow-up). Moreover, operations that traditionally had to be done in sequence, such as nonresponse follow-up and then verifying the housing unit status for addresses marked vacant, can now be performed simultaneously by using the MCD, which may shorten the time needed for local census offices to stay open. However, the Bureau’s ability to collect and transmit data using the MCD is not known and, at this point, constitutes a risk to the cost-effective implementation of the 2010 Census. During the 2004 test of nonresponse follow-up and the 2006 test of address canvassing, the MCDs experienced significant reliability problems. During the 2004 Census Test, the MCDs experienced transmission problems, memory overloads, and difficulties with a mapping feature—all of which added inefficiencies to the nonresponse follow-up operation. During the 2006 Census Test, for address canvassing, the device was slow to pull up and exit address registers, accept the data entered by the census workers, and link map locations to addresses for multiunit structures. Furthermore, the MCDs would sometimes lockup, requiring workers to reboot them. Census workers also found it difficult to transmit an address and map location that were identified for deletion. Because the Bureau could not fix this problem, workers returned to the local census office so technicians could address the problem. The MCD’s global positioning system (GPS) receiver, a satellite-based navigational system to help workers locate street addresses and collect coordinates for each structure in their assignment area, was also unreliable. Some workers had trouble receiving signals, and when a signal was available, the receiver was slow to find assignment areas and correct map locations, according to Bureau officials. The Bureau extended the operation 10 days and still was unable to complete the job, leaving census blocks in Austin, Texas and on the Cheyenne River Reservation, South Dakota, unverified. The Bureau has acknowledged that the MCD’s performance is an issue but believes it will be addressed through a contract awarded on March 30, 2006, to develop a new MCD. However, the new MCD will not be tested until the 2008 Dress Rehearsal, and if problems do emerge, little time will be left to develop, test, and incorporate refinements. Given that, it will be important that the Bureau have a risk mitigation plan in place to help ensure the successful testing of the MCD at the Dress Rehearsal. In our May 2006 report, we highlighted the tight time frames to develop the MCD and recommended that systems being developed or provided by contractors for the 2010 Census—including the MCD—be fully functional and ready to be assessed as part of the 2008 Dress Rehearsal. The Department of Commerce, the Census Bureau’s parent agency, noted in its comments on our draft report that the Bureau provided competitors for the contract with information about the design, requirements, and specification for the 2006 test in the request for proposals. Commerce also noted that the Bureau would share preliminary results from the 2006 test with the firm that was awarded the contract, upon the availability of those results. The Bureau, however, did not specify when preliminary results would be available. However, if after the 2008 Dress Rehearsal the MCD is found not to be reliable, the Bureau could be faced with a remote but daunting possibility of having to revert to the costly, paper-based census used in 2000. Finally, a targeted second mailing to households that fail to respond to the initial census questionnaire could reduce the workload and cost of nonresponse follow-up. According to Bureau studies, sending a second questionnaire could yield a gain in overall response of 7 to 10 percent from non-responding households. In reports, we have highlighted how a second mailing could boost the mail response rate by several percentage points, which in turn would result in considerable savings by reducing the number of costly personal visits enumerators would need to make to non- responding households. The Bureau has never before included this operation as part of a decennial census and over the decade has been testing its feasibility. The targeted second mailing is a part of the 2006 test, the results of which will allow the Bureau to identify and resolve any operational issues; to demonstrate a more refined plan as part of the 2008 Dress Rehearsal; and, ultimately, to increase the likelihood that the second mailing will produce the desired cost savings and other benefits in 2010. Recent work that we have conducted has identified several challenges that, if not properly managed, could increase the cost of the 2010 Census. As the Bureau moves from testing to demonstrating the design in the Dress Rehearsal, it will be important for the Bureau to have risk mitigation plans in place to reduce the severity of challenges to a cost-effective census. These challenges include (1) overseeing contractors responsible for conducting key census-taking operations, (2) successfully updating address and map files, and (3) assessing the resources that will be needed to update the address files and maps for areas affected by hurricanes Katrina and Rita. The Bureau is relying extensively on contractors to supply mission-critical functions and technologies for the 2010 Census. The Bureau estimates that they will spend $1.9 billion, or nearly 17 percent, of the Bureau’s overall decennial costs to award seven major contracts for the 2010 Census. To date, the Bureau has awarded three of its seven major contracts. These three contracts support (1) MAF/TIGER modernization; (2) the development and operation of the Decennial Response and Integration System (DRIS)—a system planned to integrate paper, Internet, and telephone responses; and (3) the Field Data Collection Automation (FDCA) program—a system designed to provide field staff with the equipment and infrastructure needed to collect census data. Contractors can help the Bureau address the challenges it faces as it plans for and implements the 2010 Census, especially as it becomes increasingly difficult for the Bureau to count the nation’s population with its in-house staff and capabilities. The contractors that the Bureau relied on to perform major decennial activities during Census 2000 generally performed well. However, increased reliance on contractors entails certain management challenges, including the oversight of contractors to ensure that they meet the Bureau’s needs in an effective, economical, and timely manner. For example, according to the Department of Commerce Office of Inspector General, the Bureau did not have sufficient program management staff to efficiently acquire systems and manage complex, high-dollar contracts during Census 2000. As a result, the cost of the Bureau’s data capture system increased from $49 million to $238 million by the end of that decennial. As we noted in our May 2006 report, the Bureau has not yet awarded four other major contracts for the 2010 Census, but has already pushed back the award dates of two of the remaining contracts because of changes in its acquisition approach. The Bureau’s tight schedule for systems development and testing as well as the interdependence of decennial systems could affect its ability to develop fully functional and sufficiently mature systems that can be demonstrated in concert with other operations during the 2008 Dress Rehearsal. We previously reported that during the 1998 Dress Rehearsal for the 2000 Census, a number of new features were not test-ready; as a result, the Bureau said it could not fully evaluate them with any degree of assurance as to how they would affect the census. These late design changes and untested systems resulted in additional costs to the census. Closely monitoring major contracts continues to be important. In March 2006, we testified that while project offices responsible for the DRIS and FDCA contracts had carried out initial acquisition management activities, neither office had the full skill sets needed to effectively manage the acquisitions. For DRIS, the Bureau’s project office had established baseline requirements, but the Bureau had not validated the requirements and had not implemented a process for managing them. Also, the project office had identified the project’s risks but had not written mitigation plans or established milestones for completing key risk mitigation activities. As for FDCA, the Bureau again had specified baseline requirements but had not validated them. While, the project office had begun to oversee the contractor’s performance, it had not determined which performance measures it would use, and the office had not implemented a risk management process. Until these basic management activities are implemented, both systems could face increased risks of cost overruns, schedule delays and performance shortfalls. We have made recommendations addressing those issues, such as developing mitigation plans with milestones for key activities and regularly briefing senior managers. The Bureau has agreed to complete these activities as soon as possible. As part of its effort to allow respondents to use the Internet during the decennial census, the Bureau proposed to develop the use of the Internet under the DRIS contract. However, in May 2006, Bureau officials informed us that the Internet response option was no longer a contract requirement and that they are uncertain whether Internet response would be an option for the 2010 Census. The removal of the Internet from the DRIS contract is an unexpected change, because just 3 months earlier in our March 2006 testimony, we reported that the DRIS contract was expected to process Internet responses for the 2010 Census. High-level Bureau officials explained that they made the decision to remove the Internet from the contract partly because of the potential risks associated with computer security attacks. In addition, according to a Bureau official, the Bureau’s testing to date showed nothing to indicate that offering an Internet response option would improve overall response rates or save any money. According to Bureau officials, if the Internet response option is included in the design, it will be developed in-house by Bureau staff. Bureau officials emphasized that they only have one chance every 10 years to collect this information; moreover, any public perception of an unsecured Internet Web site could result in residents not responding to the census, and in the long term could cost more than if the Internet had not been used. It should be noted that there are security techniques to address Internet attacks, and other federal agencies use the Internet to successfully meet many missions. According to a Bureau official, the Bureau believes it made a sound business decision by removing the Internet from the DRIS contract requirements. Further, the official told us that the Bureau did not develop a formal business case document on this decision. To contain decennial costs, long-standing and emerging issues related to the Bureau’s address lists and maps need to be addressed. A complete and accurate address list is the cornerstone of a successful census because it identifies all households that are to receive a census questionnaire and serves as the control mechanism for following up with households that fail to respond. Although the Bureau went to great lengths to build a complete and accurate MAF for the 2000 Census, of the 116 million housing units contained in the database, the Bureau estimates it incorrectly included 2.3 million housing units and missed another 2.7 million housing units. In light of these and other problems, the Bureau concluded that enhancements to MAF/TIGER were necessary to make census data more complete and accurate. The Bureau has conducted research and testing to help resolve each of the problems experienced in the 2000 Census, including addresses that were duplicated, missed, deleted, and incorrectly located on a map (a problem known as “geocoding error”). For example, the Bureau is researching ways to capture missed addresses for housing units that were hard to find—often associated with apartments in small multiunit structures. However, some deadlines for completing research are not firm, while other deadlines that have been set continue to slip. As a result, it is not known whether the research and evaluation efforts underway will be completed in sufficient time to allow the Bureau to develop new methodologies and procedures for improving the MAF by June 2007—the Bureau’s announced deadline for determining the baseline for all program requirements. In addition, one major research effort using software to identify duplicate addresses (an estimated 1.4 million duplicate addresses were removed during the 2000 Census) did not work and will not be used in 2010. As a result, duplicate addresses may still be a problem for the 2010 MAF, and if not detected, can result in increased cost when nonresponse enumerators attempt to collect data from a duplicate address incorrectly listed in the MAF. New issues surrounding the schedule of address activities have emerged. One such issue revolves around the planning and development of the 2010 Census amid tight and overlapping schedules for updating addresses and map files. For example, Bureau officials estimate that TIGER maps for 600 to 700 counties of 3,232 counties in the United States will not be updated in time to be part of local update of census address (LUCA)—the Bureau’s program to give local, state, and tribal government officials the opportunity to review the address lists and maps and suggest corrections. LUCA participation is important because local knowledge contributes to a more complete and accurate address file. Not having the most current TIGER maps could affect the quality of a local government’s review and could potentially increase the cost of conducting the census. For example, to the extent LUCA participants are not able to use the maps to identify duplicate and nonexistent addresses, and if subsequent address operations also fail to identify those same addresses, then nonresponse follow-up enumerators would make unnecessary and costly attempts to locate these incorrectly included addresses. The Bureau does not have a plan to assess additional resources that may be needed to update the address and map file for areas affected by hurricanes Katrina and Rita. The task of updating Census address files to reflect the changes caused by the hurricanes will be formidable and possibly costly, as much has changed to the landscape since the 2000 Census. On August 29, 2005, hurricane Katrina devastated the coastal communities of Louisiana, Mississippi, and Alabama. A few weeks later, hurricane Rita hit the border areas of Texas and Louisiana. Damage was widespread. For example, the Red Cross estimated that nearly 525,000 people were displaced as a result of hurricane Katrina and approximately 90,000 square miles were affected. In some places, entire communities were obliterated. Homes were declared uninhabitable, and streets, bridges, and other landmarks were destroyed. For the 2010 Census, locating housing units and the people who reside in them will be critical to accurate population counts of places hit by the hurricanes, especially since it is estimated that hundreds of thousands of people have—either temporarily or permanently—migrated to other areas of the country. The Bureau anticipates that by 2009, residents will have decided whether to return to the region. However, Bureau officials have not provided information regarding the basis of this conclusion. Given the magnitude of the area, population, and infrastructure affected, it would be prudent for the Bureau to begin assessing whether new procedures will be necessary, determining whether additional resources may be needed, and identifying whether local partners will be available to assist the Bureau in its effort to update address and map data, as well as other census-taking activities. Without having done a resource analysis, the Bureau remains uncertain about whether additional funds will be needed to help locate and count residents affected by the hurricanes. In summary, the 2010 Census is an expensive but vitally important undertaking, the success of which is needed to meet the information requirements of policymakers at all levels of government, as well as business interests, and academic researchers. The Bureau responded to concerns about the accuracy, completeness, and cost-effectiveness of the 2000 Census by reengineering the heretofore paper-based processes used in all previous censuses. At the same time, the projected life-cycle cost of $11.3 billion makes the next decennial census the most expensive in our history, and many factors can cause the 2010 Census to be more expensive. It is important to consider that some factors that may increase the costs of the census— such as counting more people than ever who do not speak English or who live in alternative, hard-to-find housing—are inherent in the characteristics of the population that needs to be counted. Largely, demographically related cost factors will continue to exist, regardless of actions taken by the Bureau, and must be treated as givens by Bureau planners. Still, other factors that can cause cost increases can and should be mitigated. While needed, the reengineering introduced by the Bureau presents new challenges and increased risks. The Bureau needs to ensure that its new MCDs work as designed, and that contractors perform according to requirements, on schedule, and at cost. Moreover, the Bureau still needs to fully resolve preexisting issues related to the accuracy and completeness of the address list. Overall, we have long recognized that redesigning massive enterprises entail risks and uncertainties. Such risks and uncertainties need to be managed through the use of adequate planning and risk management by Bureau management. Such tools also serve the oversight requirements of external stakeholders—most notably Congress, which is being asked to authorize and appropriate more funds than ever to pay for the census. In January 2004, recognizing the cost escalation risks of the 2010 Census, we concluded that the Bureau’s plans for 2010 lacked the needed budgetary supporting detail, supporting analysis, and other information, making it difficult for Congress and us to oversee the Bureau’s operations and assess the feasibility of the Bureau’s design and the extent to which it would lead to greater cost-effectiveness. While the Bureau has made progress in planning and designing the 2010 Census, the Bureau will need to continue to take steps to manage and mitigate risks for a comprehensive, accurate, and cost-effective population count in 2010. That concludes my statement, Mr. Chairman. I would be pleased to respond to any questions you or other members of the Subcommittee may have. For questions regarding this testimony, please contact Brenda S. Farrell, on (202) 512-6806, or by email at farrellb@gao.gov Individuals making contributions to this testimony include Betty Clark, Robert Goldenkoff, Ernie Hazera, Shirley Hwang, Krista Loose, Lisa Pearson, Scott Purdy, Cynthia Scott, and Tim Wexler. 2010 Census: Census Bureau Generally Follows Selected Leading Acquisition Planning Practices, but Continued Management Attentions Is Needed to Help Ensure Success. GAO-06-277. Washington, D.C.: May 18, 2006. Census Bureau: Important Activities for Improving Management of Key 2010 Decennial Acquisitions Remain to Be Done. GAO-06-444T. Washington, D.C.: March 1, 2006. 2010 Census: Planning and Testing Activities Are Making Progress. GAO-06-465T. Washington D.C.: March 1, 2006. Information Technology Management: Census Bureau Has Implemented Many Key Practices, but Additional Actions Are Needed. GAO-05-661. Washington, D.C.: June 16, 2005. 2010 Census: Basic Design Has Potential, but Remaining Challenges Need Prompt Resolution. GAO-05-09. Washington, D.C.: January 12, 2005. Data Quality: Census Bureau Needs to Accelerate Efforts to Develop and Implement Data Quality Review Standards. GAO-05-86. Washington, D.C.: November 17, 2004. Census 2000: Design Choices Contributed to Inaccuracies in Coverage Evaluation Estimates. GAO-05-71. Washington, D.C.: November 12, 2004. American Community Survey: Key Unresolved Issues. GAO-05-82. Washington, D.C.: October 8, 2004. 2010 Census: Counting Americans Overseas as Part of the Decennial Census Would Not Be Cost-Effective. GAO-04-898. Washington, D.C.: August 19, 2004. 2010 Census: Overseas Enumeration Test Raises Need for Clear Policy Direction. GAO-04-470.Washington, D.C.: May 21, 2004. 2010 Census: Cost and Design Issues Need to Be Addressed Soon. GAO- 04-37. Washington, D.C.: January 15, 2004. Decennial Census: Lessons Learned for Locating and Counting Migrant and Seasonal Farm Workers. GAO-03-605. Washington, D.C.: July 3, 2003. Decennial Census: Methods for Collecting and Reporting Hispanic Subgroup Data Need Refinement. GAO-03-228. Washington, D.C.: January 17, 2003. Decennial Census: Methods for Collecting and Reporting Data on the Homeless and Others Without Conventional Housing Need Refinement. GAO-03-227. Washington, D.C.: January 17, 2003. 2000 Census: Lessons Learned for Planning a More Cost-Effective 2010 Census. GAO-03-40. Washington, D.C.: October 31, 2002. The American Community Survey: Accuracy and Timeliness Issues. GAO-02-956R. Washington, D.C.: September 30, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The decennial census is a constitutionally mandated activity, with immutable deadlines. It produces data used to allocate about $200 billion yearly in federal financial assistance, reapportion the seats of the House of Representatives, and provide a profile of the nation's people to help guide policy decisions. The U.S. Census Bureau (Bureau) estimates the 2010 Census will cost $11.3 billion, making it the most expensive census in the nation's history, even after adjusting for inflation. Based primarily on GAO's issued reports, this testimony addresses the extent to which the Bureau has (1) developed detailed and timely cost data for effective oversight and cost control, (2) reduced nonresponse mail follow up costs, and (3) produced risk mitigation plans to address identified challenges. The Bureau's most recent life-cycle cost estimate for the 2010 Census does not reflect the most current information from testing and evaluation nor provide complete information on how changing assumptions may affect cost. As GAO reported in January 2004, the Bureau derived its initial cost estimate by considering the cost of the 2000 Census along with certain assumptions that drive costs, such as staffing needs, the nonresponse rate for mailing back the census questionnaire, census worker productivity and pay rates, and inflation; however, GAO's ongoing work has found that the most recent (September 2005) estimate does not incorporate current information on certain 2001 assumptions. For example, the 2004 Census Test suggests some assumptions about staffing and space associated with new technology have changed. Specifically, Bureau evaluations indicate that more staff at the local census office was needed to support the use of the new hand-held mobile computing device (MCD) and additional storage space was needed for the MCDs. Since 2000, the Bureau has reengineered the decennial census and has begun new initiatives to reduce nonresponse follow up costs. Key to the Bureau's steps to reduce the costs of nonresponse follow up is successfully using the MCDs to eliminate millions of paper questionnaires and maps. Importantly, the Bureau must first resolve the MCD's technological challenges. During 2004 and 2006 tests, the MCDs had significant reliability problems. For example, in the 2004 test the MCDs experienced transmission problems, memory overloads, and difficulties with the map ping feature. Bureau officials have contracted the design and implementation for a new MCD that will not be ready until the 2008 Dress Rehearsal. If after the Dress Rehearsal the MCD is found not to be reliable, the Bureau could be faced with the remote but daunting possibility of having to revert to the costly paper-based Census used in 2000. The Bureau does not have risk mitigation plans to address certain identified challenges to a cost-effective census. Most notably, the Bureau does not have a plan to assess additional resources that may be needed to update the address and map file for areas affected by hurricanes Katrina and Rita. Moreover, the Bureau has not yet assessed whether new procedures will be necessary nor whether local partners will be available to assist in updating address and map data. Updating address files to reflect the changes caused by the hurricanes will be formidable, in part because, according to Red Cross estimates, nearly 525,000 people were displaced in a 90,000 square mile area. Another risk to be mitigated stems from the need to closely monitor the performance of about $1.9 billion in contracts. The Bureau has agreed to take steps to mitigate some of those risks. For example, the Bureau has said it will enhance the ability of key contract project offices to better manage contracts through such actions as developing mitigation plans with milestones for key activities and regularly briefing senior managers. |
Since 1955, the executive branch has encouraged federal agencies to obtain commercially available goods and services from the private sector when the agencies determine that such action is cost-effective. OMB formalized the policy in its Circular A-76, issued in 1966. In 1979, OMB supplemented the circular with a handbook that included procedures for competitively determining whether commercial activities should be performed in-house, by another federal agency through an interservice support agreement, or by the private sector. OMB has updated this handbook several times. Under A-76, commercial activities may be converted to or from contractor performance either by direct conversion or by cost comparison. Under direct conversion, specific conditions allow commercial activities to be moved from government or contract performance without a cost comparison study (e.g., for activities involving 10 or fewer civilians.)Generally, however, commercial functions are to be converted to or from contract performance by cost comparison, whereby the estimated cost of government performance of a commercial activity is compared with the cost of contractor performance in accordance with the principles and procedures set forth in Circular A-76 and the revised supplemental handbook. As part of this process, the government identifies the work to be performed (described in the performance work statement), prepares an in-house cost estimate on the basis of its most efficient organization, and compares it with the winning offer from the private sector. According to A-76 guidance, an activity should not be moved from one sector to the other (whether public to private or vice versa) unless doing so would save at least $10 million or 10 percent of the personnel costs of the in-house performance (whichever is less). OMB established this minimum cost differential to ensure that the government would not convert performance for marginal savings. The handbook also provides an administrative appeals process. An eligible appellant must submit an appeal to the agency in writing within 20 days of the date that all supporting documentation is made publicly available. Appeals are supposed to be adjudicated within 30 days after they are received. Private-sector offerors who believe that the agency has not complied with applicable procedures have additional avenues of appeal. They may file a bid protest with GAO or file an action in a court of competent jurisdiction. Circular A-76 requires agencies to maintain annual inventories of commercial activities performed in-house. A similar requirement was included in the 1998 Federal Activities Inventory Reform (FAIR) Act, which directs agencies to develop annual inventories of their positions that are not inherently governmental. The fiscal year 2001 inventory identified approximately 841,000 full-time equivalent commercial-type positions, of which approximately 413,000 were in the Department of Defense (DOD). DOD has been the leader among federal agencies in recent years in its use of OMB Circular A-76; the Circular’s use by other agencies has been very limited. However, in 2001, OMB signaled its intention to direct greater use of the circular on a government-wide basis. In a March 9, 2001, memorandum, OMB directed agencies to take action in fiscal year 2002 to directly convert or complete public-private competitions of not less than 5 percent of the full-time equivalent positions listed in their FAIR Act inventories. Subsequent guidance expanded the requirement to 15 percent in fiscal year 2003, with the ultimate goal of competing at least 50 percent. Although comprising a relatively small portion of the government’s overall service contracting activity, competitive sourcing under Circular A-76 has been the subject of much controversy because of concerns about the process raised both by the public and private sectors. Federal managers and others have been concerned about the organizational turbulence that typically follows the announcement of A-76 studies. Government workers have been concerned about the impact of competition on their jobs, the opportunity for input into the process, and the lack of parity with industry offerors to protest A-76 decisions. Industry representatives have complained about unfairness in the process and the lack of a level playing field between the government and the private sector in accounting for costs. Concerns have also been raised about the adequacy of the oversight of subsequent performance, whether the work is being performed by the public or private sector. Amid these concerns over the A-76 process, the Congress enacted section 832 of the National Defense Authorization Act for Fiscal Year 2001. The act required the Comptroller General to convene a panel of experts to study the policies and procedures governing the transfer of commercial activities for the federal government from government to contactor personnel. The act also required the Comptroller General to appoint highly qualified and knowledgeable persons to serve on the panel and ensure that the following entities received fair representation on the panel: DOD. Persons in private industry. Federal labor organizations. OMB. Appendix I lists the names of the Panel members. The legislation mandating the Panel’s creation required that the Panel complete its work and report the results of its study to the Congress no later than May 1, 2002. The Panel’s report was published on April 30, 2002. In establishing the Panel, a number of steps were taken to ensure representation from all major stakeholders as well as to ensure a fair and balanced process. This began with my selection of Panel members, which was then followed by the Panel’s establishment of a process to guide its work. To ensure a broad array of views on the panel, we used a Federal Register notice to seek suggestions on the Panel’s composition. On the basis of the nominations received in response to that notice, as well as the need to include the broad representation outlined in legislation, I personally interviewed a number of potential panel members before selecting other members to serve on the panel. I believe that we selected a group of outstanding individuals representative of diverse interest groups from the public and private sectors, labor unions, academia, and members with experience in dealing with sourcing decisions at the local government level. Once convened, the Panel, as a group, took a number of steps at the outset to guide its deliberations and ensure a full and balanced consideration of issues. The first step was the adoption of the following mission statement: Mission of the Commercial Activities Panel The mission of the Commercial Activities Panel is to improve the current sourcing framework and processes so that they reflect a balance among taxpayer interests, government needs, employee rights, and contractor concerns. The Panel also agreed that all of its findings and recommendations would require the agreement of at least a two-thirds supermajority of the Panel in order to be adopted. The Panel further decided that each Panel member would have the option of having a brief statement included in the report explaining the member’s position on the matters considered by the Panel. In addition to the Federal Register notice soliciting input on issues to be considered by the Panel, the Panel held 11 meetings over the period of May 2001 to March 2002, 3 of which were public hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio, Texas. In the public hearings, Panel members heard testimony from scores of representatives of the public and private sectors, state and local governments, unions, contractors, academia, and others. Panelists heard first-hand about the current process, primarily the cost comparison process conducted under OMB Circular A-76, as well as alternatives to that process. Appendix II provides more detail on the topics and concerns raised at the public hearings. The Panel also maintained an E-mail account to receive written comments from any source. After the completion of the field hearings, the Panel members met in executive session several times, augmented between meetings by the work of staff to help them (1) gather background information on sourcing trends and challenges, (2) identify sourcing principles and criteria, (3) consider A-76 and other sourcing processes to assess what’s working and what’s not, and (4) assess alternatives to the current sourcing processes. As the Panel began its work, it recognized early on the need for a set of principles that would provide a framework for sourcing decisions. Those principles, as they were debated and fleshed out, provided an important vehicle for assessing what does or does not work in the current A-76 process, and provided a framework for identifying needed changes in the process. During its meetings, the Panel coalesced around a set of principles to guide sourcing decisions. The principles helped frame many of the Panel’s deliberations and became a reference point for the Panel’s work. Moreover, the principles were unanimously adopted by the Panel and included as part of the Panel’s recommendations. While each principle is important, no single principle stands alone, and several are interrelated. Therefore, the Panel adopted the principles and their accompanying narrative comments as a package and then used these principles to assess the government’s existing sourcing system and to develop additional Panel recommendations. The Panel believes that federal sourcing policy should: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Support agency missions, goals, and objectives. Be consistent with human capital practices designed to attract, motivate, retain, and reward a high-performing federal workforce. Recognize that inherently governmental and certain other functions should be performed by federal workers. Create incentives and processes to foster high-performing, efficient, and effective organizations throughout the federal government. Be based on a clear, transparent, and consistently applied process. Avoid arbitrary full-time equivalent or other arbitrary numerical goals. Establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in-house, work currently contracted to the private sector, and new work, consistent with these guiding principles. Ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible. Ensure that competitions involve a process that considers both quality and cost factors. Provide for accountability in connection with all sourcing decisions. The principles and their accompanying commentary are included in their entirety in appendix III. The Panel’s principles supplied a strong conceptual framework and specific criteria against which to measure any proposals for change in the government’s competitive-sourcing policies. The Panel concluded that there are some advantages to the current system. First, A-76 cost comparisons are conducted under an established set of rules, the purpose of which is to ensure that sourcing decisions are based on uniform, transparent, and consistently applied criteria. Second, the A-76 process has enabled federal managers to make cost comparisons between sectors that have vastly different approaches to cost accounting. Third, the current A-76 process has been used to achieve significant savings and efficiencies for the government. Savings result regardless of whether the public or the private sector wins the cost comparison. This is because competitive pressures have served to promote efficiency and improve the performance of the activity studied. Despite these advantages, the Panel heard frequent criticisms of the A-76 process. The Panel’s report noted that both federal employees and private firms complain that the A-76 competition process does not meet the principles’ standard of a clear, transparent, and consistently applied process. Since January 1999, GAO has issued 22 decisions on protests involving A-76 cost comparisons. Of these decisions, GAO sustained 11 and denied 11. “Sustaining” a protest means that GAO found that the agency had violated procurement statutes or regulations in a way that prejudiced the protester. Protests involving A-76 represent a very small percentage of the many hundreds of bid protest decisions that GAO issued in the past 3 years. They do, however, indicate an unusually high percentage of sustained protests. In protests decisions covering all procurements, GAO has sustained about one-fifth of the protests, while in A-76 protests, GAO has sustained half. (It should be kept in mind, though, that most A-76 decisions are not protested, just as most contract award decisions are not protested.) These sustained protests generally reflect only the errors made in favor of the government’s most efficient organization since only the private-sector offeror has the right to protest to GAO. While any public-private competition is, by nature, challenging and open to some of the concerns that have been raised regarding the A-76 process, the high rate of successful A-76 protests suggests that agencies have a more difficult time applying the A-76 rules than they do applying the normal (i.e., Federal Acquisition Regulation) acquisition rules. At least in part, this may be because the Federal Acquisition Regulation (FAR) rules are so much better known. While training could help overcome this lack of familiarity (and many agencies, particularly those in DOD, have been working on A-76 training), the Panel noted that the FAR acquisition and source selection processes are already better known and better understood; they, in a sense, serve as a “common language” for procurements and source selections. In the Panel’s view, the most serious shortcoming of the A-76 process is that it has been stretched beyond its original purpose, which was to determine the low-cost provider of a defined set of services. Circular A-76 has not worked well as the basis for competitions that seek to identify the best provider in terms of quality, innovation, flexibility, and reliability. This is particularly true in today’s environment, where solutions are increasingly driven by technology and may focus on more critical, complex, and interrelated services than previously studied under A-76. In the federal procurement system today, there is common recognition that a cost-only focus does not necessarily deliver the best quality or performance for the government or the taxpayers. Thus, while cost is always a factor, and often the most important factor, it is not the only factor that may need to be considered. In this sense, the A-76 process may no longer be as effective a tool, since its principal focus is on cost comparisons. During its year-long study, the Panel identified several key characteristics of a successful sourcing policy. First, the Panel heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, high performance, and continuous performance improvement. The means by which the government utilizes competition for sourcing its commercial functions was at the center of the Panel’s discussions and work. The Panel strongly supported a continued emphasis on competition as a means to improve economy, efficiency, and effectiveness of the government. The Panel also believed that whenever the government is considering converting work from one sector to another, public-private competitions should be the norm. Direct conversions generally should occur only where the number of affected positions is so small that the costs of conducting a public-private competition clearly would outweigh any expected savings. Moreover, there should be adequate safeguards to ensure that activities, entities, or functions are not improperly separated to reduce the number of affected positions and avoid competition. A second theme consistently cited at the public hearings was the need for a broader approach to sourcing decisions, rather than an approach that relies on the use of arbitrary quotas or that is unduly constrained by personnel ceilings. Critical to adopting a broader perspective is having an enterprise-wide perspective on service contract expenditures, yet the federal government lacks timely and reliable information about exactly how, where, and for what purposes, in the aggregate, taxpayer dollars are spent for both in-house and contracted services. The Panel was consistently reminded about, and fully agrees with, the importance of ensuring accountability throughout the sourcing process, providing the workforce with adequate training and technical support in developing proposals for improving performance, and assisting those workers who may be adversely affected by sourcing decisions. Improved accountability extends to better monitoring of performance and results after competitions are completed—regardless of the winner. The Panel heard about several successful undertakings involving other approaches to sourcing decisions. Some involved business process reengineering and public-private partnerships, and emphasized labor- management cooperation in accomplishing agency missions. For example, in Indianapolis, Indiana, on August 8, 2001, the Panel heard from representatives from several organizations that had taken different approaches to the sourcing issue. Among them were the Naval Surface Warfare Center in Crane, Indiana, which reengineered its business processes to reduce costs and gain workshare, and the city of Indianapolis, which effectively used competition to greatly improve the delivery of essential services. In doing so, the city also provided certain technical and financial assistance to help city workers successfully compete for work. These entities endeavored to become “most efficient organizations.” It was from these examples and others that the Panel decided that all federal agencies should strive to become “high performing organizations.” Third, sourcing policy is inextricably linked to the government’s human capital policies. This linkage has many levels, each of which is important. It is particularly important that sourcing strategies support, not inhibit, the government’s efforts to attract, motivate, and retain a high-performing in- house workforce, as well as support its efforts to access and collaborate with high-performance, private-sector providers. Properly addressed, these policies should be complementary, not conflicting. In addition to the principles discussed earlier, the Panel adopted a package of additional recommendations it believed would improve significantly the government’s policies and procedures for making sourcing decisions. It is important to emphasize that the Panel decided to consider and adopt these latter recommendations as a package, recognizing the diverse interests represented on the Panel and the give and take required to reach agreement among a supermajority of the Panelists. As a result, a supermajority of the Panel members recommended the adoption of the following actions: Conduct public-private competitions under the framework of an integrated FAR-based process. The government already has an established mechanism that has been shown to work as a means to identify high-value service providers: the negotiated procurement process of the Federal Acquisition Regulation. The Panel believes that in order to promote a more level playing field on which to conduct public-private competitions, the government needs to shift, as rapidly as possible, to a FAR-type process under which all parties compete under the same set of rules. Although some changes in the process will be necessary to accommodate the public- sector proposal, the same basic rights and responsibilities would apply to both the private and the public sectors, including accountability for performance and the right to protest. This and perhaps other aspects of the integrated competition process would require changes to current law or regulation (e.g., requirements in title 10 of the U.S. Code that DOD competitive sourcing decisions be based on low cost). Make limited changes to the existing A-76 process. The development of an integrated FAR-type process will require some time to be implemented. In the meantime, the Panel expects current A-76 activities to continue, and therefore believes some modifications to the existing process can and should be made. Accordingly, the Panel recommended a number of limited changes to OMB Circular A-76. These changes would, among other things, strengthen conflict-of-interest rules, improve auditing and cost accounting, and provide for binding performance agreements. Encourage the development of high-performing organizations (HPOs). The Panel recommended that the government take steps to encourage HPOs and continuous improvement throughout the federal government, independent of the use of public-private competitions. In particular, the Panel recommended that the Administration develop a process to select a limited number of functions currently performed by federal employees to become HPOs, and then evaluate their performance. Then, the authorized HPOs would be exempt from competitive sourcing studies for a designated period of time. Overall, however, the HPO process is intended to be used in conjunction with, not in lieu of, public-private competitions. The successful implementation of the HPO concept will require a high degree of cooperation between labor and management, as well as a firm commitment by agencies to provide sufficient resources for training and technical assistance. In addition, a portion of any savings realized by the HPO should be available to reinvest in continuing reengineering efforts and for the HPO to use for further training and/or for incentive purposes. Let me speak specifically to the creation of HPOs. Many organizations in the past, for various reasons, have found it difficult to become high- performing organizations. Moreover, the federal government continues to face new challenges in making spending decisions for both the long and near term because of federal budget constraints, rapid advances in technology, the impending human capital crisis, and new security challenges brought on by the events of September 11, 2001. Such a transformation will require that each organization reverse decades of underinvestment and lack of sustained attention to maintaining and enhancing its capacity to perform effectively. The Panel recognized that incentives are necessary to encourage both management and employees to promote the creation of HPOs. It envisioned that agencies would have access to a range of financial and consulting resources to develop their plans, with the costs offset by the savings realized. The Panel’s report focused primarily on HPOs in the context of commercial activities, given its legislative charter. However, there is no reason why the concept could not be applied to all functions, since much of the government’s work will never be subject to competition. HPOs may require some additional flexibility coupled with appropriate safeguards to prevent abuse. The Panel also envisioned the use of performance agreements and periodic performance reviews to ensure appropriate transparency and accountability. Although a minority of the Panel did not support the package with the three additional recommendations noted above, some of them indicated that they supported one or more elements of the package. Importantly, there was a good faith effort, even at the last minute of the report’s preparation, to maximize agreement and minimize differences between Panelists. In fact, changes were made even when it was clear that some Panelists seeking changes were highly unlikely to vote for the supplemental package of recommendations. As a result, on the basis of Panel meetings and my personal discussions with Panel members at the end of our deliberative process, the major differences between the Panelists were few in number and philosophical in nature. Specifically, disagreement centered primarily on the (1) recommendation related to the role of cost in the new FAR-type process and (2) the number of times the Congress should be required to act on the new integrated process, including whether the Congress should specifically authorize a pilot program that tests that process for a specific time period. Many of the Panel’s recommendations can be accomplished administratively under existing law, and the Panel recommends that they be implemented as soon as practical. The Panel also recognizes that some of its recommendations would require changes in statutes or regulations and that making the necessary changes could take some time. Any legislative changes should be approached in a comprehensive and considered manner rather than a piecemeal fashion in order for a reasonable balance to be achieved. Like the guiding principles, the recommendations were the result of much discussion and compromise and should be considered as a whole. Moreover, although the Panel views the use of a FAR-type process for conducting public-private competitions as the end state, the Panel also recognizes that some elements of its recommendations represent a shift in current procedures for the federal government. Therefore, the Panel’s report outlined the following phased implementation strategy that would allow the federal government to demonstrate and then refine its sourcing policy on the basis of experience: A-76 studies currently under way or initiated during the near term should continue under the current framework. Subsequent studies should be conducted in accordance with the improvements listed in our report. OMB should develop and oversee the implementation of a FAR-type, integrated competition process. In order to permit this to move forward expeditiously, it may be advisable to limit the new process initially to civilian agencies where, except for allowing protests by federal employees, its use would not require legislation. Statutory provisions applying only to DOD agencies may require repeal or amendment before the new process could be used effectively at DOD, and the Panel recommends that any legislation needed to accommodate the integrated process in DOD be enacted as soon as possible. As part of a phased implementation and evaluation process, the Panel recommends that the integrated competition process be used in a variety of agencies and in meaningful numbers across a broad range of activities, including those currently performed by federal employees, work currently performed by contractors, and new work. Within 1 year of initial implementation of the new process, and again 1 year later, the Director of OMB should submit a detailed report to the Congress identifying the costs of implementing the new process, any savings expected to be achieved, the expected gains in efficiency or effectiveness of agency programs, the impact on affected federal employees, and any lessons learned as a result of the use of this process together with any recommendations for appropriate legislation. GAO would review each of these OMB reports and provide its independent assessment to the Congress. The Panel anticipates that OMB would use the results of its reviews to make any needed “mid-course corrections.” On the basis of the results generated during the demonstration period, and on the reports submitted by OMB and GAO, the Congress will then be in a position to determine the need for any additional legislation. The federal government is in a time of transition, and we face a range of challenges in the 21st century. This will require the federal government to transform what it does, the way that it does business, and who does the government’s business in the 21st century. This may require changes in many areas, including human capital and sourcing strategies. On the basis of our statutory mandate, the Commercial Activities Panel primarily focused on the sourcing aspects of this needed transformation. I supported the adoption of the set of principles as well as the package of additional recommendations contained in the Panel’s report. Overall, I believe that the findings and recommendations contained in the Panel’s report represent a reasoned, reasonable, fair, and balanced approach to addressing this important, complex, and controversial area. I hope that the Congress and the Administration will consider and act on this report and its recommendations in a timely manner. I particularly want to urge the Congress and the Administration to consider the importance of encouraging agencies to become high-performing organizations on an ongoing basis. Agencies should not wait until faced with the challenge of public-private competitions to seek efficiencies to retain work in-house. In addition, most of government’s workers will never be subject to competitions. As a result, I believe that the Panel’s recommendation pertaining to high-performing organizations could be an important vehicle for fostering much needed attention to how we enhance the economy, efficiency, and effectiveness of the federal government in ways other than through competition. Finally and most importantly, in considering the Panel’s package of recommendations or any other changes that may be considered by the Congress and the Administration, the guiding principles, developed and unanimously agreed upon by the Panel, should be the foundation for any future action. Let me also add that I appreciate the hard work of my fellow Panelists and their willingness to engage one another on such a tough issue—one where we found much common ground despite a range of divergent views. I also want to thank the GAO staff and the other support staff who contributed to this effort. The Panel has completed its work. It is time for the Congress and OMB to act on our report. 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. David M. Walker, Chairman, Comptroller General of the United States E. C. “Pete” Aldridge, Jr., Under Secretary of Defense for Acquisition, Technology and Logistics Frank A. Camm, Jr., Senior Analyst, RAND Mark C. Filteau, President, Johnson Controls World Services, Inc. Washington, D.C., June 11, 2001 “Outsourcing Principles and Criteria” Status quo is not acceptable to anyone. Sourcing decisions require a strategic approach. Federal workers should perform core government functions. Need for MEOs throughout the government. Government needs clear, transparent, and consistently applied sourcing criteria. Avoid arbitrary FTE goals. Objective should be to provide quality services at reasonable cost. Provide for fair and efficient competition between the public and private sectors. Sourcing decisions require appropriate accountability. Indianapolis, Indiana, August 8, 2001 “Alternatives to A-76” Crane Naval Surface Warfare Center’s reengineering process led to significant efficiencies and reduced workforce trauma. Employees must be involved with any reform effort. Secrecy is counterproductive. Committed leadership, effective implementation, and well-planned workforce transition strategies are key to any reform effort. Privatization-in-place was used effectively at Indianapolis Naval Air Warfare Center to avert a traditional Base Realignment and Closure action. The city of Indianapolis provided certain technical and financial assistance to help workers successfully compete for the work. Certain technology upgrades in Monterey, California, via a public–private partnership led to efficiencies and increased effectiveness. Measuring performance is critical. A-76 is only one of many efficiency tools available to federal managers. Other tools include Bid to goal, which helps units become efficient and thus avoid A-76, Transitional Benefit Corporation, a concept that promotes the transfer of government assets to the private sector and provides transition strategies for employees, and ESOP, under which employees own a piece of the organization that employs them. ESOPs have been established in a few federal organizations. San Antonio, Texas, August 15, 2001 “A-76, What’s Working and What’s Not” A-76 process is too long and too costly. Cost of studies can greatly reduce government savings. Cost to industry in both dollars and uncertainty. Demoralized workers quit. But successful contractors need these workers. Larger A-76 studies can yield greater savings, but these studies become much more complex. Lack of impetus for savings without competition. One-step bidding process should be used. MEO and contractors should Compete together in one procurement action, Be evaluated against the same solicitation requirements using the same Be awarded contracts based on best value. Provide more training for MEO and A-76 officials. MEOs should have legal status to protest and appeal awards and obtain bid information. A-76 rules should be more clear and applied consistently through a centralized management structure. For bid and monitoring purposes, government costs should be collected and allocated consistent with industry (e.g., activity-based costing). Need to eliminate any suggestion of conflicts of interest. Need incentives for agencies and workers (e.g., share-in-savings). Provide soft landings for workers. Allow workers to form public-sector organizations for bidding. Based on public input, a review of previous studies and other relevant literature, and many hours of deliberation, the Panel developed and unanimously adopted a set of principles that it believes should guide sourcing policy for the federal government. While each principle is important, no single principle stands alone. As such, the Panel adopted the principles as a package. The Panel believes that federal sourcing policy should: 1. Support agency missions, goals, and objectives. Commentary: This principle highlights the need for a link between the missions, goals, and objectives of federal agencies and related sourcing policies. 2. Be consistent with human capital practices designed to attract, motivate, retain, and reward a high-performing federal workforce. Commentary: This principle underscores the importance of considering human capital concerns in connection with the sourcing process. While it does not mean that agencies should refrain from outsourcing due to its impact on the affected employees, it does mean that the federal government’s sourcing policies and practices should consider the potential impact on the government’s ability to attract, motivate, retain, and reward a high-performing workforce both now and in the future. Regardless of the result of specific sourcing decisions, it is important for the workforce to know and believe that they will be viewed and treated as valuable assets. It is also important that the workforce receive adequate training to be effective in their current jobs and to be a valuable resource in the future. 3. Recognize that inherently governmental and certain other functions should be performed by federal workers. The sourcing principles were taken in their entirety from Commercial Activities Panel, Improving the Sourcing Decisions of Government: Final Report (Washington, D.C.: April 2002). the Federal Activities Inventory Reform (FAIR) Act has helped to identify commercial work currently being performed by the government. It is clear that government workers need to perform certain warfighting, judicial, enforcement, regulatory, and policymaking functions, and the government may need to retain an in-house capability even in functions that are largely outsourced. Certain other capabilities, such as adequate acquisition skills to manage costs, quality, and performance and to be smart buyers of products and services, or other competencies such as those directly linked to national security, also must be retained in-house to help ensure effective mission execution. 4. Create incentives and processes to foster high-performing, efficient, and effective organizations throughout the federal government. Commentary: This principle recognizes that, historically, it has primarily been when a government entity goes through a public-private competition that the government creates a “most efficient organization” (MEO). Since such efforts can lead to significant savings and improved performance, they should not be limited to public-private competitions. Instead, the federal government needs to provide incentives for its employees, its managers, and its contractors to constantly seek to improve the economy, efficiency, and effectiveness of the delivery of government services through a variety of means, including competition, public-private partnerships, and enhanced worker-management cooperation. 5. Be based on a clear, transparent, and consistently applied process. Commentary: The use of a clear, transparent, and consistently applied process is key to ensuring the integrity of the process as well as to creating trust in the process on the part of those it most affects: federal managers, users of the services, federal employees, the private sector, and the taxpayers. 6. Avoid arbitrary full-time equivalent (FTE) or other arbitrary numerical goals. Commentary: This principle reflects an overall concern about arbitrary numbers driving sourcing policy or specific sourcing decisions. 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. Any FTE or other numerical goals should be based on considered research and analysis. The use of arbitrary percentage or numerical targets can be counterproductive. 7. Establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in- house, work currently contracted to the private sector, and new work, consistent with these guiding principles. Commentary: Competitions, including public-private competitions, have been shown to produce significant cost savings for the government, regardless of whether a public or a private entity is selected. Competition also may encourage innovation and is key to improving the quality of service delivery. While the government should not be required to conduct a competition open to both sectors merely because a service could be performed by either public or private sources, federal sourcing policies should reflect the potential benefits of competition, including competition between and within sectors. Criteria would need to be developed, consistent with these principles, to determine when sources in either sector will participate in competitions. 8. Ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible. Commentary: This principle addresses key criteria for conducting competitions. Ineffective or inefficient competitions can undermine trust in the process. The result may be, for private firms (especially smaller businesses), an unwillingness to participate in expensive, drawn-out competitions; for federal workers, harm to morale from overly long competitions; for federal managers, reluctance to compete functions under their control; and for the users of services, lower performance levels and higher costs than necessary. Fairness is critical to protecting the integrity of the process and to creating and maintaining the trust of those most affected. Fairness requires that competing parties, both public and private, or their representatives, receive comparable treatment throughout the competition regarding, for example, access to relevant information and legal standing to challenge the way a competition has been conducted at all appropriate forums, including the General Accounting Office and the United States Court of Federal Claims. 9. Ensure that competitions involve a process that considers both quality and cost factors. | The Commercial Activities Panel is a congressionally mandated panel to study, and make recommendations for improving, the policies and procedures governing the transfer of commercial activities from government to contractor personnel. The growing controversy surrounding competitions under the Office of Management and Budget's Circular A-76 to determine whether the government should obtain commercially available goods and services from the public or private sectors led to the establishment of this Panel. In establishing the Panel, several steps were taken to ensure representation from all major stakeholders as well as to ensure a fair and balanced process. To ensure a broad range of views on the Panel, a Federal Register notice was used to seek suggestions for the Panel's composition. As the Panel began its work, it recognized the need for a set of principles for sourcing decisions. These principles provide for an assessment of what does or does not work in the current A-76 process and provide a framework for identifying needed changes. Many of the Panel's recommendations can be accomplished administratively under existing law, and the Panel recommends that they be implemented as soon as practical. The Panel also recognizes that some of the recommendations would require changes in statutes or regulations that could take some time. Any legislative changes should be comprehensive and considered to achieve a reasonable balance. |
The DOD supply chain is a global network through which DLA and the military departments provide commodities and distribution services to the U.S. military forces. The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and its subordinate, the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness, prescribe policies and procedures for the conduct of logistics, maintenance, materiel readiness, and sustainment support, to include supply and transportation, and monitor and review these activities. The Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness also exercises authority, direction, and control over DLA. In addition, the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics has overall responsibility and oversight of DOD real property, including the infrastructure in DOD’s network of distribution centers, and its subordinate, the Office of the Assistant Secretary of Defense for Energy, Installations, and Environment, is responsible for managing policy for DOD’s real property. The Secretaries of the military departments also have specific assigned responsibilities for real property management that include implementing policies and programs to acquire, manage, and dispose of real property. The OUSD Comptroller establishes the policies and procedures for DOD’s financial management, including the Defense-wide Working Capital Fund. As part of this role, the OUSD Comptroller provides guidance in DOD’s Financial Management Regulation to operate the Defense-wide Working Capital Fund and to set prices for commodities and services that are to reimburse the fund. In addition, the OUSD Comptroller provides oversight of the prices set by DLA during the annual budget process. DLA is responsible for the effective and efficient provision of commodities and services that have been determined to be appropriate for integrated management by a single agency on behalf of all DOD components, or that have been otherwise specifically assigned. To carry out this responsibility, DLA is organized into five management subgroups for commodities that provide troop support—clothing and textiles, construction and equipment, industrial hardware, medical, and subsistence—three subgroups for commodities that support weapons systems—aviation, land, and maritime—and one subgroup for distribution services. During the annual budget formulation process, DLA establishes a price to charge its customers for commodities and distribution services for that upcoming budget year. In the current budget year, however, these prices remain unchanged. This “stabilized” price is intended to protect DLA’s customers, who are appropriated funds based on the expected price, from any market price volatility. Instead, the cash balance of the Defense- wide Working Capital Fund absorbs any fluctuations in the costs to procure or to provide the commodity or distribution services during the current budget year. According to DOD’s Financial Management Regulation, the goal of the fund is to remain revenue-neutral—to neither make a gain nor incur a loss—over time. At the end of execution of each budget year, DLA assesses its actual revenue against its actual costs. Any gains are returned to customers as reductions to future prices. Any losses will be added as increases to future prices, with the aim of ultimately recovering all costs to the fund. A price increase resulting from a loss will apply to all consumers of the good or service, regardless of the impact of their demand on DLA’s costs. This practice results in some cross-subsidization across the military departments. DLA considers three components to set prices for a budget year: costs, price adjustments, and estimated workload. Costs: DLA’s commodities include two types of costs, material costs and operating costs, while DLA’s distribution services involve only operating costs. Material cost is the cost of procuring a commodity from a vendor (e.g., purchasing fabric and having uniforms sewn) and operating costs are the non-material costs to provide a commodity (e.g., storing uniforms and shipping once ordered). Operating costs— also referred to as “overhead”—are further defined as direct or indirect costs. A direct cost is associated with direct support to a specific mission (e.g., labor to process uniform orders) while an indirect cost is associated with support provided to multiple missions or agency-wide operational activities (e.g., information technology). Both direct and indirect costs can include labor and non-labor costs. Price adjustments: There are four types of price adjustments that can be used to increase or decrease cash balances with the fund. These include responses to revenue gains or losses as well as cash surcharges, capital surcharges, and depreciations. DLA adjusts prices for both commodities and distribution services based on revenue gains or losses to remain revenue-neutral over time. In addition, DLA may use cash surcharges, capital surcharges, and depreciation to adjust prices for commodities. Cash surcharges are used to recover unplanned investments in inventory to ensure that the appropriate cash balance is maintained. Capital surcharges or depreciations are used to cover the costs associated with capital or infrastructure- related investments, depending on the number of years needed to recover the cost to prevent steep increases in the year-to-year price. Estimated workload: DLA’s estimation of its customers’ requirements for a future budget year is based on input from the military departments on their budget planning decisions and execution data from prior years. These estimates may be made as early as 18 months before the budget year. The sum of the costs and all price adjustments represents the amount of revenue that is required to break even. This total is divided by the estimated workload to determine a price, as shown in figure 1. Since fiscal year 2009, DLA has contributed to reductions in the costs to provide its commodities and has maintained fairly constant prices for them. Specifically, our analysis showed that DLA’s operating costs, as a percentage of material costs, declined by almost 6 percent between fiscal years 2009 and 2015. When developing annual budgets, DLA has also generally underestimated revenue for commodities, which has contributed to gains that were subsequently applied as reductions to future prices. Lastly, we found that DLA has maintained fairly constant prices for commodities, which have not exceeded an annual increase of more than 3.3 percent due, in part, to the reductions in costs and revenue gains. OUSD Comptroller officials told us that they consider increases above 5 percent to be significant. Since fiscal year 2009, DLA’s operating costs to provide commodities to the military departments and other customers has declined by almost 6 percent. As discussed earlier, DLA’s commodities include two types of costs, material costs (i.e., the cost of procuring a commodity from a vendor) and operating costs (i.e., the non-material costs to provide a commodity). DOD monitors the operating costs that DLA charges by assessing the proportion of these costs to the material cost, and then reports this information in budget justification materials for the Defense- wide Working Capital Fund. Our review of this information shows DLA’s proportion of operating costs to the total cost declined by 5.7 percent, from 14.0 percent in fiscal year 2009 to 13.2 percent in fiscal year 2015. DLA officials told us they have contributed to reductions in their operating costs, in part through various actions such as improvements to customer delivery methods and integration of information technology systems. For example, for items that are readily available from commercial vendors, such as most medical and subsistence commodities, DLA keeps operating costs low by not purchasing or storing these items. Instead, DLA has these items shipped directly from the vendors to DLA’s customers when ordered. In addition, DLA consolidated different legacy financial and business operation databases into one enterprise-wide system to streamline business functions across DLA and to improve the quality and timeliness of data used to inform DLA’s operations. For fiscal years 2009 through 2015, DLA underestimated annual revenue for commodities in all but 2 fiscal years, as shown in figure 2. DLA develops annual revenue estimates based on operating costs and the military departments’ estimated workload demands during the annual process to develop a budget and set prices for commodities. When actual revenue is more than estimated revenue, DLA must adjust future prices to return the gained revenue to its customers. Similarly, when actual revenue is less than estimated, DLA must increase future prices to make up for lost revenue. In the fiscal years that DLA underestimated revenue for commodities, the difference between the estimated and actual revenue ranged between 9.9 percent and 26.4 percent. For these years, DLA yielded a gain above estimated costs that ranged between $1.9 billion and $5.2 billion in fiscal year 2015 dollars. According to DLA officials, in years for which they underestimated revenue, the military departments had more workload demand than DLA had initially anticipated. Specifically, the military departments purchased more commodities than anticipated when DLA was formulating the budget for that fiscal year, a process that typically occurs more than 18 months earlier. Some of the difference can be explained by unanticipated changes in DLA’s actual workload that were not part of the estimated workload demand. For example, in 2010, the Defense Health Agency implemented a home prescription service that increased revenue for DLA’s medical supply chain group. Also, in 2014, the firefighting equipment and materials, known as “stock group 80”, was transferred from the General Services Administration to DLA, increasing DLA’s customers for the items to all federal, state, and local firefighters. In contrast, in fiscal years 2013 and 2014, DLA overestimated revenue by 3.2 percent and 4.4 percent, respectively, and experienced lost revenue of approximately $670 million and $970 million, respectively, in fiscal year 2015 dollars. These losses are much smaller in magnitude compared with the gains in other fiscal years. The workload demand in these 2 fiscal years was less than DLA had initially anticipated. For example, DLA officials told us that the military departments’ workload demand when formulating the budget for fiscal year 2013 did not anticipate the sequestration ordered in March 2013, which triggered a reduction in spending authority across all DOD accounts funded with nonexempt discretionary amounts. Also, when formulating the budget for fiscal year 2014, the workload estimates did not anticipate lower enacted funding than DOD planned due to the Budget Control Act of 2011. Our prior work has found that, while challenging to do, the military departments can take action to better estimate their workload demand for commodities. For example, we identified weaknesses in the demand forecasts for spare parts that have contributed to the military departments creating at times inventory in excess of current need and backorders of spare parts across DOD. DOD has taken steps to address weaknesses in this forecasting for commodities through the implementation of the department’s Comprehensive Inventory Management Improvement Plan. As part of this effort, the Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness, in collaboration with the military departments and DLA, began using two metrics to track and monitor each organization’s performance in accurately forecasting the workload demand for spare parts. We have found that DOD has taken actions that have resulted in greater accuracy in its forecasts and that DOD continues to implement additional actions aimed at improved forecasting, including efforts to measure the accuracy of planning factors. DLA has maintained fairly constant prices for commodities since fiscal year 2009, due in part to reductions in operating costs and large gains in revenue, as previously discussed. Specifically, we found that the aggregate price for all commodities that DLA offers has increased marginally since fiscal year 2009, but that year-to-year fluctuations did not exceed an increase of 3.3 percent between fiscal years 2009 and 2017, as shown in figure 3. DOD reports the year-to-year change in price in the annual budget justification materials submitted to Congress. OUSD Comptroller officials told us that they consider increases above 5 percent to be significant. As discussed earlier, for all but 2 of the fiscal years we reviewed, DLA reduced the costs to provide commodities and returned the gains from prior fiscal years to its customers in the form of reductions in future fiscal year prices. For example, in fiscal year 2009, DLA had a revenue gain of about $5.2 billion that could be applied to reduce future prices. Such revenue gains have contributed to the marginal increases in DLA’s annual prices for commodities by offsetting inflationary increases in material costs and the relatively smaller revenue losses of fiscal years 2013 and 2014, among other things. OUSD Comptroller officials told us they collect information on the aggregate year-to-year change in price for commodities to understand any potential impacts on the budget and to monitor growth in prices attributed to an increase in the costs to provide the commodities. Officials told us they conduct a review when prices increase above 5 percent, seek additional details to understand the specific costs that are influencing the increase, and direct DLA, when necessary, to make adjustments in how it allocates cost when setting a price. DLA and OUSD Comptroller officials told us that while aggregate prices have remained stable, the individual prices of commodities that DLA offers its customers may experience price increases between fiscal years, and that such increases are usually generated by growth in material costs. To help control increases in material costs, DLA has implemented numerous initiatives that have further contributed to the relative price stability. For example, DLA awarded more long-term contracts (whereby prices are set over the contract period) and introduced reverse auctions (whereby suppliers can view other suppliers’ bids with the intent of increasing competition among the suppliers to lower bids). Between fiscal years 2011 and 2015, DLA has contributed to reductions by about 25 percent in its overall operating costs for providing distribution services, in part, through the use of existing authorities to reduce infrastructure, while the indirect portion of these costs increased by 9.4 percent. This increase in indirect costs was due, in part, to policy-driven changes such as to achieve audit readiness. However, DLA has consistently overestimated revenue since fiscal year 2009 for distribution services, which resulted in losses that DLA must eventually recover in future year prices. Finally, we found that DLA had often increased annual prices above 10 percent for fiscal years 2009 through 2015 as a result of a declining workload and the need to recoup losses, among other things. DLA has contributed to an overall reduction in operating costs of about 25 percent to provide distribution services to the military departments and other customers between fiscal years 2011 and 2015. DLA’s operating costs for distribution services can either be direct (e.g., the labor to operate a distribution center) or indirect (e.g., administrative support). According to DLA’s data, direct costs have declined by more than half (or 55.8 percent) from about $1.1 billion in fiscal year 2011 to $480 million in fiscal year 2015. DLA has achieved cost reductions, in part, by using existing infrastructure-related authorities to implement the following steps: Demolishing facilities: DOD has authority to dispose of infrastructure assets under certain conditions. As part of DLA’s initiative to reduce excess inventory, officials took steps to demolish warehouses in poor condition that DOD determined were no longer needed through its demolition approval process. Since 2012, DLA has taken action to demolish 42 buildings, totaling 4.6 million gross square feet. These efforts were concentrated at distribution centers in Richmond, Virginia; Mechanicsburg, Pennsylvania; and San Joaquin, California. According to DLA officials, this effort contributed to reducing DLA’s costs to operate the facilities and achieved cost savings for the department. Closing and realigning operations: DOD has authority to close or realign facilities outside of a Base Realignment and Closure process based on certain thresholds. In 2013, DLA used this authority to consolidate all of its San Joaquin regional operations at its Tracy Defense Distribution Depot and to terminate its operations at Sharpe Army Depot, reducing costs to DLA by about $8.5 million in fiscal year 2015. According to officials, this effort achieved a cost savings and future cost avoidance for DLA, but the Army continues to operate the space that DLA formerly used at Sharpe Army Depot. Therefore, the effort did not achieve a cost savings for the department as a whole. Although direct costs have declined, indirect costs have increased for distribution services by 9.4 percent over the same period. Specifically, DLA identified three different categories of indirect costs that have significantly increased since fiscal year 2011. Most of these costs are considered policy-driven changes, but DLA has taken steps to manage growth in these areas and continues to look for opportunities to reduce them in the future. The indirect costs, which have been adjusted into constant fiscal year 2015 dollars, are as follows: Audit readiness: The costs associated with achieving audit readiness across DLA increased from $1.3 million in fiscal year 2011 to $151.9 million in fiscal year 2015, more than a hundredfold increase. DLA officials stated they allocated an average of 1.6 percent of these costs to distribution services. According to DLA officials, in order to add inventory controls associated with the department’s congressionally mandated efforts to become auditable, DLA had to invest in technology and hire additional civilian employees to implement the inventory controls. To manage growth in audit readiness costs, DLA officials told us that they have taken steps to consolidate contract support and rely more heavily on its existing workforce. Information technology: Information technology costs across DLA increased from $842.8 million in fiscal year 2011 to $974.4 million in fiscal year 2015, an increase of about 15.6 percent. DLA officials stated they allocated 7 percent of these costs to distribution services. DLA officials also stated that the increase in information technology costs were primarily for sustainment and the modernization of information technology infrastructure to improve business operations and capabilities as well as to purchase greater data storage and more bandwidth to ensure the continuity of business operation systems and secure communications. DLA officials also told us they have taken steps to manage growth in information technology costs. For example, DLA leveraged the Defense Information Services Agency’s lower cost teleconferencing and voice services. Infrastructure support: Infrastructure support costs increased from $83.4 million in fiscal year 2011 to $125.8 million in fiscal year 2015, an increase of more than half or about 51 percent. According to DLA officials, the rise in infrastructure support costs is due to the sustainment, restoration, and modernization of the aging facilities that DLA operates and to demolition costs. For example, many of the buildings that DLA operates at its distribution centers were constructed during the 1940s and 1950s and are close to the end of their lifecycle, requiring more funds to maintain. To try to control these cost increases, DLA officials told us that they fund the suggested sustainment, restoration, and maintenance costs at a lower percentage than DOD’s model suggests and prioritize repairs that are health and safety related, but such a strategy can result in higher costs over the long term if needed maintenance continues to be deferred. Also, since fiscal year 2012, DLA has invested about $24.4 million to demolish aged facilities to avoid future infrastructure support costs. For fiscal years 2009 through 2015, DLA consistently overestimated revenue for its distribution services. As with commodities, DLA develops annual revenue estimates based on operating costs and the military departments’ workload demands during the annual process to develop a budget and set prices for distribution services in advance of the budget request. When the actual revenue is less than estimated revenue, DLA adjusts future prices to recover the loss in its operating costs. Such adjustments contribute to increasing prices in future budget years. According to DLA data, distribution services have experienced annual losses ranging from $39.2 million to $352.9 million in every year from fiscal year 2009 through fiscal year 2015, as shown in figure 4. According to DLA officials, they have generated less revenue than estimated for distribution services because the military departments’ workload demand was less than they had initially anticipated when formulating the budget for the budget year at least 18 months earlier. Some of the difference can be explained by unanticipated changes in DOD’s planned operations. For example, DLA planned in years 2008 through 2010, based on the military departments’ estimates, that the workload to move equipment and materiel from Iraq to other locations would be greater in fiscal years 2010 through 2013 than the actual workload demand for those years. Also, DLA planned in 2011 and 2012, based on the military department’s plans for withdrawal from Afghanistan that the workload demand for processing inventory to these locations would decrease in fiscal years 2013 and 2014. However, the actual reduction in workload demand was greater than planned. DLA officials stated there are opportunities for the military departments to improve their estimates of workload demand for distribution services. As such, DLA has taken actions since 2014 to work with the military departments to improve workload estimates by holding quarterly meetings with senior-level military department representatives from their finance and logistics offices. According to DLA officials, these quarterly cost summits are used to discuss estimates of workload demand and how differences during budget execution can affect DLA’s cost recovery and the military departments’ budgets. For example, during the November 2016 cost summit, DLA officials provided 5 years of data for second destination transportation costs—a distribution service cost associated with processing—that compared the price each military department was charged based on their combined workload estimates with the cost for the actual amount each military department had used. DLA officials had not previously shared these data with the military departments. DLA reported that over the 5 years, two of the three military departments had used less second destination transportation than their workload estimate and cumulatively had overpaid by approximately $100 million, while the third military department had underpaid by $12.6 million. In response to questions during the cost summit about the status of the surplus payments, DLA officials stated that any gains were returned through reductions in price to all customers regardless of whether they had previously overpaid or underpaid compared with their workload estimate. DLA plans to continue to share data that compares estimates with actuals to encourage the military departments to develop more accurate workload estimates. In addition, DLA has proposed to the military departments to not include second destination transportation in the price for processing, but to bill separately for actual second destination transportation costs. Since fiscal year 2009, DLA’s annual prices for distribution services have often increased above 10 percent. DOD reports its annual prices for distribution services in the budget justification materials, but does not include information on the year-to-year change in price. Therefore, we calculated the year-to-year change in annual price for four types of distribution services to determine the trends in pricing. The four types of distribution services—covered storage, open storage, specialized storage, and processing—all experienced significant price increases. For example, covered storage prices increased by more than 10 percent in 5 out of the 9 years reviewed. The largest increases in the price for all distribution services occurred in fiscal year 2017, as shown in figure 5. As discussed earlier, any losses from prior fiscal years as a result of overestimated revenue must be eventually recovered by DLA in its future pricing. In addition to such losses, DLA’s declining workload at its distribution centers has also contributed to significant increases in annual prices for distribution services. DLA officials told us that the costs to operate these centers are relatively fixed and do not fluctuate based on the workload. As DLA’s workload has declined with combat operations in Iraq and Afghanistan and through inventory reduction initiatives, DLA has had to continue to apply the fixed costs of operating these distribution centers to the declining workload. For example, in fiscal year 2009, DLA spread the operating cost across a larger storage workload, which resulted in an average cost per cubic foot for covered storage of $3.05, but by fiscal year 2012 these costs spread across a smaller workload resulting in an average cost per cubic foot of $5.67. Moreover, DLA’s decision to delay recovering its prior revenue losses when setting prices for distribution services in fiscal years 2014 through 2016 led to the largest price increases for distribution services in fiscal year 2017 for the period reviewed. Specifically, DLA set lower-than-actual prices to keep prices constant in fiscal years 2014 through 2016 while military departments recovered from budgetary cuts due to sequestration. In fiscal year 2017, DLA returned to its usual procedure and set prices based on estimated costs, estimated workload, and prior years’ losses. When we asked OUSD Comptroller officials about these price increases, they told us that they do not separately track the aggregate price changes for distribution services over time. Instead, the officials stated that they can assess price growth in distribution services through the price change information reported in the budget justification materials because the costs for approximately 70 percent of DLA’s distribution services workload is included in DLA’s prices for commodities. Moreover, when workload decreases and DLA experiences prior-year revenue losses in providing distribution services, the Financial Management Regulation allows DLA to increase prices significantly to recover its full operating costs. DLA has taken steps to manage growth in indirect costs and to improve workload estimates for distribution services. In addition, DLA officials stated they have also sought opportunities to reverse the recent decline in workload for distribution services in order to lower prices. Specifically, our analysis of DLA covered storage shows that its usage declined from 70.8 million cubic feet in fiscal year 2009 to 42.1 million cubic feet in fiscal year 2015, a decrease of 41 percent. To address this decline in usage, DLA reviewed how the department is consuming these services and found instances where the military departments are using private storage for government-owned inventory in close proximity to DLA distribution centers. For example, the Army’s Stryker program stores inventory in commercial locations that are located near DLA distribution centers in Anniston, Alabama and Puget Sound, Washington. DLA estimates moving Stryker inventory from storage owned by private companies to DLA distribution centers in Anniston, Alabama and San Joaquin, California could save DOD approximately $4 million in distribution costs in the first year. In addition, according to DLA officials, they found instances where the military departments had moved storage workload from DLA’s distribution centers to their own storage facilities. DLA officials told us that increasing their workload could contribute to reducing prices and this could be achieved by changing, when appropriate, the military departments’ practice of obtaining distribution services outside of DLA. DOD has taken steps to increase the use of its U.S. distribution centers, but additional opportunities exist to more efficiently use this network of distribution centers, including those that DLA operates. For example, the department has recently taken steps to address the military departments’ use of private storage when DLA distribution centers are in the same vicinity as the private storage locations. In January 2017, the department revised DOD Instruction 5000.02, Operation of the Defense Acquisition System, to require that program managers who are responsible for contracts with DOD maintenance depots store government-owned inventory at DLA’s distribution centers when located in the same geographic area as those depots. According to officials, this revision is intended to reduce unnecessary costs to DOD’s total budget by utilizing DOD’s existing investment in DLA’s network. In addition, the department sought authority from Congress to make DLA’s storage and distribution services support available to defense weapon system contractors. The National Defense Authorization Act for Fiscal Year 2017 provided such authority under a 6-year pilot program whereby DLA and defense weapon system contractors can enter into a separate contract for the storage and distribution of materiel and spare parts used in the support of a defense weapon systems contract. DOD has other opportunities to more efficiently use its network of distribution centers to provide distribution services. Specifically, DOD previously identified inefficiencies, including overlapping and duplicative distribution service functions, across its distribution network. The Under Secretary of Defense for Acquisition, Technology, and Logistics has the responsibility to ensure that its policies and programs are designed and managed to improve efficiency, among other things, and to use DOD’s existing systems, facilities, and services to avoid unnecessary overlap and duplication and to achieve maximum efficiency and economy. As a subordinate to the Under Secretary of Defense for Acquisition, Technology, and Logistics, the Assistant Secretary of Defense for Logistics and Materiel Readiness has been delegated the responsibility and authority to prescribe policies and procedures in the department for the conduct of logistics and materiel readiness, to include supply and transportation, among others. In carrying out this responsibility, starting in 2010, DOD established a program called Strategic Network Optimization that identified and undertook actions to address inefficiencies in its distribution network. The program had a three-phased approach with each phase primarily focused on one of the following areas: transportation, inventory, and infrastructure. In the context of distribution infrastructure, Strategic Network Optimization program officials identified in 2011 that DLA and the military departments provided distribution services—including storage and processing—at 256 distribution centers in the United States that often are in close proximity to one another and, in some cases located on the same installations. In addition, they found that 91 of the distribution centers accounted for 95 percent of the total network’s historical workload while the other sites accounted for the remaining 5 percent. To address this issue, Strategic Network Optimization program officials suggested a number of possible actions to improve the efficiency of the distribution service network. In January 2012, the Joint Logistics Board approved an approach whereby 5 DLA distribution centers were designated as the main suppliers within an assigned region of the United States to the remaining 12 DLA distribution centers, which are smaller, and to other distribution centers run by the military departments. The 5 main suppliers would ship inventory to all customers within the distribution network. Each of the other distribution centers would be limited to providing service to local customers located on its individual installation. See figure 6 for an example of the regional consolidation that was proposed in the redesign of the U.S. distribution network. This approach was intended to minimize DLA and the military departments providing unnecessary overlapping or duplicative distribution services by redistributing the workload. In addition, the workload redistribution was to have decreased the number of distribution centers within DOD’s network and increased DLA’s overall distribution services workload. In October 2014, DOD discontinued the Strategic Network Optimization program. By this time, DOD had implemented a majority of the actions for the first two—transportation and inventory—of the program’s three phases. But DOD had not yet developed a business plan to guide the implementation of the third phase intended to reduce infrastructure in the distribution network through consolidation. According to DOD and DLA officials, all of the remaining actions from the first and second phases of the program were incorporated into normal business processes. DOD and DLA officials acknowledged that unnecessary overlap and duplication continues to exist in DOD’s network of distribution centers. However, in the case of the effort to reduce infrastructure, the officials stated that without Base Realignment and Closure authority, they would not be able to address unnecessary overlap and duplication in functions at DOD’s U.S. distribution centers, as many of the distribution centers are owned by the military departments. According to DOD and DLA officials, proposals within the department on the appropriate course of action to address unnecessary overlap and duplication in DOD’s network of distribution centers have evolved since the 2011 study to include options for base closures. In each annual budget request since fiscal year 2013, the department has requested Base Realignment and Closure authority, but Congress has yet to approve DOD’s request. DOD has existing authorities it can use to minimize unnecessary overlap and duplication and more efficiently use the department’s network of distribution centers. For example, DOD could use its existing authorities to close or realign its installations and functions outside of a Base Realignment and Closure round. However, if doing so would exceed certain thresholds set out in 10 U.S.C. § 2687—based on the number of civilian personnel affected or potentially affected—DOD must notify Congress and wait 60 days after notification before taking any irreversible actions. In addition, DOD has authority to dispose of real property through demolition when a facility’s condition has deteriorated. We found that DOD had not assessed the extent to which it could use existing authorities to minimize unnecessary overlap and duplication and more efficiently use the department’s network of U.S. distribution centers, beyond the actions DLA has already taken. We previously reported that while DOD makes hundreds of basing decisions a year that are not subject to congressional notification, it has yet to take any actions that require notification. In discussions about DOD’s existing authorities, officials at the Office of the Assistant Secretary for Energy, Installations, and Environment told us that the department does not believe 10 U.S.C. § 2687 is a viable tool to achieve significant base closures because under that section, DOD’s authorities are narrowly circumscribed and the statutory requirements are burdensome. However, other DOD components could assess and implement similar actions as DLA using existing authorities. Further, in discussing the current fiscal pressures and budgetary constraints within the department and the need to reduce lower priority programs to comply with the Bipartisan Budget Act, DOD’s budget overview for fiscal year 2017 states that “the need to reduce unneeded facilities is so critical that in the absence of authorization for a new round of base realignment and closure, the department will explore any and all authorities that Congress has provided to eliminate wasteful infrastructure.” While these actions may not entirely address inefficiencies in its network of U.S. distribution centers, they could achieve efficiencies and potential cost savings. Without maximizing the use of its existing authorities in the absence of a Base Realignment and Closure round, DOD’s network of distribution centers will continue to result in inefficiencies and pose difficulties in minimizing price increases for distribution services. In addition, the department will continue to spend funds on storage and distribution costs that could be applied to support higher priorities. Under current fiscal pressures and budgetary constraints within the department, DOD has sought to provide its commodities and distribution services to its U.S. military forces as efficiently as possible while reducing costs. Further, DOD has identified inefficiencies in how it provides distribution services at its network of U.S. distribution centers. DOD maintains that it needs Base Realignment and Closure authority; however, the department has not assessed whether it can use existing authorities to minimize unnecessary overlap and duplication, and more efficiently use this network. Any actions resulting from DOD’s assessment, if implemented, could also have the potential to realize near- term savings in storage and distribution costs that could be made available to support higher priorities. To minimize unnecessary overlap and duplication and more efficiently use DOD’s U.S. distribution centers, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics (or the subsequent Under Secretary for Acquisition and Sustainment), in conjunction with the Director of DLA, and the Secretaries of the Army, the Air Force, and the Navy, to assess and direct the implementation of actions, as appropriate, that can be taken using existing authorities to close, realign, or dispose of existing infrastructure. We provided a draft of this report to DOD for review and comment. In its comments, DOD concurred with our recommendation and cited various statutes that constrain both the department’s authority to conduct large- scale closures or realignments of installations and small-scale closures, realignments, or disposals of facilities, including the infrastructure in the network of U.S. distribution centers. DOD’s comments are reprinted in their entirety in appendix I. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and to the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Under Secretary of Defense, Comptroller; the Director of DLA, and the Secretaries of the Air Force, Army, and 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 (213) 830-1011 or vonaha@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Tina Won Sherman (Assistant Director), Vincent Buquicchio, Tim Carr, Lina Grant, Mae Jones, Susan Langley, Amie Lesser, Benjamin Sclafani, and Michael Silver made key contributions to this report. | In fiscal year 2015, DLA generated $23 billion in revenues from supply chain management sales to the military departments and other customers, such as federal agencies. These sales included commodities and distribution services provided through the Defense-wide Working Capital Fund, a revolving fund. Senate Report 114-255 and House Report 114-537 included provisions for GAO to evaluate DLA's costs to provide commodities and services using the Defense-wide Working Capital Fund. This report identifies trends in the costs and annual prices that DLA has charged for commodities and distribution services; and evaluates the extent to which DOD has taken steps to more efficiently use its network of U.S. distribution centers. GAO analyzed the most currently available DLA cost data, estimated and actual revenue, and prices for commodities and distribution services since fiscal year 2009; reviewed DOD documentation; and interviewed knowledgeable DOD officials. GAO found that since fiscal year 2009, the Defense Logistics Agency (DLA)—the largest logistics combat support agency for the Department of Defense (DOD)—had reduced costs and maintained fairly constant prices for commodities, such as repair parts, clothing, and food. When developing annual budgets, DLA has generally underestimated revenue from the sales of commodities. The underestimated revenue contributed to gains that were applied to future year prices in the form of reductions, and helped offset inflationary increases in material costs. GAO also found that since fiscal year 2011, DLA had reduced costs for distribution services (e.g., the processing and storing of inventory) by about 25 percent through the use of existing authorities to reduce infrastructure. However, DLA has often increased annual prices for distribution services by more than 10 percent due, in part, to a declining workload. DLA has generally overestimated revenue from the sales of distribution services. The overestimated revenue contributed to losses as well as to price increases in subsequent years as DLA sought to recover those losses. DOD has taken steps to increase the use of DLA's 17 U.S. distribution centers to improve efficiency of DLA's operations, but additional opportunities for efficiencies exist across DOD's network of approximately 256 U.S. distribution centers. In January 2017, DOD revised guidance to require storage of government-owned inventory at DLA's distribution centers instead of at privately owned storage when both are located in the same geographic area to reduce costs. DOD has also identified inefficiencies in the provision of its distribution services. Specifically, the military departments, along with DLA, provided distribution services using U.S. distribution centers that often were in close proximity to or located on the same installation. To address inefficiencies, DOD established a program to, among other things, decrease the number of U.S. distribution centers. In October 2014, DOD discontinued the program without implementing its plan to reduce the number of distribution centers. Though DLA has been able to use existing authorities to realign functions and demolish some facilities to gain efficiencies at its distribution centers, DOD officials told us the department needs Base Realignment and Closure authority—a process whereby Congress authorizes an independent federal commission to review and determine whether to forward to the President for approval DOD's proposals to realign and close military installations—to address any additional inefficiencies. GAO found, however, that DOD had not assessed the extent to which the department could further use its existing authorities to minimize unnecessary overlap or duplication in its network of distribution centers. Without assessing the use of its existing authorities, inefficiencies in DOD's network of U.S. distribution centers that the department has previously identified may remain. GAO recommends that DOD assess and direct the implementation of actions, as appropriate, that can be taken using existing authorities to close, realign, or dispose of existing infrastructure to more efficiently use the department's network of U.S. distribution centers. DOD concurred with the recommendation. |
Since 2003, JPDO and ATO have made progress in planning for and implementing NextGen. In accordance with Vision 100, JPDO created a multi-agency research and development plan for the transition to NextGen. This plan consists of three basic documents—a Concept of Operations, an Enterprise Architecture, and an Integrated Work Plan. Collectively, these three documents form a basis for interagency and industry planning and coordination. JPDO views these plans as iterative and intends to issue further versions as NextGen technologies are developed and implemented. As NextGen progressed from the planning to the implementation phase, ATO produced its NextGen Implementation Plan, which addresses the more detailed level of planning and activities necessary to achieve NextGen capabilities. According to ATO, it and JPDO have worked to align and ensure linkages between these planning documents. The current version of the NextGen Implementation Plan, released in January 2009, focuses on the midterm (2012 though 2018) implementation of NextGen capabilities. In a previous testimony, we raised some concerns about the usefulness of the NextGen planning documents, and we still have some concerns. For example, we reported that the planning documents lacked the type of specific information that industry stakeholders need for their own planning purposes, such as a catalog of critical needs, clearly defined and prioritized intermediate objectives, and a structured plan for achieving tangible results. Recent versions of NextGen planning documents have partially addressed some of these concerns, but industry stakeholders continue to express frustration that the planning documents lack any specific timelines or commitments. A senior FAA official has acknowledged that FAA will face ongoing challenges in attempting to communicate effectively with industry and other stakeholders to ensure that they fully understand the content and objectives of the initiative and remain engaged and committed to its planning and implementation. Beyond these planning efforts, FAA has continued to move forward in planning and conducting demonstrations of some key NextGen technologies. For example, a recently announced demonstration with US Airways and Aviation Communications and Surveillance Systems at the Philadelphia International Airport will test ADS-B technology that allows an aircraft with the necessary avionics to transmit its own position as well as to receive information from other similarly equipped aircraft. FAA is providing $6 million to purchase the necessary avionics equipment for the aircraft involved in the demonstration. FAA has also initiated projects to demonstrate the benefits of integrating NextGen capabilities. For example, in December 2008, FAA signed a memorandum of agreement with NetJets—an Ohio-based air service provider with a fleet of 600 aircraft. In this demonstration, FAA will test a number of NextGen technologies and procedures including ADS-B. The company will provide real-time data, allowing FAA to validate performance requirements. This demonstration will help FAA identify the costs and benefits associated with NextGen implementation. To help address current congestion and delays, many stakeholders have suggested that FAA focus on maximizing what can be done with existing, proven capabilities and existing infrastructure. For example, industry stakeholders highlighted “off-the-shelf” technologies, including Traffic Management Advisor (TMA), Traffic Flow Management (TFM), and User Request Evaluation Tool (URET), as well as performance-based navigation and tailored arrival procedures. Such technologies and procedures are being implemented in airports now and, according to these stakeholders, could be implemented more widely and used more effectively to address capacity constraints. For example, TMA—a decision- support tool that helps controllers manage air traffic flows more efficiently—has been used at some airports to increase capacity. However, according to one stakeholder, some airports equipped with TMA are not using it to its fullest extent to increase capacity. Industry stakeholders also maintain that using existing performance-based navigation procedures during low-visibility conditions—when the required distances separating aircraft are normally increased for safety reasons—would enable greater use of closely spaced parallel runways, thereby increasing capacity. In part to help accelerate the implementation of existing capabilities in the midterm—including technologies that are part of NextGen’s five transformational programs such as ADS-B—FAA has created a NextGen Midterm Implementation Task Force through RTCA. According to the NextGen Implementation Plan, the task force will focus on maximizing the benefits of midterm NextGen operational capabilities and addressing business and investment-related issues associated with implementing these capabilities. A member of the task force indicated that it will be identifying a handful of capabilities that can be implemented in the midterm and prioritizing them according to their relative net benefits. Furthermore, the task force will be examining the potential for deploying capabilities regionally to address key bottlenecks in the national air transportation system before deploying them nationally. Current plans call for the task force to provide final conclusions and recommendations to FAA in August 2009. Implementing these capabilities in the midterm, as well as over the long term, depends not only on FAA, but also on aircraft operators, who must acquire the necessary equipment. For example, aircraft must be equipped with appropriate technology to use ADS-B. Some airlines have purchased some of the necessary technology, but over all, airlines are waiting for FAA to specify requirements and address funding concerns. In addition, industry stakeholders have expressed concerns about the progress made by FAA in adequately explaining and demonstrating the benefits of equipping aircraft with advanced avionics equipment, which comes at a significant cost to the aviation industry. For example, one industry stakeholder told us that, without an explicit FAA commitment to reduce separation standards—a key benefit of deploying aircraft with ADS-B equipment—the industry has little incentive to voluntarily purchase the equipment. One objective of the new NextGen Midterm Implementation Task Force is to help operators identify the benefits of acquiring NextGen- compatible equipment sooner rather than later. A range of potential requirements and incentives could encourage aircraft operators to purchase equipment. These could include mandated deadlines or operational preferences—such as preferred airspace, routings, or runway access. Industry stakeholders have expressed concerns that the array of operational benefits available to early equippers has yet to be identified and defined, and have also questioned the extent to which such preferences would result in tangible benefits. Another proposed option would combine mandated deadlines and operational preferences with equipment investment tax credits that would financially support equipment implementation for a limited initial set of aircraft operators. The credits would provide a competitive advantage for early equippers. Airlines that continue to delay equipage will become more and more disadvantaged, thus providing an incentive for these airlines to equip. Before midterm NextGen implementation can occur, FAA must validate and certify technologies and issue rules for the use of procedures. FAA has made some progress in this area, including developing specifications for performance-based navigation procedures at selected airports, but much remains to be done. We and others have previously expressed concerns about the time and human resources required for these efforts and have identified them as a significant risk to the timely and cost- effective implementation of NextGen. In recent interviews, stakeholders have expressed similar concerns about the midterm implementation of existing or off-the-shelf technologies and capabilities. For example, an avionics manufacturer, an aircraft manufacturer, and an airline association we interviewed all cited the time it takes to develop rules for new procedures and the problems that result from deploying equipment before rules are finalized. Any activities needed to implement new policies and procedures, such as the expanded use of performance-based navigation procedures; to demonstrate new capabilities, such as the use of closely spaced parallel runways; to set parameters for the certification of new systems, such as ADS-B; and to develop new technologies will take time and be a priority in the mid- and long-term planning for NextGen. Just as important, the time required to complete such activities will have to be balanced against the need to ensure the reliability and safety of procedures and systems before they are used in the national airspace system. We have previously reported on stakeholders’ concerns about the fragmented management structure for NextGen and resulting lack of clear accountability for NextGen’s implementation, as well as concerns about JPDO’s and FAA’s efforts to fully involve stakeholders and acquire needed expertise. Resolving these issues will be critical to advancing both the implementation of capabilities in the midterm and the full transformation to NextGen in the long term. Initially, JPDO was established as a separate and independent office within FAA, reporting directly to both the COO of ATO and the FAA Administrator (see fig. 1). In May 2008, FAA announced a reorganization of its NextGen management structure and named a Senior Vice President for NextGen and Operations Planning who reports to ATO’s COO (see fig. 2.). The reorganization eliminated JPDO’s dual reporting status, and the JPDO Director now reports directly to the newly created Senior Vice President for NextGen and Operations Planning. The reorganization also led to JPDO’s placement lower in FAA’s organizational structure—it is now a fourth-level organization. According to ATO’s COO, a purpose of the reorganization was to respond to industry stakeholders’ concerns about the fragmentation of authority and lack of accountability for NextGen, which might delay its implementation. In particular, stakeholders have expressed frustration that a program as large and important as NextGen does not follow the industry practice of having one person with the authority to make key decisions. In the COO’s view, the reorganization creates one “team” with one person in charge to plan, implement, and oversee NextGen. According to FAA, the Senior Vice President for NextGen and Operations Planning is responsible for integrating and implementing all elements of NextGen. In November 2008, the President issued Executive Order 13479, which took the positive step of treating NextGen as an important national initiative, but potentially added another level of complexity and uncertainty to the management structure for NextGen. The order directed the Secretary to create a staff to support the Senior Policy Committee, an advisory body chaired by the Secretary of Transportation whose members are the heads of the federal partner agencies and whose purpose is to provide policy guidance for NextGen planning. Previously, JPDO coordinated the agenda of the Senior Policy Committee, but now, according to FAA, the new support staff will coordinate the committee’s agenda, although JPDO will continue to be involved in the development of issues and topics for the committee. Furthermore, notwithstanding JPDO’s statutory responsibility for coordinating with the federal partner agencies, the director of the support staff will serve as the senior DOT liaison between the Secretary and the federal partner agencies. It remains unclear how these changes will affect JPDO’s role relative to the Senior Policy Committee or to other federal partner agencies. The executive order also directed the Secretary to establish a committee to advise the Secretary on the implementation of NextGen. According to FAA’s interpretation of the executive order, the new advisory committee will be an external (nongovernmental) committee whose role will be to provide an external stakeholder perspective. The role of this committee could potentially duplicate the roles of other advisory bodies associated with the NextGen initiative. FAA has said that it and JPDO are working with the Department to clarify roles and responsibilities in executing the executive order. It is difficult to tell how well the reorganization and the implementation of the executive order will address stakeholders’ concerns about the fragmentation of authority for NextGen. For example, although the reorganization places JPDO and the office responsible for NextGen integration and implementation under the leadership of the same Senior Vice President, other activities critical to NextGen’s implementation lie outside this official’s jurisdiction. Several types of aviation operations are under the leadership of the Senior Vice President for Operations, and responsibilities for airport and aviation safety activities fall outside ATO altogether and are headed by FAA Associate Administrators. According to FAA, the NextGen Management Board, which is composed of Associate Administrators, the COO, Senior Vice Presidents, and the Director of the JPDO, ensures agencywide support for NextGen. However with no direct line of authority between the Senior Vice President for NextGen and Operations Planning and these other operations and activities, accountability for NextGen outcomes is unclear, creating the potential for delays in implementation. It is also unclear how the reorganization and the implementation of the executive order will affect the overall role created for JPDO by Vision 100. For example, according to one industry stakeholder, its ability to understand and be involved in the NextGen- related efforts of federal partner agencies has been hampered by JPDO’s placement under ATO’s management. Several stakeholders have suggested that an office above the Senior Vice President for NextGen and Operations Planning and these other units—an office that would report directly to the FAA Administrator or the Secretary of Transportation—is needed to ensure accountability for NextGen results. In contrast, another stakeholder suggested that further reorganization may not be needed, but FAA’s existing leadership could play a greater role in clarifying the responsibilities of the various offices involved in planning and implementing NextGen and in clearly assigning accountability for NextGen outcomes. In September 2008, the National Academy of Public Administration (NAPA) released a workforce study contracted by FAA that identified leadership as the single most important element of success for large-scale systems integration efforts like NextGen and highlighted leadership as a NextGen implementation challenge. The study, therefore, recommended that FAA tailor its leadership development program to focus on the specific leadership skills needed for managing this large, complex, evolving program, to include communication, collaboration, change management, and accountability and measurement. Some stakeholders, such as current air traffic controllers and technicians, will play critical roles in NextGen, and their involvement in planning for and deploying the new technologies will be important to its success. We have previously reported that active air traffic controllers were not involved in the NextGen planning effort. In following up on this issue, we found that some progress has been made. According to FAA, it has used active controllers as subject matter experts in NextGen development; representatives of both the controllers’ and the technicians’ unions have seats on the NextGen Management Board; and the controllers’ union is participating in the NextGen Midterm Implementation Task Force. Controller union officials have likewise reported participating in several NextGen planning and decision-making groups, including the Institute Management Council, and acknowledge that active controllers serve as subject matter experts for NextGen working groups. However, these union officials have expressed concern that the union is not involved in selecting the subject matter experts. According to the technicians’ union, it does not generally participate in NextGen efforts, although it has a liaison working on ADS-B and is seeking to participate in the NextGen Midterm Implementation Task Force. We maintain that input from current air traffic controllers with recent experience controlling aircraft, who will be responsible for managing traffic in the NextGen environment, and from current technicians, who will maintain NextGen equipment, is important when considering human factors and safety issues. Our work on past air traffic control modernization projects has shown that a lack of stakeholder or expert involvement early and throughout a project can lead to cost increases and delays. FAA will also need technical skills, such as systems engineering and contract management expertise, to implement NextGen. Because of the scope and complexity of the NextGen effort, the agency may not currently have the in-house expertise to manage the transition to NextGen without assistance. In November 2006, we recommended that FAA examine the strengths and weaknesses of its technical expertise and contract management expertise in light of the skills required to define, implement, and integrate the numerous complex programs inherent in the transition to NextGen. In response to our prior recommendation and as noted earlier in this statement, ATO contracted with NAPA to (1) determine the mix of skills needed by the nonoperational (acquisition) workforce to implement NextGen and (2) identify the strategies for acquiring the necessary workforce competencies. The study found that ATO will need to develop or strengthen skills in the areas of software development, systems engineering, research and development, strategic planning, financial budget analysis, and contract administration, among others. Strategies presented to ATO for consideration in acquiring the skills needed for the NextGen transition include aggressively marketing the NextGen vision, enhancing internal research and development skills, and working collaboratively with the agency’s human capital office to develop a more integrated approach to NextGen workforce planning. According to an FAA official, FAA plans to fill a total of 378 NextGen positions in fiscal years 2009 and 2010. NextGen staffing needs can be difficult to address, a senior FAA official said, because historically NextGen skills have been in short supply and competitively priced in the marketplace. However, the current economic conditions could make hiring for these positions less difficult than it otherwise might be. If not adequately addressed, this situation could contribute to delays in integrating new technologies and transforming the national airspace system. A number of other challenges affect FAA’s ability to move forward with NextGen’s implementation, such as addressing ongoing research and development needs, reconfiguring and maintaining existing facilities, and enhancing the physical capacity of airports. As NextGen moves forward, applied research will be needed to integrate its five transformational technologies, as well as the legacy facilities and systems that will also be part of NextGen, to ensure that all the components work safely and reliably together. According to FAA, the funding requested in its Capital Improvement Program for 2009 through 2013 reflects the research and development and capital investments deemed necessary to deliver NextGen capabilities in the midterm. The funding requested for FAA NextGen research and development has significantly increased, from a total of $83 million in fiscal year 2009 to about twice that amount in each of the next 4 fiscal years. FAA believes that this level of FAA funding for NextGen research and development will complement investments made by federal partner agencies—particularly the National Aeronautics and Space Administration (NASA)—and will adequately support NextGen’s implementation. In addition, the American Recovery and Reinvestment Act has increased NASA’s budget for aeronautics research by $150 million, although it does not indicate whether this additional funding will be focused on NextGen-specific research. NASA’s aeronautics research has long supported FAA’s air traffic modernization efforts. To help ensure that NASA’s aeronautics research is effectively transferred to FAA, the two agencies have developed a strategy that initially establishes four research transition teams, which are aligned with JPDO’s planning framework. This strategy also outlines the two agencies’ responsibilities for the research—FAA will develop user requirements, and NASA will conduct the fundamental research in each of the four areas and then transfer projects back to FAA for further development. According to FAA, its collaboration with NASA on the research transition teams has better focused NASA’s investments on FAA’s requirements. Research transition teams have not, however, been established between FAA and the other partner agencies. Prioritizing the research and development needed for NextGen is also important to avoid gaps and delays. The most recent version of JPDO’s Integrated Work Plan identifies the sequence of research that must be completed before specific NextGen capabilities can completed. This research, however, cannot be fully prioritized without identifying the benefits that can be expected from the different capabilities and technologies. According to JPDO officials, they are developing a matrix that will identify benefits and costs and build a business case for all the components of NextGen over the next year that will help in prioritizing research and development. Going forward, further research and development is needed in a number of areas to implement NextGen, according to FAA, stakeholders, and our analysis. For example: Environmental Impact Research: According to a JPDO analysis, the environmental impact of aviation will be the primary constraint on the capacity and flexibility of the national airspace system unless this impact is managed and mitigated. In proposed legislation reauthorizing FAA, $111 million for fiscal years 2009 through 2011 may be used for a new FAA research and development program to help reduce aviation noise and emissions. This program—the Continuous Lower Energy, Emissions, and Noise (CLEEN) initiative—would facilitate over the next 10 years the development, maturation, and certification of improved airframe technologies. Aeronautics industry representatives and experts we consulted said that the program’s funding levels may not be sufficient to attain the goals specified in the proposal. According to these experts, the proposed funding levels would allow for the further development of one or possibly two projects. FAA recognizes the implications of the proposed funding structure for CLEEN and characterizes the program as a “pilot.” Human Factors Research: Human factors research explores what is known about people and their abilities, characteristics, and limitations in the design of the equipment they use, the environments in which they function, and the jobs they perform. Compared with the current ATC system, NextGen will rely to a greater extent on automation, and the roles and responsibilities of pilots and air traffic controllers will change. For example, both pilots and controllers will depend more on automated communications and less on voice communications. Such changes in roles and responsibilities raise significant human factors issues for the safety and efficiency of the national airspace system. Until fiscal year 2005, NASA was a primary source of federal aviation-related human factors research, but NASA then began reducing its human factors research staff, reassigning some staff to other programs and reducing the contractor and academic technical support for human factors research. According to NASA, human factors research continues to be a critical component of its aeronautics research program, although its work is now focused at the foundational (earlier-stage) level. FAA plans to invest $180.4 million in human factors research from fiscal year 2009 through fiscal year 2013. It remains to be seen whether or to what extent FAA’s research and development, which is typically more applied than NASA’s, will offset NASA’s reductions in human factors research. Weather Related Research: Improved weather information is essential to realize key NextGen capabilities that depend on accurate weather information for decision-making. According to FAA, 70 percent of delays are attributable to weather every year. NextGen Network Enabled Weather (NNEW) is one of the five NextGen transformational programs for which current reseach and development is needed, even though their full benefits may not be realized until after the midterm. NNEW is intended to provide weather support services for decision-making in the NextGen environment. More specifically, NNEW is FAA’s contribution to the 4- dimensional weather cube—a technology that will provide weather observations and analyses, including forecasts of expected weather conditions, for all users of the national airspace system. FAA is developing the requirements for this program, and the Department of Commerce, through its National Oceanic and Atmospheric Administration, will lead the development of the 4-dimensional weather cube, using the Department’s resources and those of the partner agencies. FAA expects to finish defining the requirements for NNEW in March 2009. After validating the requirements, FAA will solicit reviews from the relevant stakeholders on the extent to which their requirements are aligned with those of the other agencies. This is a collaborative effort whose success will depend on contributions from all parties. Delays in aligning agency requirements, as well as the lack of meteorological knowledge, could lead to delays in implementing NextGen systems. To fully realize NextGen’s capabilities, a new configuration of ATC facilities will be required. FAA has not developed a comprehensive reconfiguration plan, but says that preliminary efforts are underway to plan concepts for future FAA facilities. Going forward, it will also be critical for FAA to ensure the safety and efficiency of its existing ATC system, since it will be the core of the national airspace system for a number of years and some of its components will become part of NextGen. FAA faces an immediate task to maintain and repair existing facilities so that the current ATC system continues to operate safely and reliably. FAA has estimated a one-time cost of approximately $268 million to repair over 400 existing terminal and en route facilities. Once FAA develops and implements a facility reconfiguration plan, the costs of facility repairs and maintenance may be reduced. The American Recovery and Reinvestment Act provides $200 million to be made available within the next 2 years for improvements in power systems, air route traffic control centers, air traffic control towers, terminal radar approach control facilities, and navigation and landing equipment and indicates that projects that can be completed in 2 years should be given priority. The availability of these funds increases the importance of FAA’s developing facility consolidation and reconfiguration plans to ensure that the funds are spent efficiently and effectively. FAA has acknowledged the need to keep long- term plans in mind so that it does not invest unnecessarily in facilities that will not be used for NextGen. Finally, FAA has determined that, even after planned improvements have been completed at 35 of the busiest airports, 14 airports—including some of the 35 busiest—will still need enhanced physical capacity by 2025. Planning infrastructure projects to increase capacity, such as building additional runways, can be a lengthy process, and will require substantial advance planning and safety and cost analyses. Furthermore, without substantial reductions in emissions and noise around the nation’s airports and continuing efforts at all levels of government, including increased research and development activities, achieving the goal of safely expanding the capacity and efficiency of the national airspace system to meet 21st century needs may not be attainable. Thank you Mr. Chairman. I would be pleased to answer any questions that you or Members of the Subcommittee may have at this time. For further information on this testimony, please contact Dr. Gerald L. Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Individuals making key contributions to this testimony include Andrew Von Ah (Assistant Director), Bess Eisenstadt, Bert Japikse, Kieran McCarthy, and Richard Scott. Next Generation Air Transportation System: Status of Systems Acquisition and the Transition to the Next Generation Air Transportation System. GAO-08-1078. Washington, D.C.: September 11, 2008. Responses to Questions for the Record; Hearing on the Future of Air Traffic Control Modernization. GAO-07-928R. Washington, D.C.: May 30, 2007. Next Generation Air Transportation System: Status of the Transition to the Future Air Traffic Control System. GAO-07-784T. Washington, D.C.: May 9, 2007. Joint Planning and Development Office: Progress and Key Issues in Planning the Transition to the Next Generation Air Transportation System. GAO-07-693T. Washington, D.C.: March 29, 2007. Federal Aviation Administration: Key Issues in Ensuring the Efficient Development and Safe Operation of the Next Generation Air Transportation System. GAO-07-636T. Washington, D.C.: March 22, 2007. Next Generation Air Transportation System: Progress and Challenges Associated with the Transformation of the National Airspace System. GAO-07-25. Washington, D.C.: November 13, 2006. 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. | To prepare for forecasted air traffic growth, the Federal Aviation Administration (FAA), including its Joint Planning and Development Office (JPDO) and Air Traffic Organization (ATO), is planning for and implementing the Next Generation Air Transportation System (NextGen) in partnership with other federal agencies and the aviation industry. NextGen will transform the current radar-based air traffic control system into a more automated, aircraft-centered, satellite-based system. GAO's previous work has identified issues related to the usefulness of NextGen planning documents, FAA's organizational structure to manage the transition to NextGen, and FAA's workforce to oversee and implement NextGen. Recently, the focus of NextGen planning and implementation has shifted to capabilities that can be achieved in the midterm, defined as 2012 through 2018. GAO's testimony focuses on (1) JPDO's and ATO's progress in planning and implementing NextGen, (2) ongoing efforts to implement midterm capabilities to address capacity constraints and delays, (3) the potential impact on NextGen of organizational changes and human capital issues, and (4) research and development and facilities maintenance and reconfiguration challenges going forward. GAO's testimony updates prior GAO work with FAA data and interviews with agency and union officials and industry stakeholders, including airline, aircraft, and avionics manufacturer representatives. JPDO and ATO have made progress in planning for and developing NextGen. JPDO has continued to update its basic planning documents, and in January 2009, ATO released the current version of its NextGen Implementation Plan, which focuses on the midterm implementation of capabilities. Recent versions of NextGen planning documents have partially addressed some of GAO's concerns about their usefulness, but industry stakeholders continue to express frustration that the documents lack any specific timelines or commitments. In addition to these planning efforts, FAA has continued to plan and conduct several demonstrations of some key NextGen technologies. To help address current congestion and delays, industry stakeholders have frequently suggested that FAA focus on maximizing what can be done with existing, proven capabilities and existing infrastructure. Partly to help accelerate the implementation of capabilities in the midterm, FAA has created a NextGen Midterm Implementation Task Force, which is to report its recommendations to FAA in August 2009. The task force plans to identify and prioritize capabilities that can be implemented in the midterm and potentially be deployed regionally to address key bottlenecks. Essential to the mid- and long-term success of these efforts is persuading the airlines to make costly investments in NextGen equipment--a step they are reluctant to take without clearly demonstrated benefits. Incentives that could encourage such investments include operational preferences--such as preferred airspace, routings, or runway access--and equipment investment tax credits. FAA will also have to validate, certify, and issue rules for these capabilities. Recent changes in the management structure for NextGen, though designed to address industry stakeholders' and others' concerns about fragmentation of authority and lack of accountability, have not fully addressed these issues and have raised further questions about parties' roles and responsibilities. Additionally, human capital issues remain to be resolved, including the degree to which key stakeholders, such as controllers and technicians, are involved in NextGen efforts and whether FAA is able to acquire the systems engineering, contract management, leadership, and other skills needed for NextGen. FAA plans to fill 378 NextGen positions in fiscal years 2009 and 2010. Going forward, FAA faces challenges in addressing ongoing research needs, reconfiguring and maintaining existing facilities, and enhancing the physical capacity of airports. For NextGen, research on the environmental impact of aviation, human factors, and weather will be critical. Air traffic facilities will also have to be reconfigured to support NextGen, and existing facilities require maintenance to ensure safety and reliability. FAA is currently reviewing its facility needs.Finally, even with the efficiencies anticipated from implementing NextGen, FAA has determined that it will need additional airport and runway capacity. Efforts to develop new infrastructure will require significant advance planning and cost and safety analyses. |
Although NORAD had performed some risk assessments in response to individual DOD leadership inquiries about ASA operations, it had not done routine risk assessments as part of a risk-based management approach to determine ASA operational requirements. Moreover, NORAD has not conducted similar assessments since 2006. For example, NORAD had completed three assessments that we determined could be part of a risk- based management approach. NORAD completed the first of these assessments after the September 11, 2001, terrorist attacks, when it worked with other federal agencies and determined, based on vulnerabilities and criticality, which sites should be protected by ASA operations. NORAD conducted two other assessments, in 2005 and 2006, primarily in response to the 2005 Base Closure and Realignment Commission process and efforts to cut costs for Operation NOBLE EAGLE. On both of these occasions, NORAD conducted a cost evaluation, considering aviation security improvements—such as secured cockpits and enhanced passenger screening—that were made by the Transportation Security Administration since 2001. At the time of our review, DOD had not required NORAD to manage ASA operations using a risk management approach, which includes routine risk assessments. By performing routine risk assessments, NORAD could better evaluate the extent to which previous threats have been mitigated by DOD or other government agencies, better evaluate current and emerging threats to determine which ones require the most urgent attention, and determine operational requirements to address changing conditions. Routine risk assessments could also help NORAD determine the appropriate level and type of resources, including units, personnel, and aircraft for ASA operations, especially in a resource-restricted environment. Furthermore, during the course of our review, Air Force and ANG officials acknowledged the benefits of performing risk assessments on a routine basis for determining operational requirements for ASA operations. Although its units are conducting ASA operations, the Air Force had not implemented these operations as a steady-state mission in accordance with NORAD, DOD, and Air Force directives and guidance. For example, in response to a December 2002 NORAD declaration of a steady-state air defense mission, the Air Force issued a directive assigning specific functions and responsibilities to support the mission. According to the directive, the Air Force was to take 140 actions to implement ASA as a steady-state mission. For example, the directive required the Air Force Deputy Chief of Staff for Personnel to ensure that ASA active personnel requirements were included in the Air Force submission to the Future Years Defense Program. The directive also required Air Force major commands to develop the capability to report on the readiness of ASA activities in DOD’s readiness system, and the Deputy Chief of Staff for Personnel to work with the appropriate officials to limit adverse effects on the careers of personnel affected by the steady-state mission. However, the Air Force had not implemented ASA operations as a steady-state mission. For example, although the Office of the Secretary of Defense directed the Air Force to program ASA operations across the 6 years of its Future Years Defense Program submission, the Air Force decided to program ASA operations in 2-year increments. According to headquarters Air Force officials, the Air Force did not implement ASA operations as a steady-state mission because (1) it has focused on other priorities, such as overseas military operations, and (2) it believed that ASA operational requirements, such as number of sites, might be decreased to pre-September 11, 2001, levels at some point in the future. As a result, the readiness of the units conducting ASA operations was not being fully assessed, and commanders of ASA units reported they were experiencing difficulties pertaining to a variety of factors, such as personnel and funding, which challenged their ability to perform both their expeditionary missions and ASA operations. NORAD partially assessed readiness through inspections; however, the Air Force, which as the force provider is responsible for measuring readiness for its missions by evaluating personnel, training, and the quantity and quality of equipment needed, has not done so for ASA operations. Air Force officials said they do not perform such assessments because the service has not formally assigned the mission to the units. Specifically, the Air Force issues mission Designed Operational Capability statements that identify the unit’s mission(s) and related requirements (e.g., type a However, the Air Force has not identified ASA number of personnel). operations as a mission in the operational capability statements of those units that conduct ASA operations on a daily basis. Unit commanders told us during our structured interviews that they did not evaluate and report the personnel, training, or quantity and quality of equipment to perform ASA operations because they had not been assigned the mission in their operational capability statements. As a result, the Air Force did not have complete information to assess readiness, and DOD and Congress lacked visibility of costs and other important information to inform decisions for these homeland defense operations. Because the Air Force did not implement ASA operations as a steady-state mission in accordance with NORAD, DOD, and Air Force guidance, at the time of our review ASA units were experiencing a number of difficulties that challenged their ability to perform both their expeditionary missions and ASA operations. The unit commanders we interviewed identified funding, personnel, and dual tasking of responsibilities as the top three factors affecting ASA operations. For example, during our structured interviews, officials from 17 of the 20 units stated that personnel issues were a moderate or great concern and that recruiting, retention, and promotion limitations were the primary issues arising from the current practice of programming for ASA operations in 2-year increments. Commanders at the ASA sites that we visited told us that they had lost some of their most experienced personnel due to job instability caused by the manner in which ASA operations are programmed. Similarly, commanders at 17 of the 20 units stated that the Air Force treats ASA operations as a temporary mission and has not provided sufficient resources. Thirteen of the 20 units reported that dual tasking—training and conducting for their expeditionary mission and for ASA operations— was a moderate or great concern and that the Air Force was not adequately equipping units to conduct both missions. Headquarters Air Force and National Guard Bureau/Air National Guard (NGB/ANG) officials acknowledged the units’ difficulties in conducting ASA operations. Figure 1 depicts units’ responses regarding difficulties they have experienced in conducting ASA operations. Because the Air Force has not programmed for ASA operations in its Future Years Defense Program submissions, the Office of the Secretary of Defense, NORAD, and Congress lack visibility into the costs of these operations. This program is one of the principal tools used to inform DOD senior leaders and Congress about resources planned to support various programs, and reflects DOD decisions regarding allocation of federal resources. Implementing ASA operations as a steady-state mission may help to mitigate the challenges associated with ASA operations, as well as provide Congress and DOD leaders cost visibility into ASA operations, which support DOD’s high-priority homeland defense mission. Of the 18 ASA sites, 13 sites are currently equipped with F-16s, which, according to ANG estimates, will reach the end of their useful service lives between fiscal years 2015 and 2020. Five sites have F-15s, which were grounded for 3 months in late 2007 and early 2008 after an F-15 broke apart during a normal flying operation in November 2007. According to Air Force and ANG officials, the F-15s’ useful service lives could end earlier than the expected time frame of 2025 if the aircraft are used increasingly for overseas deployments or other missions. Depending on when the F-16s reach the end of their useful service lives and on the availability of next- generation F-22 and F-35 fighter aircraft, a gap in the number of available aircraft may affect units performing ASA operations. Figure 2 shows the projected number of current ASA sites with and without viable aircraft to conduct ASA operations through 2032. As the figure reflects, unless the Air Force modifies its current fielding schedules or extends the service lives of its F-15s and F-16s to the extent that this option is possible, it will lack viable aircraft to conduct ASA operations at some of the 18 current ASA sites after fiscal year 2015. The figure also shows that 2 of the current ASA sites will not be equipped with viable aircraft and thus will be unable to conduct ASA operations even after the Air Force fields all of its currently planned F-22s and F-35s in fiscal year 2031. This figure is based on our analysis of documentation on the expected service lives of the F- 15s and F-16s and the Air Force’s fielding schedules for the F-22s and F- 35s at the time of our review, and represents one possible scenario. The House report accompanying the National Defense Authorization Act for Fiscal Year 2008 directed the Secretary of the Air Force, in consultation with the Chief of the National Guard Bureau and the Secretary of Homeland Security, to conduct a study on the feasibility and desirability of equipping certain ASA units with F-35s. The Air Force study, which was submitted to Congress in December 2008, states that, although the F-35’s capabilities make it a desirable platform to conduct air defense operations, a number of factors—such as fiscal, operational, and environmental considerations—will affect where F-35s are based. Consequently, it is unclear whether or when the current ASA sites will receive F-35 aircraft. For the purpose of our analysis, however, we assumed that the Air Force would provide the F-35s to ANG sites conducting ASA operations. Our March 2009 reports about the F-35 acquisition program have also questioned the reliability of its production schedule and cost estimates. For example, we reported that despite the program’s continued manufacturing problems and the infancy of the flight test program, DOD officials wanted to accelerate F-35 production from 485 to 654 aircraft over a 6-year time frame from fiscal years 2010 through 2015. On April 6, 2009, the Secretary of Defense announced that DOD intends to increase F-35 production to 513 aircraft across the 5-year defense plan. We continue to believe DOD’s increased production approach is overly optimistic. During our review, we discussed some options with Air Force and ANG officials that could reduce the potential gap between retired aging aircraft and the replacements needed to conduct ASA operations, but these options are not without challenges. The options we discussed included the following: Replace the F-16s with either F-22s or F-35s, both of which the Air Force is acquiring. However, according to the F-22 and F-35 fielding schedules at the time of our review, only 1 of the 12 units—Shaw Air Force Base, South Carolina—will receive the new aircraft before its fleet of F-16s reaches the end of its useful service life. Replace the F-16s with F-15 models from the current inventory. However, F-15s, like F-16s, are beginning to reach the end of their useful service lives for reasons including structural problems and accelerated use for overseas deployments and other missions. Extend the service life of the F-15 and F-16 aircraft. However, at the time of our review, the Air Force had not determined the extent to which such actions were viable. Until the Air Force plans accordingly, the extent to which replacement aircraft will be available to conduct ASA operations and mitigate this fighter shortage is unclear. Given the importance of the capability to deter, detect, and destroy airborne threats to the United States, it is important that the Air Force address current and future requirements of the ASA mission to ensure its long-term sustainability. In our January 2009 report, we recommended that DOD take a number of actions to address the issues that we identified during our review. In summary, we recommended that the Secretary of Defense direct The Commander of the U.S. command element of NORAD to routinely conduct risk assessments to determine ASA requirements, including the appropriate numbers of ASA sites, personnel, and aircraft to support ASA operations. The military services with units that consistently conduct ASA operations to formally assign ASA duties to these units and then ensure that the readiness of these units is fully assessed, to include personnel, training, equipment, and ability to respond to an alert. The Secretary of the Air Force to establish a timetable and implement ASA operations as a steady-state mission, to include: updating and implementing the ASA program action directive; updating Air Force guidance to incorporate and define the roles and responsibilities for ASA operations; and incorporating the ASA mission within the Air Force submissions for the 6-year Future Years Defense Program. The Secretary of the Air Force to develop and implement a plan to address any projected capability gaps in ASA units due to the expected end of the useful service lives of their F-15s and F-16s. In its written comments on our report, DOD fully or partially concurred with all of our recommendations. However, based on DOD’s written response, it is unclear the extent to which DOD will implement these recommendations. For example, DOD partially concurred with our recommendation to employ a risk-based management approach, which would include routine risk assessments to determine ASA requirements. However, DOD stated that sufficient guidance and a long-standing risk- based process currently guide its decisions on ASA operations and, therefore, it does not plan on taking any further action. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions that you may have at this time. For further information regarding this testimony, please contact Davi M. D’Agostino at (202) 512-5431 or dagostinod@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Lorelei St. James and Marc Schwartz (Assistant Directors), Tommy Baril, Grace Coleman, Greg Marchand, Terry Richardson, Bethann Ritter, Kenneth Cooper, and Jane Ervin. In addition, Victoria DeLeon and John Trubey made significant contributions to the January 2009 report that supported this testimony. The Vermont ANG unit at Burlington International Airport is conducting ASA operations until the Massachusetts ANG unit at Barnes Air National Guard Station assumes responsibility for ASA operations in fiscal year 2010. A detachment from the Vermont ANG conducts ASA operations at Langley Air Force Base, Virginia; the South Dakota ANG unit from Sioux Falls is assisting with ASA operations at this site until the Massachusetts ANG assumes responsibility for the New England ASA operations in fiscal year 2010. ASA operations at Homestead Air Force Base, Florida are conducted by a detachment from the Jacksonville, Florida ANG unit. ASA operations at Ellington Field, Texas are conducted by a detachment from the Tulsa, Oklahoma ANG unit. 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 recently issued report on the North American Aerospace Defense Command's (NORAD) and the Department of Defense's (DOD) air sovereignty alert (ASA) operations. According to the National Strategy for Aviation Security, issued in March 2007, and officials from U.S. intelligence agencies with whom we met, air attacks are still a threat to the United States and its people. To address this threat, NORAD and DOD have fully fueled, fully armed aircraft and trained personnel on alert 24 hours a day, 365 days a year, at 18 ASA sites across the United States. Of the 18 sites, 16 are maintained by Air National Guard (ANG) units and 2 are maintained by active duty Air Force units. If warranted, NORAD can increase personnel, aircraft, and the number of ASA sites based on changes in threat conditions. The Air Force provides NORAD with personnel and equipment, including F-15 and F-16 aircraft, for these operations. ASA units are tasked to conduct and train for both expeditionary missions (e.g., military operations in Iraq) and ASA operations. This testimony will discuss whether (1) NORAD routinely conducts risk assessments to determine the appropriate operational requirements; (2) the Air Force has implemented ASA operations as a steady-state mission, which would require programming funding and measuring readiness, in accordance with NORAD, DOD, and Air Force guidance; and (3) the Air Force has developed a plan to address the recapitalization challenges to sustaining ASA operations for the future. Although NORAD had performed some risk assessments in response to individual DOD leadership inquiries about ASA operations, it had not done routine risk assessments as part of a risk-based management approach to determine ASA operational requirements. Moreover, NORAD has not conducted similar assessments since 2006. Although its units are conducting ASA operations, the Air Force had not implemented these operations as a steady-state mission in accordance with NORAD, DOD, and Air Force directives and guidance. For example, in response to a December 2002 NORAD declaration of a steady-state air defense mission, the Air Force issued a directive assigning specific functions and responsibilities to support the mission. According to the directive, the Air Force was to take 140 actions to implement ASA as a steady-state mission. NORAD partially assessed readiness through inspections; however, the Air Force, which as the force provider is responsible for measuring readiness for its missions by evaluating personnel, training, and the quantity and quality of equipment needed, has not done so for ASA operations. Air Force officials said they do not perform such assessments because the service has not formally assigned the mission to the units. Specifically, the Air Force issues mission Designed Operational Capability statements that identify the unit's mission(s) and related requirements (e.g., type anumber of personnel). Because the Air Force did not implement ASA operations as a steady-state mission in accordance with NORAD, DOD, and Air Force guidance, at the time of our review ASA units were experiencing a number of difficulties that challenged their ability to perform both their expeditionary missions and ASA operations. The unit commanders we interviewed identified funding, personnel, and dual tasking of responsibilities as the top three factors affecting ASA operations. |
The Medicare physician fee schedule has three components. The first, the physician work component, provides payment for the physician’s time, skill, and training required to provide a given service. The second, the practice expense component, reflects the expenses incurred in operating a practice, such as rent; utilities; equipment; supplies; and the salaries of nurses, technicians, and administrative staff. Finally, the malpractice component establishes payments for the costs of obtaining professional liability coverage. In 1999, the three components accounted for approximately 55 percent, 42 percent, and 3 percent, respectively, of the average fee. Payments for the physician work component were the first to be converted from being charge-based to resource-based, beginning in 1992. Using specialty-specific physician expert panels, physician time and effort in providing various services were estimated and used to establish payments for this component. In 1999, the practice expense component began to be paid under a resource-based methodology. Resource-based payments for the third component, malpractice expenses, were implemented a year later. The resource-based payments were required to be budget neutral with respect to the former payment method, meaning that Medicare’s aggregate payments to physicians could not change as a result of the implementation of the new methodology. Medicare’s physician payment system ranks services on a common scale based on the relative amount of resources needed to provide each service, and then makes payments for each service proportional to those resources. The need to estimate and rank practice expenses for thousands of medical services presents enormous challenges. Most physicians’ practices have readily available data on their costs, such as wages for administrative and clinical staff and the costs associated with rent, electricity, and heat. However, Medicare pays physicians by service, such as for a skin biopsy or a stress test, so CMS needs to estimate the portion of total practice expenses associated with each service—data that are not readily available. The task of estimating practice expenses is made more difficult because there is considerable variation in practice expenses among specialties. This variation is likely due to historical differences in practice styles, the mix of services provided, and the setting in which services are provided. For example, physicians in some specialties may provide almost all services in their offices, thus incurring all of the expenses associated with providing the service, including medical equipment, technicians, and medical supplies. Physicians in other specialties may deliver most of their services at a hospital, thus incurring only expenses such as rent, administrative labor, and general office equipment. A physician in a solo practice is also likely to have practice costs different from those of a physician in a group practice. As a result, practice expenses, even for the same service, can vary considerably by specialty or by physician practice. The effect of both problems—the difficulty in allocating practice expenses to services and the variation in expenses across practices—is mitigated somewhat because Medicare’s fee schedule payment for each service is based on the service’s cost relative to all other services. Even though the actual expenses associated with a service cannot be precisely measured and vary across physicians’ practices, the cost of one service relative to another is easier to estimate and is likely to vary less across practices. Medicare recognizes over 65 different physician specialty groups, such as internal medicine, cardiology, and oncology. Specialties differ in the types of services they provide. Most specialties provide evaluation and management (E&M) services (for example, an office visit for an established patient) that make up almost half of physician services provided to Medicare beneficiaries. However, only certain specialties generally provide each of the remaining physician servicesfor example, cardiologists, general internists, and family practitioners provide the majority of electrocardiogram services. A small share (5 percent) of services, though billed by physicians, do not involve a physician’s time because they are performed by nurses or other cliniciansservices such as the drawing of blood or administration of certain chemotherapy treatments. These services are referred to in this report as nonphysician services. The basic methodology for developing resource-based payments for practice expenses has three steps. First, each specialty’s total practice expense pool—that is, the total costs that physicians in that specialty incur to operate their practices—is estimated. Second, this practice expense pool is allocated to the services provided by that specialty, based on estimates of the resources required to deliver each service. This results in an estimate of practice expenses for each service provided within each specialty. Third, when the same service is provided by more than one specialty, an average of those specialties’ expenses for the service is computed. A final adjustment is made so that total physician payments are budget neutral—that is, the same as they would have been under the previous payment system. (See appendix II for a more complete discussion of the basic methodology). Each specialty’s total practice expense pool was derived from 1995- through-1998 practice expense data collected by the AMA’s Socioeconomic Monitoring System (SMS) survey and from Medicare physician billing data. From the SMS survey, the average expense per hour of physician time were calculated for each of six expense categories, clinical labor (nurses and medical technicians), medical equipment, medical supplies, administrative labor (such as an office manager or billing clerk), office expenses (such as rent and utilities), and other expenses. These hourly expense estimates were multiplied by the total hours spent by all physicians in each specialty treating Medicare beneficiaries (information obtained from Medicare billing data) to estimate each specialty’s total practice expense pool. HCFA convened 15 expert panels comprising physicians, nurses, and practice administrators to estimate the practice expense resources needed for specific services. Based on these service-specific resource estimates, practice expenses that are regarded as directclinical labor, medical equipment, and medical suppliesare allocated to particular services based on estimates of the quantity and cost of these resources required to provide each service. The indirect expenses, or overheadadministrative labor, office expenses, and other expensesare allocated to specific services in proportion to the direct expenses and physician work involved in providing each service. Thus, a service that requires high direct costs (such as the use of an expensive, dedicated piece of equipment) or that has a high physician work value, indicating that it is a time-consuming or complex service, would have relatively high indirect costs. As required by law, the Medicare physician fee schedule must establish a single value or fee for each service, regardless of which specialty provides it. Consequently, when more than one specialty provides a service, an average is computed based on the frequency with which each specialty provides that service. As a result, specialties that perform a service more frequently have more influence over establishing the fee for that service than specialties that rarely perform it. To compensate for potential shortcomings in the basic methodology and limitations in the data used to establish payments, HCFA made several adjustments to the specialties’ practice expense pools and the method for calculating the payment rates for individual services. In response to concerns from various specialties regarding perceived low payments for nonphysician services, such as certain chemotherapy administration services, HCFA developed an alternative method to calculate payments for these services. The alternative method creates a separate practice expense pool for all nonphysician services and then allocates the practice expense pool using historical charges rather than the expert panels’ estimates of the resources required for each service. Recognizing that this alternative method did not always increase payments for the targeted services, HCFA allowed all specialties (in the second year of implementation of the resource-based practice expense payments) to identify individual nonphysician services that would “opt-out” of the alternative methodology and have payments determined using the basic methodology for all physician services. Several specialty societies requested that HCFA calculate payments for some or all of their specialties’ nonphysician services under the basic method, and all such requests were granted. (See appendix III for a discussion of the alternative method for estimating practice expenses for nonphysician services.) An adjustment specific to oncologists’ practice expense estimates substituted the average medical supply expenses reported by all physicians for those expenses oncologists reported in the SMS survey. An adjustment was necessary because the oncologists’ reported supply expenses included the costs of drugs administered in physicians’ offices, most notably chemotherapy drugs, which are reimbursed separately. In the first year, the adjustment reduced the supply expense reported by oncologists from $87.20 per physician hour to $7.20the supply expense of the average physician specialtyto avoid paying twice for drugs. In its ongoing efforts to improve payments, CMS receives recommendations from the Practice Expense Advisory Committee (PEAC) for refinements to direct practice expense estimates for specific services, and it has implemented many of these refinements. The agency has also made changes to its estimates of specialties’ practice expense pools based on supplemental practice expense survey data submitted by some specialties. In accordance with recent legislation, all physician specialties may submit supplemental data to CMS, and the agency is required to consider these data in updating the physician fee schedule. As of August 2001, three specialty societies have done so. The implementation of the resource-based practice expense payments did, as expected, result in a redistribution of payments across specialties with some specialties’ payments increasing and others decreasing. Oncology’s practice expense payments in 2001 are 8 percent higher than they would have been had the charge-based fee schedule continued in 2001. Oncology has fared at least as well as the average specialty under the new fee schedule, in that its payments equal about the same share of estimated practice expenses as the average for all specialties. Nonetheless, oncologists have expressed concern that their payments are too low because of certain adjustments HCFA made to the basic methodology and inadequacies in the survey data used to estimate practice expenses. However using higher estimates of oncology’s medical supply expenses would have only a modest impact on oncology payments because the alternative method is used to calculate payments for nonphysician services. Potential future improvements in the practice expense data may affect estimated expenses for other specialties as well. Because the fees are established to reflect the relative costs of services across specialties, it is not clear whether payments to oncologists would increase, decrease, or stay the same with changes to the underlying data. Oncology is among the specialties that benefit from resource-based practice expense payments. Its practice expense payments are 8 percent more than they would have been had the charge-based fee schedule continued in 2001 (see table 1). Although other specialties’ payments are also higher than they would have been had the previous system remained in effect, many specialties’ practice expense payments are lower. For example, dermatology’s resource-based practice expense payments are 46 percent higher than what they would have been under the charge-based system. Other specialties’ practice expense payments decreased, ranging from 9 percent to 35 percent less than what their practice expense payments would have been under the charge-based system. Total payments calculated with resource-based practice expenses ranged from 20 percent higher than total payments calculated with charge-based practice expenses to 17 percent lower. The budget neutrality requirement results in practice expense payments on average equaling approximately 70 percent of estimated practice expenses. However, payments equal different shares of estimated practice expenses for different specialties (see table 2). Payments are a smaller share of practice expenses for those specialties with higher-than-average hourly practice expenses and a larger share of expenses for specialties with below-average hourly expenses. This is primarily because of the statutory requirement that there be a single fee for each service regardless of which specialty provides it. A single fee for each service is calculated by averaging the service-specific practice expense estimates of the specialties that perform the service. This requirement has a substantial impact on many specialties’ payments, in part because E&M services, which are provided by most specialties, constitute a large share of many specialties’ services. Medicare payments to oncologists equal about the same share of estimated practice expenses as the average for all specialties. Compared to oncology, 6 specialties had practice expense payments that equaled a larger share of their estimated practice expenses, while 15 specialties had practice expense payments that equaled a smaller share. Payments to two specialties, radiology and allergy and immunology, equaled a much larger share of their estimated practice expenses compared to other specialties. Oncology representatives have raised several concerns about HCFA’s estimate of their total practice expenses. HCFA reduced oncology’s practice expense pool to account for the costs of drugs that are reimbursed separately. Oncology representatives acknowledge that a reduction is appropriate but state that the all-physician average supply expense that HCFA substituted understates oncology’s supply expenses. In our earlier report, we noted this concern and recommended that HCFA assess the validity of using the all-physician average. To date, CMS has not developed an independent estimate of oncologists’ supply expenses. An alternative estimate of supply expenses based on a methodology proposed by ASCO yields an estimate almost twice as high ($13.25) as the 2001 all-physician average ($7.30). Using this higher estimate, oncology’s practice expenses would increase 6 percent and practice expense payments based on this estimate would increase 1 percent. Some oncologists we spoke with have raised other issues that they believe caused their practice expense pool to be underestimated. The first is that only physician time is used to estimate the practice expense pools. HCFA estimated the practice expense pools by multiplying the number of physician hours spent serving Medicare patients by the estimated practice expense per physician hour. The method HCFA used to calculate the practice expense per physician hour, however, results in an estimate that captures the expenses associated with both physician and nonphysician services rather than just the expenses associated with physician services. Therefore, what some oncologists believe to be understated hours are used with expenses associated with physician plus nonphysician services to estimate the total practice expense pool. As a result, the pool may not be understated. Some oncology representatives believe that their practice expense estimates are too low because they do not account for certain expenses incurred in operating a practice, such as the time spent providing uncompensated care and extended periods of patient monitoring. Some also believe Medicare patients are more expensive to treat than the average patient due to their age and the increased presence of multiple medical conditions, implying that a higher share of expenses should be allocated to Medicare. Finally, some oncology representatives believe that their current expenses are higher than those included in the 1995-through- 1998 SMS survey data due to changes in the delivery of outpatient chemotherapy services. Although clinical time spent on non-billable activities, more expensive-than-average patients, or changing practice patterns could affect oncologists’ practice expenses, accounting for these factors would not necessarily raise payments to oncologists. This is because these factors are likely to affect the total practice expenses of other specialties as well. Payments to oncologists would only change if their costs increased or decreased relative to the costs of all other specialties. Some oncology representatives also state that the SMS survey does not accurately reflect the mix of oncology practices and, as a result, their practice expense pool is underestimated. They contend that the 34 oncology respondents to the SMS survey are not representative of the typical practice because the survey respondents were disproportionately in practices that do not provide chemotherapy services in their offices. Because these practices do not incur the direct costs (such as nursing, equipment, and supplies) associated with these services, they argue that a disproportionate share of these practices in the sample led to an underestimation of oncology practice expenses. They also assert that the survey respondents included some surgical oncologists, a subspecialty that provides little or no office-based chemotherapy—again leading to an understatement of the practice expenses incurred by the typical practice. Although the AMA weights the sample responses to adjust the survey results so they are representative of an entire specialty, ASCO contends these adjustments are inadequate. The effect on payments to oncologists of using updated or more accurate data to estimate practice expenses is uncertain, but potentially modest. This is because the estimates of the practice expenses for other specialties and other services may change as well. Payment levels change when the estimated practice expenses of one specialty change relative to the overall average. Thus, the change in oncologists’ payments will depend on how much estimated practice expenses for oncology increase or decrease compared to practice expenses for other specialties. In addition, the use of the alternative method to calculate practice expense payments for nonphysician services mitigates the impact of any change in the data on the resulting payments. Our analysis indicates that if estimated practice expenses for oncologists were increased or decreased 10 percent from their current estimates, their practice expense payments would only increase or decrease by 1 percent. The change in payments is less than the change in estimated expenses because under the alternative practice expense method, which determines payments for a large share of oncology services, oncology’s actual practice expense estimates do not determine the payment. To correct for perceived low payments for services that do not involve direct physician participation (such as many chemotherapy administration services), HCFA created an alternative method to establish practice expense payments for these services. Contrary to the intended purpose, payments for over 40 percent of nonphysician services provided by all specialties actually decrease after the alternative method is applied, and payments for many physician services increase. Payments for some chemotherapy administration services decline, and oncology’s average payments are actually lower than they would be if payments for all services were calculated under the basic method. Other specialties fare differentlyfor example, payments to radiation oncology are considerably higher as a result of the alternative method. This alternative method does not address the more fundamental issue affecting payments for nonphysician services, the allocation of indirect expenses to all services. Four elements of the alternative method developed by HCFA to correct for perceived underpayments for nonphysician services (including chemotherapy administration) affect the relative payments for oncologists as well as other specialties. First, the alternative method involves creating a single practice expense pool for all nonphysician services provided by all specialties, so differences in practice expenses across specialties are not recognized, as they are under the basic method. Thus, payments for services, such as chemotherapy administration, that are provided predominately by higher-cost specialties are lower than they would be if specialty-specific expenses were used to estimate payments for these services. Second, the expense pool is allocated to individual nonphysician services based on average historical charges for each service, rather than on the expert panels’ estimates of the resources needed for each service. For some services, the charge-based allocations are higher than the expert panels’ estimates; for others, they are lower. Third, HCFA subsequently allowed any specialty to choose whether or not the alternative method would be used for their particular nonphysician services. As specialties choose to have payments for certain nonphysician services computed using the basic method, the fees for all the other nonphysician services may increase or decrease. Finally, the expenses associated with the nonphysician services are double counted because they were not taken out of the specialty-specific practice expense pools when the nonphysician practice expense pool was established. The resulting specialty-specific practice expense pools were too high because they included expenses for physician and nonphysician services, yet they were allocated only to the physician services. As a result, payments for some physician services increased. While intended to counter perceived low payments for nonphysician services under the basic method, the alternative method resulted in higher payments for only 58 percent of nonphysician services, compared to payments under the basic method. For example, the practice expense fee for one chemotherapy service (billing code 96400) would be $59.60 under the basic method, but decreases to $5.07 under the alternative method (see table 3). In contrast, the practice expense fee for a chemotherapy infusion service (billing code 96412) increases from $31.32 to $43.11. The use of the alternative method also has a dramatic effect on payments for some physician services due to the double counting problem. For example, payment for chemotherapy intracavitary service (billing code 96445), which involves a physician’s direct time, increases from $148 to $316. Payments for oncology’s nonphysician services are 15 percent lower when calculated under the alternative method than when calculated under the basic method, while payments for its physician services are 1 percent higher (see table 4). Across all oncology services, payments are 6 percent lower when the alternative method is used. Payments to other specialties that have a large share of nonphysician services are affected differently. For example, payments for the nonphysician services provided by allergy and immunology specialists are 13 percent lower when using the alternative method, while payments for nonphysician services of radiation oncologists are 14 percent higher. Payments for the physician services of both specialties increase considerably as a result of the alternative methodby 16 percent for allergy and immunology and 20 percent for radiation oncology. Recognizing the potential need to modify its practice expense methodology, HCFA contracted with The Lewin Group to examine practice expense payments and suggest improvements to the payment method. The contractor raised concerns that the expense pools of specialties with nonphysician services may be understated for two reasons. First, it stated that the practice expense estimates based on the SMS survey may underreport expenses for nonphysician services because practices that provide only nonphysician services (such as independent laboratories and radiology centers) were not included in the survey and may have higher practice expenses. Second, it believed that the use of physician time in estimating the total practice expense pools could understate the estimate for specialties with nonphysician services, although it acknowledged that hourly practice expense estimates that include expenses related to nonphysician services may offset this. It also determined that indirect expenses are not appropriately allocated to nonphysician services. The Lewin Group discussed the option of establishing payments for nonphysician services under the basic method after correcting the allocation of indirect expense for these services. It also stated that if CMS retains the alternative methodology, it should consider the option of establishing specialty-specific practice expense pools for nonphysician services, instead of the single pool, to account for the differing costs across specialties. However, the report did not consider the double counting issue, nor did it address the fact that payments for nonphysician services would continue to reflect historical charges rather than relative resources, as required by Congress. CMS said that it plans to evaluate these options and consider changes to its method for calculating nonphysician services. While oncologists’ average payments equal approximately the same share of estimated practice expenses as the average for all specialties, the relationship between payments and estimated practice expenses for different types of oncology services varies considerably (see table 5). The use of the alternative method for determining nonphysician service payments and the requirement for a single payment for each type of service across all specialties contribute to this variation. Payments for E&M services, which make up about two-thirds of oncologists’ services, are much higher relative to estimated practice expenses than are payments for other services. In contrast, payments for nonphysician administered chemotherapy, which comprises about one-third of oncology services, are a significantly lower than average share of estimated expenses. These variations in payments relative to expenses across types of services have implications for different practices and could affect the mix of services an oncology practice would provide. The practices of individual oncologists vary considerably in the mix of services they provide (see table 6). While E&M services composed 67 percent of oncology services in 1999, they made up 84 percent of the services provided by oncologists with small Medicare practices. Nonphysician services (predominantly chemotherapy administration) made up more than three times the share of total services for oncologists with large Medicare practices, compared with oncologists who had small practices. HCFA developed the alternative method for nonphysician services because it believed the practice expense payments for these services were too low, and they attributed this to possible inaccuracies in the expert panels’ estimates of resources needed for these services. Regardless of the accuracy of the panels’ expense estimates, the basic method for allocating indirect expenses for all services, which relies partly on physician work as the basis for allocation, does not adequately account for the indirect costs associated with nonphysician services. Because nonphysician services have no physician work associated with them, they are allocated a lower share of indirect expenses compared with services that are performed by physicians. Methods for allocating indirect expenses, other than the current use of physician work plus direct expenses, could assign these costs more appropriately across all services. As we noted in a 1999 report, indirect expenses such as rent, utilities, and office space are more likely to vary with the time required to perform a service than with the physician’s work, which also measures the level of skill required to perform the service. For nonphysician services, clinical time could be substituted for physician work to allocate overhead expenses more appropriately. Using only direct practice expenses to allocate indirect costs is another option, but under the current fee schedule methodology this option would result in understating the indirect cost estimates for services provided in hospital settings and overstating the expenses for office-based services. In its study of the practice expense methodology, The Lewin Group also examined the method of allocating indirect expenses. It compared practice expense estimates using different indirect cost allocation methods across broad groups of services and specialties. Its analyses showed that for these groups of services and specialties, practice expenses in most cases did not change much when the indirect allocation method was changed. Therefore, it concluded there is no consensus on an appropriate method for allocating indirect practice expenses and that CMS’s current approach is reasonable. However, the comparisons did not consistently consider the effect of averaging the specialty-specific practice expense estimates to determine a single payment rate. Further, its comparisons indicated how much practice expense estimates changed relative to expenses estimated with the current indirect allocation method, which may not be an appropriate benchmark because it underallocates indirect expenses to nonphysician services and overallocates them to physician services. The effect of different allocation methods on nonphysician services was not assessed, even though the current method is problematic for them as well. Finally, it did not examine the effects of different allocation methods across individual specialties and services, even though the effects may have varied considerably. The basic method for determining practice expense payments under the fee schedule establishes payments for individual services that are resource-based and reflect the relative costs of all services provided by all specialties. Practice expenses for most services are estimated using the best information available, including national data and expert assessments of the resources required to perform services. As we have reported before, because of limitations in the fee schedule methodology and the underlying data used to establish payments, the payment system needs to be analyzed thoroughly to determine how it can be improved. Our analysis of oncologists’ estimated practice expenses and their payments indicates that oncology has fared as well under the resource- based fee schedule as it did under the former charge-based system and compared to other specialties. Yet oncology was disproportionately affected by the alternative method HCFA used to calculate payments for nonphysician services, which failed to address the underlying problem with the allocation of indirect expenses to all services. Further, the use of the all-physician average supply expenses in estimating oncology practice expenses is inappropriate without evidence regarding oncologists’ actual supply expenses. Addressing these two problems is likely to increase practice expense payments to oncologists. Other concerns oncology representatives raise about the adequacy of the practice expense data used to establish payments should also be dealt with. Addressing these underlying data issues, however, is likely to affect the practice expense estimates of other specialties as well, so the resulting effect on payments to oncologists is unclear. This is because payments reflect relative resource use across all specialties and services and payments must be budget neutral, meaning that increases and decreases are balanced so that total payments do not change from these kinds of adjustments. To ensure appropriate payments across all specialties and services, CMS needs to use current and accurate practice expense data for all specialties and refined service-specific expense estimates. The approach to obtaining these data needs to balance the need for valid, verifiable information with the administrative resources and provider burdens that collecting it may entail. Just as more current and accurate data will affect payments for all services, refinements to the current practice expense methodology will also affect payments across all specialties and services. The widely varying effects of elements of the current fee schedule methodology on specialties and services underscore the importance of examining the effect of future refinements on payments in the aggregate, for individual specialties, and for individual services. To ensure that practice expense payments for all services under the fee schedule better reflect the costs of providing services, we are recommending that the Administrator of CMS: examine the effects of adjustments made to the basic methodology across specialties and types of services and validate the appropriateness of these adjustments, including the adjustment made to oncologists’ reported medical supply expenses, giving priority to those having larger impacts on payment levels; change the allocation of indirect expenses so that all services are allocated the appropriate share of indirect expenses; and calculate payments for all services without direct physician involvement under the basic method, using information on the resources required for each service, and, if deemed necessary, validate the underlying resource- based estimates of direct practice expenses required to provide each service. We received comments from CMS, the AMA and ASCO on a draft of this report. The comments and our discussion are presented below. In comments on a draft of this report, CMS agreed with our general findings (see Appendix IV). CMS agreed that a better estimate of actual oncology supply expenses is needed and acknowledged the usefulness of reviewing indirect cost allocation methods and the importance of this allocation for practice expense payments. It also noted that the studies conducted by The Lewin Group to evaluate several different allocation options found no reason to change the current methodology. CMS also agreed that the alternative methodology used to calculate payments for nonphysician services needs further evaluation. It stated, however, that as an interim policy, the alternative methodology is serving its intended purpose and that changing it would redistribute payments across specialties. CMS did not indicate that it plans to implement our recommendations. It also provided a summary of its ongoing efforts to refine practice expense payments. In agreeing that a better estimate of oncology supply expenses is needed, CMS indicated that it has suggested changes to the AMA’s SMS survey instrument to improve the SMS data, with particular suggestions about supply expenses. A modified survey instrument is an appropriate step in improving the data, but there are no assurances that the AMA will implement these changes. Further, CMS has not indicated that it has any plans to examine the effects of all of the adjustments made to the basic methodology on payments across specialties and types of services. We believe this type of systematic evaluation, followed by targeted refinements to areas with a greater impact on payments, is necessary to improve practice expense payments. In its comments, CMS said it would be useful to review the allocation of indirect expenses in establishing practice expense payments, and it asked The Lewin Group to do the review. The Lewin Group confirmed the problem with the current indirect allocation method. As two alternatives to improve the practice expense payment calculations, it proposed that CMS examine specialty-specific nonphysician practice expense pools or correct the indirect allocation method for nonphysician services and then return these services to the basic method. It acknowledged that any changes to practice expense payment calculations would result in higher payments for some specialties and lower payments for others, and it urged caution in implementing any changes. However, indirect costs are systematically under-allocated to nonphysician services and over-allocated to physician services. Further, the alternative method, which was intended to increase payments for nonphysician services, does not consistently do so and it inflates payments for some physician services. We believe that CMS should address these issues consistently across all services. We have added discussion of The Lewin Group studies to the body of our report. CMS indicated that it does not intend to eliminate the alternative method for nonphysician services until it can identify and propose a better approach. Yet our analysis indicates that this interim approach violates congressional intent that payments be resource-based and significantly changes payments for some services. Oncology is one of the specialties that is disproportionately affected by the interim approach. An improved indirect allocation method—one that allocates an appropriate share of indirect expenses to all services, including nonphysician services, combined with calculating payments for all services under the basic method—would result in resource-based practice expense payments under Medicare’s physician fee schedule that reflect the relative costs of providing each service. We believe that these improvements should be made, even though they will cause payment redistributions. CMS also made technical comments, which we incorporated as appropriate. In its comments, the AMA expressed concern about the scope of the report, questioning whether it provided enough information to the Congress regarding the adequacy of payments for outpatient cancer therapy. In this context, it had concerns about the range of physician groups we consulted and whether we had reviewed all relevant studies conducted for CMS. The AMA said it would have liked us to conduct a survey of oncologists’ supply costs. The AMA also said that our discussion about how oncology has fared under the fee schedule relative to other specialties is inconsistent with our conclusion that oncology’s concerns about the data and methods underlying their payments should be addressed. The AMA also stated that it had “significant concerns” about our recommendations. Regarding our first recommendation that CMS examine the effects of all adjustments, the AMA pointed out that CMS had already simulated the effects of adjustments made to the basic method. With respect to our recommendation that the allocation of indirect expenses be changed, the AMA referred us to The Lewin Group studies. Finally, the AMA said that the nonphysician practice expense pool and ongoing refinement process precluded the need for other refinement efforts, as we discussed in our third recommendation. To address the AMA’s concerns about the scope of our report, we have added language to the report to make it clear that we were directed to conduct three related studies. The report on Medicare payments for drugs was issued in September 2001. A forthcoming report will examine issues related to the adequacy of the data underlying the practice expense payments and ways that CMS could improve these data. That study will necessarily involve discussions with and input from a variety of physician organizations as the AMA suggests. In the current report, we addressed the adequacy of Medicare practice expense payments for outpatient chemotherapy services using national data on practice expenses to reach our conclusions. Our analysis and recommendations stress the need for ongoing examination and refinements to the data and methods underlying Medicare’s practice expense payments, but this is not inconsistent with our conclusion that oncologists have fared as well as other specialties under the Medicare fee schedule. We agree with the AMA, that CMS has simulated adjustments to their basic methodology, but we believe these simulations should be used to focus on-going refinement efforts. As discussed earlier, we did consider the work conducted by The Lewin Group in our analysis and have added a more complete discussion of its work. We believe that all payments should be calculated under the basic method because this ensures that, as the Congress has directed, payments reflect the resource use of each service relative to all other services rather than historical charges. Finally, we agree that CMS’ ongoing refinement process utilizing information supplied by the AMA is an appropriate way to identify refinements to service-specific resource estimates. Using this refinement process will be particularly important if payments for nonphysician services are established under the basic method because CMS has indicated that these resource estimates for nonphysician services need refinement. In its comments, ASCO expressed concern about the scope of this report. ASCO’s other comments fall into three broad categories. One set of concerns focuses on the quality, representativeness, and accuracy of the data used to establish practice expense payments and our use of these data in our analysis. A second set has to do with payments for nonphysician services, which ASCO acknowledges are problematic. Finally, ASCO is concerned that practice expense payments for nonphysician services do not fully cover their reported practice expense costs. It states that payments for physician work and drugs are needed to cover the practice expense payment shortfalls and that without payments that fully cover costs, oncologists may not provide chemotherapy services in office settings. We have added language to the report to make it clear that we were asked to conduct three related studies, as noted in our response to the AMA’s comments above. This report addresses the issues raised by the Congress regarding the adequacy of Medicare practice expense payments for outpatient chemotherapy services. Our report discusses the data concerns raised by ASCO and others. To illustrate the possible impact of underlying data limitations, we simulated the impact on payments of increased medical supply expenses and a 10 percent increase or decrease in practice expenses. Our conclusions and recommendations emphasize the importance of representative and reliable SMS data. Our analyses indicate that the alternative method of establishing practice expense payments for nonphysician services significantly changes payments for some services and that indirect expenses are not appropriately allocated across all services. The report includes a discussion of two ways of allocating indirect expenses, and we recommend changes to address the problems with the current method of calculating payments for nonphysician services. We also note that it is important to assess the effect of any refinements by examining changes in payments across all services and specialties. Finally, as we have noted, our prior work indicates that Medicare’s payments to physicians for drugs far exceed the reduction in payments that result from the use of the alternative method used to calculate payments for nonphysician services. We are sending copies of this report to the Administrator of CMS and interested congressional committees. We will also make copies available to others upon request. If you have any questions about this report, please call me at (202) 512- 7119 or Carol Carter, Assistant Director, at (312) 220-7711. Major contributors include Gerardine Brennan and Iola D’Souza. To conduct this work, we recreated the practice expense component of the fee schedule for 1999 and 2001 and analyzed the impact of the fee schedule on aggregate practice expense payments to all specialties and for individual services. Even though this report focuses on payments to oncologists, a thorough analysis must consider the entire practice expense payment approach because payments are intended to reflect relative cost differences across all services and specialties. We examined payments in 1999 because this was the first year of the transition from charge-based to resource-based practice expense values. We analyzed payments in 2001 because they reflect the most current fee schedule and include the most up-to-date refinements to the resource-based methodology. We also modeled payments under various other scenarios, which included: (1) assuming that the supply cost estimate for oncology was nearly double the current estimate ($13.25 vs. $7.30), (2) assuming that total practice expense cost estimates for oncology services were 10 percent higher or lower than current estimates for oncology, and (3) eliminating the separate methodology developed for nonphysician services. To model practice expense payments we used several data sources, including the American Medical Association’s Socioeconomic Monitoring System (SMS) survey and several data files required to calculate these payments for each of the years identified. To estimate practice expense payments, the following files were used: the SMS survey results from 1995 through 1998; the Health Care Financing Administration’s (HCFA) public- use utilization files based on 1997 and 1999 claims; HCFA’s public-use physician-time files for 1999 and 2001; HCFA’s public-use clinical practice expert panel (CPEP) summary file for 1999 and 2001; the published physician fee schedules for 1998, 1999, 2000, and 2001; and files provided to us by HCFA that included imputed physician fee schedule values for anesthesia codes for 1998 through 2001. Consistent with the method used by HCFA as detailed in the Federal Register, several adjustments were made to the SMS data. To estimate each service’s practice expense in table 5, we used the Centers for Medicare and Medicaid Services’(CMS) basic methodology for calculating resource-based practice expense payments with two variations. These variations were intended to account for weaknesses we identified in the current nonphysician services payment approach. First, we did not use the alternative method to calculate payments for the nonphysician services—all services were calculated using the basic method. Second, to allocate indirect costs we used time—physician time for physician services and clinical time for nonphysician services—instead of physician work. As we noted in a 1999 report, indirect expenses such as rent, utilities, and office space are more likely to vary with the time required to perform a service than with the physician’s work. Because the alternative methodology uses the all-physician average hourly expenses, it may not be a good estimate of the expenses incurred by oncologists. The medical supply expense estimate of $13.25 per physician hour was derived using a methodology suggested by the American Society of Clinical Oncology (ASCO). Using Medicare claims data, it estimated total drug costs for oncology of $441 million and medical supply costs of $79 million. These estimates suggest that medical supplies represent 15 percent of total supply costs for oncologists. Supply costs (including drugs and medical supplies) were estimated to be $87.20 per physician hour using SMS data from 1995 through 1997. The medical supply portion would be equal to 15 percent of that, or $13.25. We estimated what 2001 charge-based practice expense payments would have been by using 1998 charge-based payment rates inflated to the 2001 spending levels. To analyze the variation in the mix of chemotherapy and physician services provided by oncologists, we used 1999 Medicare physician claims data. We based our analysis on each physician’s billing identification number, which is unique to each site where a physician provides services. This analysis allowed us to examine the mix of services for each physician billing from each practice site, but it did not tell us the mix of services for a given practice in which multiple oncologists provide services. Large physician practices were defined as the top quartile of service providers, by Medicare volume, and small physician practices were defined as the bottom quartile. Throughout this process we held discussions with CMS staff to clarify and confirm our understanding of their methodology. In addition, we met with representatives from ASCO and oncology practices to obtain their views on the practice expense methodology and interviewed oncology researchers to discuss current chemotherapy administration practices. This appendix details how the Health Care Financing Administration (HCFA) developed resource-based practice expense payments. Additional details on earlier proposals and refinements can be found in our earlier reports. The Social Security Act Amendments of 1994 mandated that Medicare pay for physicians’ practice expenses based on the cost of required resources. HCFA’s method included three basic steps (see figure 1): 1. Estimating practice expense costs for specialties. Data collected in the American Medical Association’s (AMA) Socioeconomic Monitoring System (SMS) survey were used to estimate specific practice expense costs for each specialty per physician hour. Estimates were made in three direct cost categories (clinical labor, medical equipment, and medical supplies) and three indirect cost categories (administrative labor, office expenses, and other expenses). The per hour estimates for each category were multiplied by the total number of hours in a year spent by physicians in that specialty on treating Medicare patients. The resulting total expenses for each cost category were added together to estimate each specialty’s aggregate annual practice expenses, or “cost pool.” 2. Allocating total expenses to individual services. The estimated total practice expense cost pool for each specialty was allocated to individual services that specialty performs. For direct costs, this allocation was done with estimates made by clinical practice expert panels (CPEP) convened by HCFA. These panels enumerated the direct resources (such as nursing time or medical supplies) that were used to deliver each service. The panel estimates were calibrated to the direct expense pools estimated with the SMS data. The total indirect cost estimates were allocated to individual services based on (1) the direct cost estimate for each service and (2) a measure of physician work involved in the service. These estimates were also calibrated to the total expense from the SMS data. Finally, direct and indirect cost estimates were added together to determine total practice expense values per service for a specialty. 3. Averaging different estimates for services performed by multiple specialties. Because different specialties often provide the same services, the specialty-specific practice expense payment estimates had to be combined to produce one payment per service. To do so, HCFA calculated a weighted average of the various estimates. Each specialty’s practice expense estimate for a service was multiplied by the total number of times that specialty performed the service in a year. The results for all specialties were then added together. The sum was divided by the total volume of the services in a year by all specialties, and the result determined the final practice expense amount. In this way, specialties that perform a given service frequently have more influence over the payment than specialties that rarely perform it. HCFA made several adjustments to the underlying data and modifications to the basic method to compensate for shortcomings in the basic methodology and limitations in the data used to establish payments and to update payments. 1. The physician specialty groups reflected in the SMS data were not the same as the physician specialty groups used by HCFA in establishing payments. The SMS reports practice expense estimates for 26 specialties, while HCFA used over 65 specialty categories. To create practice expenses for all 65-plus specialties, HCFA matched AMA data to its own specialty categories based on judgments about the best fit. 2. To address perceived low payments for nonphysician services, HCFA developed an alternative method to calculate payments for these services, using historical charge-based cost estimates, which it implemented in the first year of resource-based practice expense payments (see appendix III for a description of this alternative method). Recognizing that this alternative method did not always increase payments for the targeted services, HCFA allowed specialties (in the second year of resource-based practice expense payments) to identify individual nonphysician services that would “opt-out” of the separate methodology and revert to having these services’ payments set using the basic methodology for all physician services. 3. HCFA adjusted the payment rates for services that include both physician and nonphysician services in performing them. For example, an x-ray includes a nonphysician activity (taking and developing the film) and a physician activity (interpreting the film). These services can be billed together if both are performed in the same office, or separately, if each is performed at separate locations. To ensure that payments were equal, regardless of billing, it set the payment for the total service equal to the sum of the payments when billed individually. 4. In an ongoing effort to improve payments, HCFA receives from the Practice Expense Advisory Committee (PEAC) recommendations for refinements to direct practice expense estimates for specific services, many of which have been implemented. 5. HCFA has made changes to its estimates of specialties’ total expenses based on supplemental practice expense survey data submitted by the specialties, in accordance with the provisions of the Balanced Budget Refinement Act of 1999. Physicians bill for services that involve little or no physician work and are performed by other staff. For example, many chemotherapy services are provided in a physician’s office by a nurse or other health care professional and billed for by the physician. In response to provider concerns that payments for these nonphysician services were too low, HCFA developed an alternative method of calculating payments. In the alternative methodology, the costs of nonphysician services were aggregated into what was called a “zero work” pool for all specialties. This, in effect created a new zero work specialty. The specialty-specific cost pools, however, were not reduced by the costs associated with the nonphysician services. Practice expense payments were then calculated for each of the nonphysician services, as they were for the other services, but with these notable deviations from the basic methodology: SMS data on average practice expenses for all physicians were used, instead of specialty-specific practice expense data, to calculate the nonphysician specialty’s practice expense pool. Clinical time (including the time of nurses and other clinical personnel) was substituted for physician time in establishing the cost pool for these services. Direct costs were allocated across services based on historical charges, rather than the expert panels’ estimates of service-specific resource requirements. Indirect cost allocations were based solely on charge-based direct cost estimates. There was no need to average payments across specialties for the nonphysician services because only one payment is estimated for each nonphysician service. Medicare: HCFA Can Improve Methods for Revising Physician Practice Expense Payments (GAO/HEHS-98-79, Feb. 27, 1998). Medicare: HCFA Can Improve Methods for Revising Physician Practice Expense Payments (GAO/T-HEHS-98-105 March 3, 1998). Medicare Physician Payments: Need to Refine Practice Expense Values During Transition and Long Term (GAO/HEHS-99-30, Feb. 24, 1999). Medicare Part B Drugs: Program Payments Should Reflect Market Prices (GAO-01-1142T, Sept. 21, 2001). Medicare: Payments for Covered Outpatient Drugs Exceed Providers’ Cost (GAO-01-1118, Sept. 21, 2001). | Medicare's physician fee schedule establishes payments for more than 7,000 different services, such as office visits, surgical procedures, and treatments. Before 1992, fees were based on charges physicians billed for these services. Since then, the Health Care Financing Administration (HCFA), which runs Medicare, has been phasing in a new fee schedule on the basis of the amount of resources used to provide that service relative to other services. The development of the resource-based practice expense component was a substantial undertaking. The implementation of the resource-based methodology has been the subject of considerable controversy, partly because of HCFA's adjustments to the underlying data and basic method and partly because payment changes were required to be budget-neutral--which means that total Medicare spending for physician services was to be the same under the new payment method as it was under the old one. As a result, Medicare payments to some specialties have increased while payments to other specialties have decreased. Oncologists claim that their practice expense payments are particularly inadequate for some office-based services, such as chemotherapy. Oncology practice expense payments in 2001 are eight percent higher than they would have been had charged-based payments continued. Oncology practice expense payments compared to their estimated practice expenses are about the same as the average for all physicians. |
Critical infrastructures are systems and assets, whether physical or virtual, so vital to our nation that their incapacity or destruction would have a debilitating impact on national security, economic well-being, public health or safety, or any combination of these. Critical infrastructure includes, among other things, banking and financial institutions, telecommunications networks, and energy production and transmission facilities, most of which are owned by the private sector. As these critical infrastructures have become increasingly dependent on computer systems and networks, the interconnectivity among information systems, the Internet, and other infrastructures creates opportunities for attackers to disrupt critical systems, with potentially harmful effects. To better manage cyber-based risks that the nation’s cyber-reliant critical infrastructure faces, public and private organizations use available cybersecurity standards and guidance that promote the security of their critical systems. Threats to systems supporting critical infrastructure are evolving and growing. In February 2011, the Director of National Intelligence testified that, in the past year, there had been a dramatic increase in malicious cyber activity targeting U.S. computers and networks, including a more than tripling of the volume of malicious software since 2009. Cyber threats can be unintentional or intentional. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled employees, foreign nations engaged in espionage and information warfare, and terrorists. GAO, Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks, GAO-08-526 (Washington, D.C.: May 21, 2008). continue to move to networked operations, the threat will continue to grow. Table 1 provides descriptions of common types of cyber exploits. Reports of cyber attacks illustrate that such attacks could have a debilitating impact on national and economic security and on public health and safety. In June 2011, a major bank reported that hackers had broken into its systems and gained access to the personal information of hundreds of thousands of customers. Through the bank’s online banking system, the attackers were able to view certain private customer information. In February 2011, media reports stated that computer hackers had broken into and stolen proprietary information worth millions of dollars from the networks of six U.S. and European energy companies. In July 2010, a sophisticated computer attack, known as Stuxnet, was discovered. It targeted control systems used to operate industrial processes in the energy, nuclear, and other critical sectors. It is designed to exploit a combination of vulnerabilities to gain access to its target and modify code to change the process. Federal law and policy have established roles and responsibilities for federal agencies working with the private sector and other entities in enhancing the cyber and physical security of critical public and private infrastructures. These include the Homeland Security Act of 2002, Homeland Security Presidential Directive 7 (HSPD-7), and the National Infrastructure Protection Plan (NIPP). In addition, regulatory entities oversee entities within critical infrastructure sectors and develop and publish various types of cybersecurity guidance to assist their examiners and organizations. The Homeland Security Act of 2002 created the Department of Homeland Security (DHS). Among other things, it assigned the department the following critical infrastructure protection responsibilities: (1) developing a comprehensive national plan for securing the key resources and critical infrastructures of the United States; (2) assisting in the development and promotion of private sector best practices to secure critical infrastructure; and (3) disseminating, as appropriate, information to assist in the deterrence, prevention, and preemption of, or response to, terrorist attacks. HSPD-7 established DHS as the principal federal agency to lead, integrate, and coordinate the implementation of efforts to protect cyber- critical infrastructures and key resources. In addition, HSPD-7 identified lead federal agencies, referred to as sector-specific agencies, which are responsible for coordinating critical infrastructure protection efforts with the public and private stakeholders in their respective sectors. For example, the Department of the Treasury and the Department of Health and Human Services are the sector-specific agencies for the banking and finance and the health care and public health sectors, respectively. The NIPP states that, in accordance with HSPD-7, DHS is a principal focal point for the security of cyberspace and is responsible for coordinating efforts to protect the cyber infrastructure to ensure its confidentiality, integrity, and availability. These responsibilities, among other things, include providing guidance on effective cyber-protective measures, assisting the sector-specific agencies in understanding and mitigating cyber risk, and assisting in developing effective and appropriate protective measures. To accomplish these responsibilities, DHS is to help in the development of comprehensive cybersecurity guidance that homeland security partners may adopt to meet accepted industry-based standards that measurably reduce the risk of cyber disruption or exploitation. The NIPP also describes a partnership model as the primary means of coordinating government and private sector efforts to protect critical infrastructure. For each sector, the model requires formation of government coordinating councils—composed of federal, state, local, or tribal agencies with purview over critical sectors—and encourages voluntary formation of SCCs—composed of owner-operators of these critical assets (some of which may be state or local agencies) or their respective trade associations. These councils create the structure through which representative groups from all levels of government and the private sector are to collaborate in planning and implementing efforts to protect critical infrastructure. The sector councils are envisioned to be policy- related and to represent a primary point of contact for government to plan the entire range of infrastructure protection activities, including those associated with mitigating cyber threats. According to the NIPP, sector-specific agencies are to work with their private sector counterparts to understand and mitigate cyber risk by, among other things, determining whether approaches for critical infrastructure inventory, risk assessment, and protective measures address assets, systems, and networks; require enhancement; or require the use of alternative approaches. They are also to review and modify existing and future sector efforts to ensure that cyber concerns are fully integrated into sector security activities and protective activities. Table 2 shows the 18 critical infrastructure sectors and the sector-specific agencies assigned to each sector. Further, the NIPP called for the sector-specific agencies, in close collaboration with the sector coordinating councils, government coordinating councils, and others, including state, local, and tribal critical infrastructure key resources partners, to develop sector-specific plans and sector annual reports to address how the sectors would implement the national plan, including how the security of cyber and other (physical) assets and functions was to be improved. More specifically, according to the NIPP, sector plans were to, among other things, describe how the sector will identify and prioritize its critical cyber and other assets and define approaches to be taken to assess risks and develop programs to protect these assets, and sector annual reports were to provide status and progress on each sector’s efforts to carry out the sector plans. In September 2009, we reported that sector-specific agencies had made limited progress in updating their sector-specific plans to fully address key cyber elements. As a result, we recommended that the Secretary of Homeland Security, consistent with any direction from the Office of the Cybersecurity Coordinator, (1) assess whether the existing sector- specific planning process should continue to be the nation’s approach to securing cyber and other critical infrastructure and, in doing so, consider whether proposed and other options would provide more effective results and (2) if the existing approach is deemed to be the national approach, work with the sector-specific agencies to develop their plans to fully address DHS cybersecurity criteria. In response to our recommendations, DHS took steps to make sector-specific planning a priority. For example, in 2009 and 2010, DHS met and worked with the sector-specific agencies and sector representatives to update sector plans with the goal of fully addressing cyber-related criteria. As of October 2011, of the 18 plans, DHS reported that 17 have been finalized and approved and 1 is still in the process of being reviewed. In addition, DHS’s Quadrennial Homeland Security Review Report identified key strategic outcomes for the department’s safeguarding and securing cyberspace mission, including, among others, that the (1) homeland security partners develop, update, and implement guidelines, regulations, and standards that ensure the confidentiality, integrity, and reliability of systems, networks, and data, and (2) critical infrastructure sectors adopt and sector partners meet accepted standards that measurably reduce the risk of cyber disruption or exploitation. In addition to public-private partnership-related efforts, regulatory entities oversee entities within critical infrastructure sectors that are under the purview of federal law, regulation, or mandatory standards pertaining to securing privately owned information systems or data. For example, depository financial institutions (such as commercial banks and credit unions) in the banking and finance sector are regulated by members of the Federal Financial Institutions Examination Council (FFIEC). The mechanisms used to perform oversight include continuous examinations, periodic examinations, self-reporting, and compliance reviews, and various types of mechanisms exist to enforce compliance. Federal regulators also develop and publish various types of cybersecurity guidance to assist (1) the examiners and inspectors in carrying out their responsibilities and (2) the regulated entities in fulfilling requirements, addressing specific threats, or mitigating identified risks. For example, FFIEC has issued handbooks that are intended to provide guidance to examiners and organizations. Cybersecurity guidance provides general guidelines and principles as well as technical security techniques for maintaining the confidentiality, integrity, and availability of information systems and data. When implementing cybersecurity technologies and processes, organizations can avoid making common implementation mistakes by consulting guidance developed by various other organizations. Public and private organizations may decide to voluntarily adopt this guidance to help them manage cyber-based risks. Some entities may also be required to meet regulations or mandatory requirements that address cybersecurity. Many organizations exist that develop standards and guidance that, among other things, promote the confidentiality, integrity, and availability of computer systems and information. Examples of such organizations include the following: International Organization for Standardization (ISO): a nongovernmental organization that develops and publishes international standards. The standards, among other things, address information security by establishing guidelines and general principles for initiating, implementing, maintaining, and improving information security management in an organization. International Electrotechnical Commission (IEC): an organization for standardization comprising all national eletrotechnical committees. The commission publishes international standards, technical specifications, technical reports, and publicly available specifications and guides. The information security standards address safety, security, and reliability in the design and operations of systems in the power industry, among other things. The International Telecommunication Union: a United Nations agency whose mission includes, among other things, developing technical standards and providing technical assistance and capacity building to developing countries. The union has also developed technical standards for security and, more recently, engaged in other cybersecurity activities. For example, the union has established a study group for telecommunications security to focus on developing standards and recommendations associated with network and information security, application security, and identity management. Similarly, the union, through its members’ efforts, prepared a report on cybersecurity best practices for countries seeking to organize national cybersecurity efforts. The International Society of Automation (ISA): a global and nonprofit organization that develops standards for automation. It has developed a series of standards to address security in industrial automation and control systems. The American National Standards Institute (ANSI): a U.S. organization that is responsible for coordinating and promoting voluntary consensus-based standards and information sharing to minimize overlap and duplication of U.S. standards-related efforts. In addition, it is the representative of U.S. interests in international standards-developing organizations. Individual industries and sectors also have their own specific standards. These include standards or guidance developed by regulatory agencies that assist entities within sectors in complying with cybersecurity-related laws and regulations. In addition, organizations that operate in a specific industry develop cybersecurity standards and guidance and promote practices for their industries. In the United States, the National Institute of Standards and Technology (NIST), a standards-setting agency under the U.S. Department of Commerce, issues Federal Information Processing Standards that, pursuant to the Federal Information Security Management Act of 2002 (FISMA), are mandatory for federal agencies and special publications that provide guidance for information systems security for non-national security systems. For example, NIST Special Publication (SP) 800-39, Managing Information Security Risk: Organization, Mission, and Information System View, provides guidance for an integrated, organizationwide program for managing information security risk to organizational operations, organizational assets, individuals, other organizations, and the nation resulting from the operation and use of NIST also developed a risk management federal information systems.framework that is one of several NIST guidelines for federal agencies to follow in developing information security programs. The framework is specified in NIST SP 800-37, Revision 1, Guide for Applying the Risk Management Framework to Federal Information Systems: A Security Life Cycle Approach, which provides agencies with guidance for applying the risk management framework to federal information systems.framework consists of a six-step process involving (1) security categorization, (2) security control selection, (3) security control implementation, (4) security control assessment, (5) information system authorization, and (6) security control monitoring. It also provides a process that integrates information security and risk management activities into the system development life cycle. NIST SP 800-53, Revision 3, Recommended Security Controls for Federal Information Systems and Organizations, provides a catalog of security controls and technical guidelines that federal agencies use to protect federal information and information systems. such as those in the nation’s critical infrastructure sectors, are encouraged but not required to use this NIST guidance where appropriate. Table 3 lists SP 800-53’s 18 control families and the 198 recommended controls. DHS’s National Cyber Security Division’s Control Systems Security Program has also issued recommended practices to reduce risks to industrial control systems within and across all critical infrastructure and key resources sectors. For example, in April 2011, the program issued the Catalog of Control Systems Security: Recommendations for Standards Developers, which is intended to provide a detailed listing of recommended controls from several standards related to control systems. A wide variety of cybersecurity guidance from national and international organizations is available to critical infrastructure sector entities. Much of this guidance is tailored to the unique characteristics of each sector. Further, entities within regulated subsectors have specific cybersecurity guidance that is required or recommended to be used, while entities operating outside of a regulatory environment have standards and guidance available, but not required, for their use. Furthermore, industry regulators, associations, and other groups have also developed and issued voluntary guidance available for use by entities within their respective sectors that is tailored to the business needs of entities or provides methods to address unique risks or operations. While SCC representatives confirmed lists of cybersecurity guidance that they stated was used within their respective sectors, the representatives emphasized that the lists were not comprehensive and that additional standards and guidance are likely used within the sectors. In addition, SCC representatives stated that they were not always aware of the extent to which the identified guidance was used by entities within their sectors. The following discussion describes cybersecurity guidance identified for each of the sectors in our review. A list of specific guidance for each sector is provided in appendix II. Banking and finance sector: The guidance documents for the banking and finance sector are diverse. For example, federal regulatory entities within the various sector segments issue specific risk-based cybersecurity requirements. In addition, financial institutions and the payment card industry have developed voluntary standards and practices. FFIEC has issued handbooks that outline cybersecurity requirements for depository institutions within the sector. In addition, federal financial regulators have issued regulations that cover a comprehensive set of high-level requirements, including security programs, risk management, data security, incident response and anti-identity-theft. These regulations are in response to laws such as the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act. The banking and finance sector-specific plan identified applicable laws, regulations, and a multitude of sector-specific guidance, especially for depository and financial institutions, that covered many cybersecurity topics such as access control authentication and phishing. Each of the FFIEC agencies often issues guidance that is similar in content but tailored to meet its legal requirements. The agencies deliver this guidance through their respective transmittal documents, such as bulletins, financial institution letters, letters to credit unions, and supervisory letters. In addition, according to an SCC representative familiar with cybersecurity guidance associated with the sector, the revision associated with the latest sector-specific plan will have more guidance on the investments and securities subsector. Communications sector: The guidance documents for the communications sector cover a variety of topics such as telecommunication industry security standards, network engineering standards, and security configuration guides. The SCC representatives familiar with cybersecurity guidance associated with the sector stated that the identified guidance is all widely used within the sector. In addition, the representatives acknowledged that a number of the documents are overlapping and cover similar areas, and that on the basis of its particular needs an entity may select among several. Further, decisions on whether or not to implement a specific practice within guidance depend on the role of the responsible implementer (e.g., service provider, network operator, or equipment supplier) and an understanding of the impact on factors such as the systems, networks, and organizations. According to SCC representatives responsible for cybersecurity efforts, cybersecurity standards and practices promoted and used by SCC members include those developed by the Alliance for Telecommunications Industry Solutions, Internet Engineering Task Force, and the International Telecommunication Union. For example, the Alliance for Telecommunications Industry Solutions issued a U.S. Standard for Signaling Security–Security Roadmap. In addition, the Communications Security, Reliability, and Interoperability Council recently published a key guidance document to update and combine a large body of sector cybersecurity practices from a variety of sources. The guidance addresses the following areas: identity management, encryption, vulnerability management, and incident response for wireless, Internet protocol services, network, people, and legacy services. The document includes 397 cybersecurity practices intended to ensure the security of networks and systems for all segments of the communications industry. According to the document, the practices are not overly prescriptive, allowing network service providers, operators, and equipment suppliers enough latitude to make deployment decisions that best suit their business practices, which revolve around technology, capability, and customer requirements. Energy sector: The energy sector is divided between the electricity and oil and natural gas subsectors. Within the electricity subsector, the Federal Energy Regulatory Commission (FERC) certified the North American Electric Reliability Corporation (NERC) as the Electric Reliability Organization that is responsible for developing reliability standards, subject to FERC oversight, review, and approval. If approved, the standards become mandatory and enforceable in the contiguous 48 states. NERC developed eight cybersecurity standards, which FERC approved in 2008, that address the following topics: critical cyber asset identification, security management controls, personnel and training, electronic security perimeter(s), physical security of critical cyber assets, systems security management, incident reporting and response planning, and recovery plans for critical cyber assets. NERC also publishes security guidelines for companies to consider for protecting electric infrastructure systems, although such guidelines are voluntary and are typically not checked for compliance. For example, NERC’s June 2010 Security Guideline for the Electricity Sector: Identifying Critical Cyber Assets is intended to assist entities in identifying and developing a list of critical cyber assets as described in the mandatory standards. Cybersecurity guidance for the oil and natural gas subsector has been issued by various related organizations, as has applicable guidance from closely related sectors, such as transportation and chemical. Among others, sector-specific guidance was identified from the American Petroleum Institute, American Gas Association, and the Interstate Natural Gas Association of America. For example, the American Petroleum Institute’s Security Guidelines for the Petroleum Industry address cyber/information technology in the petroleum industry and endorse the ISO/IEC international standard 17799 for creating a cybersecurity program as voluntary guidance.covered various topics, including cryptography, third-party connections, and control systems. Health care and public health sector: Cybersecurity guidance for the health care and public health sector covers a variety of topics specific to the security of health information. For example, ISO and ASTM International have issued health sector cybersecurity guidance. issued guidance for security management in health, and ASTM International issued guidance on user authentication and authorization. Also, according to a sector coordinating council representative, Electronic Data Interchanges are critical to data exchange within the sector and have cybersecurity implications.and public health sector annual report, the sector is engaged in an international effort to develop standardized security guidelines for health information technology that will facilitate the confidentiality, availability, and integrity of health information systems and the data residing on those systems. ASTM International was previously known as the American Society of Testing and Materials. implementing an information security program. In addition, a Department of Health and Human Services (HHS) Office for Civil Rights official familiar with health information privacy issues said that the department developed guidance on how to develop a risk-based approach for protecting electronic health information and is working with NIST to develop a self-assessment tool that entities in the health sector can use to assess their security posture. Information technology sector: Cybersecurity guidance for the information technology sector covers a number of topics, including security management system requirements, operational security, and identity management. Also, the information technology sector’s 2010 sector annual report and information provided by DHS’s National Protection and Programs Directorate reference the following organizations as providing cybersecurity guidance relevant to the sector: the Internet Engineering Task Force, an international organization that develops Internet standards and protocols; ISO/IEC, which provides standards and practices for managing information security systems; the Institute of Electrical and Electronics Engineers, which establishes standards and practices for managing information security systems;and NIST, which issues special publications and interagency reports. According to the chairperson of the IT SCC, the IT sector is very complex and there is no “short list” of cyber standards. From the industry’s perspective, there is an “ecosystem of cybersecurity standards” that includes many different components, comprising hundreds, or even thousands, of individual standards related to technologies, practices, and products and that perform a variety of functions such as enabling interoperability and assurance of security policies and controls. Further, the standards ecosystem constantly evolves in response to new technologies, cyber threats and risks, and business models. The SCC chairperson confirmed the identified cybersecurity guidance, as shown in appendix II, as an illustrative list containing examples of cybersecurity guidance available to sector entities. Nuclear reactors, materials, and waste sector: The cybersecurity- specific guidance for this sector includes documents issued by the Nuclear Regulatory Commission (NRC) and Nuclear Energy Institute. SCC representatives stated that the NRC and Nuclear Energy Institute guidance documents were widely used for nuclear power plants within the sector. NRC, under its regulatory authority, requires, among other things, that licensees provide high assurance that digital computer and communication systems and networks are adequately protected against cyber attacks. Both NRC and the institute have issued guidance containing methods that entities may use to meet the regulatory requirements. This guidance includes NRC’s Regulatory Guide 5.71 for cybersecurity programs at nuclear facilities, the most recent version of which was issued in January 2010, and the institute’s cybersecurity plan for nuclear power reactors, the most recent version of which was issued in April 2010. NRC officials and institute representatives familiar with both guides stated that they contain similar cybersecurity controls. However, these guides are not substitutes for compliance with regulations, and compliance with the guides is not mandatory. According to NRC representatives responsible for NRC’s cybersecurity-related efforts, the guides provide an approach that the NRC staff deems acceptable for complying with the commission’s regulations regarding the protection of digital computers, communications systems, and networks from a cyber attack. Although licensees may use methods other than those described within this guidance to meet the commission’s regulations, the NRC representatives said that all licensees have used one of these two methods. In addition, the NRC representatives said that they are developing a new guide to facilitate inspections of cybersecurity programs. NRC’s cybersecurity regulations are currently only applicable to power- generating facilities. The NRC representative familiar with cybersecurity guidance said that, in general, NRC’s rule-making process is based on the risk to the public and has included the issuance of regulations for the power generation facilities first, which are then typically promulgated to and then to other nuclear facilities (such as research fuel cycle facilities,reactors), as needed. Also, NRC issued a series of orders recommending greater cybersecurity after September 11, 2001. According to the 2010 sector annual report, the Nuclear Sector Cyber Subcouncil is working on a road map to secure control systems in the nuclear sector. The annual report states that the road map will build on existing government and industry efforts to enhance the security of control systems in the power and nonpower reactor segments of the sector, taking into account NRC’s cybersecurity requirements. According to a DHS official, the scope of the road map was limited to commercial nuclear power plants. Water sector: Cybersecurity guidance for the water sector covers a number of topics, including risk analysis and management and industrial control systems. However, information compiled from the SCC membership and provided by the Secretariat of the Water SCC showed that several documents cited as relevant to cybersecurity were not widely used by entities within the sector for various reasons, including the lack of resources and funding to implement a cybersecurity program. The representatives further stated that while the larger utilities have the staffing levels and budgets that enable them to more fully implement cybersecurity for their control systems, many medium-size or small utilities struggle to maintain the staff needed just to keep their systems properly running. Furthermore, Water SCC representatives familiar with cybersecurity guidance associated with the sector said that while they have not specified any specific cybersecurity guidance that water utilities are to use, some utilities are using and implementing cybersecurity guidance that has been used in other sectors. Also, the Cybersecurity Working Group of the Water SCC prepared with DHS a road map to define gaps and a strategy for addressing outstanding needs in securing process control systems. It states that planned cybersecurity activities include (1) isolating control systems from public switched networks and (2) adopting recommended practices for control systems in the water sector. Cross-sector guidance: In addition to sector-specific guidance, cybersecurity guidance from national and international organizations can be and is utilized by sector entities and was frequently mentioned as important in developing sector-specific guidance. These include NIST’s risk management framework and security controls for information systems and industrial control systems; DHS’s recommended security controls for control systems; ISO guidance on establishing an information system security control program, including security control guidance; and the International Society of Automation’s security guidance for industrial control systems. Implementation of cybersecurity guidance can occur through a variety of mechanisms, including enforcement of regulations and voluntarily in response to business incentives; however, responsible federal entities could take additional steps to promote the most applicable and effective guidance throughout the sectors. Entities operating under a federal regulatory environment are required to adhere to cybersecurity standards to meet their regulatory requirements or face enforcement mechanisms. Entities not subject to regulation do not face such enforcement mechanisms, but may voluntarily implement cybersecurity guidance in response to business incentives, such as mitigating risk, ensuring interoperability among systems, or protecting intellectual property. With respect to promoting cybersecurity guidance, sector-specific agencies, and, in particular, DHS, have specific roles to play in coordinating cybersecurity efforts, which include the promotion and dissemination of guidance and practices. While DHS and other agencies have taken a number of steps in this area, more could be done to identify guidance and standards applicable to entities within the sectors and to promote their implementation. Critical infrastructure entities covered under regulation, such as depository institutions in the banking and finance sector; the bulk power system in the electricity subsector of the energy sector; health care and public health sector; and the nuclear reactors, materials, and waste sector, are regulated by the federal government and thus are required to meet mandatory cybersecurity standards established by regulation under federal law. When an entity is determined to be not compliant with these requirements, various types of enforcement mechanisms can be employed. These mechanisms include administrative actions such as a supervisory directive or memorandum of understanding. More severe enforcement actions include cease and desist orders, remedial directives, revocations of license or certification, and civil monetary penalties. Depository Institutions (Banking and Finance Sector) Cybersecurity oversight functions are conducted by FFIEC member agencies through examinations. Subcommittee Chairperson, for most larger financial institutions, examiners have a continuous, on-site presence and are constantly evaluating their assigned financial institutions’ programs, in particular in regard to cybersecurity, which is considered high risk, to ensure that the institutions operate safely and soundly. For smaller financial institutions, examinations for cybersecurity risks occur every 12 to 18 months or after the issuance of significant regulatory guidance. For example, the Federal Deposit Insurance Corporation can initiate enforcement actions and orders against state nonmember banks, and insured foreign banks. The National Credit Union Administration can initiate enforcement actions and orders against federally insured credit unions and credit union–affiliated parties. The Office of the Comptroller of the Currency can initiate enforcement actions and orders against national banks and federal savings associations, federally chartered branches, and agencies of foreign banks. The Federal Reserve System can initiate enforcement actions and orders against state member banks; financial, bank, and thrift holding companies; and U.S. operations of foreign banking organizations. weaknesses identified by the examiners. Informal enforcement actions can consist of the following: a memorandum of understanding or document of resolution, a supervisory directive, a notice of deficiency and request for a safety and soundness individual minimum capital requirement directives. Formal actions are authorized by statute and mandated in some cases, are generally more severe, and are disclosed to the public. Depending on whether the institution is a credit union or a bank, formal enforcement actions for any violations of laws and regulations, including various cybersecurity provisions, can take the following forms: cease and desist orders, termination of insurance, and liquidation. For example, an agency can assess civil monetary penalties of $7,500 per day for any violation of law or regulation, or assess a fine up to $37,000 per day for a violation that is, for instance, likely to cause more than a minimal loss to the financial institution, or assess a penalty of up to $1,375,000 million per day for knowingly engaging, for instance, in any unsafe or unsound practice when the offender knowingly or recklessly caused a substantial loss to the financial institution or received a substantial pecuniary gain or other benefit. However, according to the FFIEC IT Subcommittee Chairperson, while depository institutions have been cited for operating in an unsafe and unsound manner as it relates to cybersecurity, none of these cases have reached the level of formal actions with civil monetary penalties. Bulk Power System (Electricity Subsector of the Energy Sector) NERC, as the Electric Reliability Organization, has the authority to enforce compliance with mandatory cybersecurity standards through its Compliance Monitoring and Enforcement Program, subject to FERC review. While FERC has authorized NERC to enforce mandatory reliability standards in the United States, the commission retains its own authority to enforce the same standards and assess penalties for violations. The commission also has the ability to review each penalty NERC proposes for noncompliance with a reliability standard in the United States, either by its own action or upon an appeal by a penalized entity. Monitoring functions are carried out by NERC inspectors through a number of actions: Performing compliance audits for bulk power system owners, operators, and users on a schedule established by NERC. Periodically conducting a self-certification to attest to compliance or noncompliance with reliability standards. Initiating spot checks or performing compliance violation investigations in response to an event or complaint. Encouraging self-reporting versus formal NERC reporting when a user, owner, or operator of the bulk power system becomes aware of a violation of a reliability standard or of a change in the violation severity level of a previously reported violation. Requiring periodic data submissions. Under this circumstance, a team of industry experts is established to review the data and provide a report to NERC. Requiring technical feasibility exception reporting for the reliability standards that allow such exceptions. Those reliability standards require reporting of exceptions to compliance with the reliability standard and approval by NERC of the exceptions as a form of compliance monitoring. Reviewing complaints received alleging violations of a reliability standard to determine if a compliance violation investigation is required. Enforcement mechanisms include monetary penalties, nonmonetary sanctions, and remedial actions, according to NERC sanction guidelines. NERC can levy monetary penalties for the violation of requirements of the reliability standards. For example, NERC or regional entities, upon delegation of NERC’s authority, can impose a monetary penalty or fine of up to $1 million per day per violation, depending on the risk factors and level of violation severity involved. NERC must file all penalties it or a regional entity proposes to impose with FERC. If FERC takes no action after 31 days, the penalties go into effect, or FERC can either reject or take up the proposed penalty for further action. Entities can appeal the penalties with FERC. For the month of July 2011, a Notice of Penalty was issued for violations of NERC Cyber Security Standards, one of which included a high violation risk factor that had a monetary penalty of $75,000 imposed, according to NERC’s publicly available enforcement information on penalties. In addition, there were 65 cybersecurity violations with a medium violation risk factor reported that had total monetary penalties of approximately $496,000 imposed and 24 cybersecurity violations with a low violation risk factor that had total monetary penalties of approximately $375,000 imposed. NERC, the regional entities, and FERC can also levy nonmonetary sanctions against a violator that include limitations or restrictions that may result in economic or other impacts. In addition to monetary and nonmonetary sanctions, NERC, the regional entities, and FERC can direct bulk power system entities to take remedial action to correct conditions, practices, or any other relevant action or activity underlying the noncompliance involved, including cybersecurity-related issues. For example, remedial actions may include the following: specifying operating or planning criteria, limits, or limitations; requiring specific system studies; defining operating practices or guidelines; requiring confirmation of data, practices, or procedures through inspection testing or other methods; requiring specific training for personnel; and requiring development of specific operating plans. HHS’s Office for Civil Rights (OCR) is responsible under HIPAA for oversight and enforcement of the protection of electronic protected health information held by covered entities within the health care and public health sector. Cybersecurity requirements are also applicable to this sector’s reimbursement and supply chain functions. Oversight of HIPAA’s Security Rule is carried out through compliance reviews and complaints that can be received through one of HHS’s 10 regional offices. According to an OCR official familiar with health information privacy issues, HHS has undertaken oversight of Security Rule compliance. For example, during calendar year 2010, HHS reported opening 243 complaints and compliance reviews involving Security Rule issues, which represents a 95 percent increase in the number of Security Rule cases opened over the average caseload of the previous 4 years. In addition, OCR reported resolving a total of 128 complaints, which is an increase of 16 percent over the average number of resolved complaints in the previous 4 years. More importantly, 55 percent of the resolved complaints required the regulated entity to take corrective action to achieve compliance with the Security Rule, whereas on average only 18 percent of the resolved complaints in prior years required such action. Additionally, HIPAA-covered entities and their business associates are to provide notification following a breach of unsecured protected health information. Clinical Health Act’s Breach Notification Interim Final Rule, OCR processes and initiates investigations of reports involving 500 or more individuals. According to the OCR health information privacy official, since the inception of the breach notification requirement, over 70 percent of the 280 major breaches reported (as of May 30, 2011) involved electronic protected health information, and thus required investigation for Security Rule compliance. Of these cases, the official stated that 6 percent of breach reports involving more than 500 individuals have been due to hacking or cybersecurity incidents, compared with 67 percent of these breaches being due to the physical loss or theft of protected health information. Under the Health Information Technology for Economic and Enforcement mechanisms include the imposition of civil money penalties for violations. HHS can levy fines or penalties for failure to comply with the cybersecurity standards or specifications of the Security Rule, Privacy Rule, and Breach Notification Interim Final Rule. Breach notification was implemented under the Health Information Technology for Economic and Clinical Health (HITECH) Act. When considering civil monetary penalties, there are four categories of violations that reflect increasing levels of culpability. The categories and minimum penalties are as follows: For each violation, the maximum penalty amount in every category is $50,000. For multiple violations in a calendar year, the maximum penalty amount in each category is $1.5 million. HHS determines the penalty amounts based on the nature and extent of the violation, resulting harm, and other factors. The OCR health information privacy official also indicated that the office has executed resolution agreements and corrective action plans in several cases where investigation has found systemic failures to comply with the Security Rule for protecting electronic health information. For example, the official stated that OCR executed a resolution agreement with a major university in the amount of $865,000, which also included a 3-year corrective action plan to implement stronger safeguards for electronic protected health information as well as comprehensive employee training on the appropriate use of patient information. In another case, OCR executed a resolution agreement with a major hospital in the amount of $1 million that included a 3-year corrective action plan to address stronger safeguards for the removal of protected health information from the hospital by employees for work-related purposes, including the removal of electronic protected health information. Nuclear Reactors (Nuclear Reactors, Materials, and Waste Sector) NRC is responsible for both physical security and cybersecurity oversight. To enhance its current cybersecurity program, NRC has issued a cybersecurity-focused regulation and a cybersecurity regulatory guide. Current cybersecurity oversight functions are carried out through inspections of licensed facilities to ensure that they are in compliance with NRC regulations and the terms of their licenses. Although NRC has not imposed a civil penalty for cybersecurity violations at its facilities under its current enforcement policy, failure to comply with NRC’s regulations may result in the imposition of enforcement sanctions such as notices of violation, civil penalties, and the issuance of orders. Prior to implementing its new cybersecurity program, NRC must review and approve the cybersecurity plans for all operational nuclear power plants. Once a cybersecurity plan is approved for a particular nuclear power plant, implementing the program defined within that plan becomes both a condition of that plant’s operating license and an inspection requirement. In addition to approving cybersecurity plans, NRC is also developing a cybersecurity inspection program that is scheduled for implementation during 2012 and is in the early stages of revising its cybersecurity enforcement policy to account for the new cybersecurity inspection program. The cybersecurity inspection program will be implemented in three stages. In the first stage, NRC intends to develop its initial inspection guidance. In the second stage, NRC intends to commence specialized inspector cybersecurity training and education in preparation for on-site cybersecurity inspections at licensed facilities. In the final stage, NRC will leverage the results of and the insights gained from its initial inspections to develop program guidance and procedures for future periodic inspections. Finally, NRC is in the early stages of revising its cybersecurity enforcement policy to account for the new cybersecurity inspection program. According to officials familiar with cybersecurity issues in their respective SCCs, the information technology, communications, and water critical infrastructure sectors and oil and natural gas subsector of the energy sector are not subject to direct federal cybersecurity-related regulation. Although the use of cybersecurity guidance is not mandatory, entities may voluntarily implement such guidance in response to business incentives, including to mitigate risks, protect intellectual property, ensure interoperability among systems, and encourage the use of leading practices. For example, officials familiar with cybersecurity issues from both the communications sector and information technology sector stated that the competitive market place, desire to maintain profits, and customer expectation of information security—rather than federal regulation—drive the adoption of best practices. Oil and gas SCC officials said that their member companies are not required to follow industry guidelines, but legal repercussions regarding standard of care may motivate the incorporation of such cybersecurity standards into their operations. As recognized in federal policy, the dissemination and promotion of cybersecurity standards and guidance is a goal in enhancing the security of our nation’s cyber-reliant critical infrastructure. The NIPP states that, in accordance with HSPD-7, DHS is a principal focal point for the security of cyberspace and is responsible for coordinating efforts to protect the cyber infrastructure to ensure its confidentiality, integrity, and availability. These responsibilities, among other things, include providing guidance on effective cyber-protective measures, assisting the sector-specific agencies in understanding and mitigating cyber risk, and assisting in developing effective and appropriate protective measures. To accomplish these responsibilities, DHS is to help in the development of comprehensive cybersecurity guidance that homeland security partners may adopt to meet accepted industry-based standards that measurably reduce the risk of cyber disruption or exploitation. In this regard, DHS and the other sector-specific agencies for the sectors selected for review have disseminated and promoted cybersecurity guidance among and within sectors. For example, officials from DHS’s National Cybersecurity Division (NCSD) stated that they work within the public-private partnership model to identify and prioritize cybersecurity risks within sectors, then coordinate with the sectors to encourage entities to adopt cybersecurity guidance to mitigate identified vulnerabilities. NCSD also engages with standards-developing organizations to provide input, resources, and support. For example, NCSD has provided resources, including time and expertise, supporting the development of security standards with NIST, ANSI, ISO, and the International Telecommunication Union. In addition, NCSD leverages a variety of resources to promote specific cybersecurity standards and practices. For example, through its Control Systems Security Program, NCSD has taken several actions, such as developing a catalog of recommended security practices for control systems, developing a cybersecurity evaluation tool that allows asset owners to assess their control systems and overall security posture, and collaborating with the Industrial Control Systems Joint Working Group to promote control standards and system security. In addition, officials from the Department of Energy’s Office of Electricity Delivery and Energy Reliability stated that the department, as the energy- sector-specific agency, is involved in many ongoing efforts to assist the sector in the development, assessment, and sharing of cybersecurity standards. For example, the department is working with NIST to enable state power producers to use current cybersecurity guidance. The department is also the Vice Chair of the Cyber Security Working Group and provides funds that will enable private sector power producers to share practices. In addition, according to Department of Energy officials, the department is currently leading an initiative to develop a risk management guideline for the electric grid to ensure that cybersecurity risks are addressed at the organization, mission or business process, and information system levels. This is modeled after NIST Special Publication 800-39 and tailored to the needs of the energy sector. Further, Department of Health and Human Services officials responsible for the agency’s sector-specific efforts also stated that they encourage the sharing of existing standards. For example, a public-private cybersecurity workgroup was formed that developed a cybersecurity primer to educate members of the sector. While these are significant steps, DHS and the other sector-specific agencies have not identified the key cybersecurity guidance applicable to or widely used in each of their respective critical infrastructure sectors. In addition, DHS guidance for preparing the sector-specific critical infrastructure protection plans calls for, among other things, outlining the sector’s cyber protection and resilience strategies; however, these plans largely do not identify key guidance and standards for cybersecurity. Specifically, only one of the seven sectors reviewed (banking and finance) listed cybersecurity guidance in its current sector-specific plan. The other six sectors mentioned certain guidance in these plans, but did not list applicable guidance. Sectors reported that they did not identify this guidance in their plans in part because DHS did not specifically address listing cybersecurity guidance in its guidance for the revision of the sector-specific plans. In addition, officials from DHS’s NCSD noted that their engagement in the area of standards focuses on promoting standards and practices from a cross-sector perspective, rather than focusing on individual sectors. However, given the plethora of guidance available, individual entities within the sectors may be challenged in identifying the guidance that is most applicable and effective in improving their security posture. Improved knowledge of the guidance that is available could help both federal and private sector decision makers better coordinate their efforts to protect critical cyber-reliant assets. Sector cybersecurity guidance related to three subsectors (electricity, depository institutions, and nuclear reactors) is substantially similar to guidance applicable to federal agencies. Specifically, sector cybersecurity guidance and supplementary documents that we analyzed addressed most of NIST’s risk management framework steps and most of the 198 recommended security controls in NIST SP 800-53 (listed in table 3) that are specified for federal information systems. In cases where differences existed in terms of security controls, sector representatives provided supplementary documents with controls that resolved the difference, or explained that some federally recommended security controls were not applicable for sector-specific reasons. NERC Cyber Security Standards 002 through 009, Version 3, and supplementary documents are substantially similar to guidance applicable to federal agencies. As discussed previously, the NIST risk management framework describes the activities important to an effective information security program (e.g., categorize information systems, select security controls). Similarly, the NERC Cyber Security Standards provide a cybersecurity framework for the identification and protection of entity- identified critical cyber assets to support reliable operation of the bulk power system.Security Management Controls and Systems Security Management), which contain mandatory and enforceable minimum security requirements (e.g., critical cyber asset identification and cyber vulnerability assessment). The standards also cover eight cybersecurity areas (e.g., As discussed previously, NIST SP 800-53, Revision 3, addresses one of the steps in the NIST risk management framework, which is to select a baseline of security controls and tailor and supplement the baseline based on an organizational risk assessment. SP 800-53 contains 18 control families (e.g., Access Control and Risk Assessment), which in total, contain 198 recommended security controls (e.g., Account Management and Malicious Code Protection) for federal information systems and organizations. We determined that the eight NERC Cyber Security Standards and supplementary documents addressed 151 of the 198 SP 800-53 controls, and NERC officials responsible for the Cyber Security Standards deemed 46 of the remaining controls to be not applicable, and stated that 1 control—transmission integrity—was not considered when revising the latest NERC Cyber Security Standards. The NERC officials provided specific reasons as to why the 46 controls were not applicable to the bulk power system, as illustrated by the following examples: A control had the potential to increase risk to operations of bulk power system entities. A control was inappropriate and not feasible in a real-time control system environment. A control did not have universal applicability. A control based on FISMA compliance did not apply to the bulk power system environment. Additionally, the NERC officials expressed their concerns about comparing NERC Cyber Security Standards with those of SP 800-53. They said that the authority and scope of their standards derived from Section 215 of the Federal Power Act, as amended, while SP 800-53 derived from FISMA; therefore, the intended purpose of their standards is different from that of the guidance for federal agencies. The officials also said that the NERC Cyber Security Standards are mandatory and enforceable, whereas SP 800-53 provides a menu of possibilities to choose from depending on the specific situation and relies on the concepts of compensating controls and risk management to make trade- offs. Table 4 provides a summary of the comparison between the electricity subsector guidance and federal guidance, including the controls deemed not applicable by sector officials. Examples of commonalities between the electricity subsector cybersecurity guidance and federal guidance, as well as the controls deemed not applicable, are described below. Commonality: SP 800-53 recommends that personnel report suspected security incidents to the organizational incident response capability and report security incident information to designated authorities. The NERC Cyber Security Standard on Incident Reporting and Response Planning contains a similar control by requiring that the responsible entity report cybersecurity incidents to the Electricity Sector Information Sharing and Analysis Center. Commonality: SP 800-53 recommends protecting the confidentiality of transmitted information. NERC Security Guidelines for the Electricity Sector, Protecting Potentially Sensitive Information, Version 1.0, contain a similar control by specifying that, among other things, critical infrastructure owners and operators should have an information security or confidentiality policy in place as an integral part of their business-level policies and that the policy should address the production, storage, transmission, and disposal of both physical and electronic information. Commonality: SP 800-53 recommends maintaining and monitoring temperature and humidity levels within the facility where the information system resides to prevent fluctuations potentially harmful to the information system. The NERC officials stated that the physical infrastructure requirements in the Emergency Preparedness and Operations Reliability Standards require backup control center functionality in the event of any kind of failure of the primary control center. Not applicable: SP 800-53 recommends implementing a session lock control after a period of inactivity or upon receiving a request from a user. According to the NERC officials, this control is not applicable and not feasible in a real-time control system environment because session lock on an operational console could result in a loss of system operations and system monitoring, leading to a loss of present situational awareness. The NERC officials also stated that a lack of situational awareness was a key factor leading to the August 14, 2003, blackout. Not applicable: SP 800-53 recommends employing virtualization techniques to present information system components as other types of components, or components with differing configurations. According to the NERC officials, given the variety of technology and scale implemented by their members, this control would not have universal applicability. Not applicable: SP 800-53 recommends separating duties of individuals as necessary to prevent malevolent activity without collusion. According to the NERC officials, the control is not applicable because it would have the potential to increase risk to operations of bulk power system entities. The NERC officials also stated that the electricity industry typically maintains a practice of separation of duties between IT system developers and support, but placing further separation of duties requirements on operations personnel would result in decreased operational responsiveness and reliability. The FFIEC IT Examination Handbook (IT Handbook), which is composed of 11 booklets, is substantially similar to guidance applicable to federal agencies. Similar to the NIST risk management framework, the IT Handbook addresses various information technology topics (e.g., information security, operations, and management). Specifically, the Information Security Booklet is intended to provide guidance to examiners and organizations for assessing the level of security risks to the organization and evaluating the adequacy of the organization’s risk management. In addition, this booklet states that financial institutions protect their information by instituting a security process that identifies risks, forms a strategy to manage the risks, implements the strategy, tests the implementation, and monitors the environment to control the risks. We determined that the IT Handbook addressed 196 of 198 SP 800-53 controls; the FFIEC officials deemed the remaining 2 controls to be not applicable. Additionally, FFIEC officials responsible for cybersecurity- related issues and guidance expressed concerns about comparing NIST guidelines with those of the IT Handbook. According to the FFIEC officials, although the general purpose for both information resources is to protect information security assets, the process by which they communicate their intended purpose is different. Specifically, according to these officials, while many NIST controls directly compare with those of the IT Handbook, the target audiences are vastly different. The IT Handbook provides a higher-level overview (i.e., risk-based principles) detailing the controls and standards, while NIST describes specific controls for a standard. Therefore, comparisons between the two sets of guidance can best be accomplished by comparing information security concepts and principles. Table 5 provides a summary of the comparison between the banking and finance sector cybersecurity guidance and federal guidance, including the controls deemed not applicable by sector officials. Examples of commonalities between the banking and finance sector cybersecurity guidance and federal guidance, as well as the controls deemed not applicable, are described below. Commonality: SP 800-53 recommends implementing a session lock control after a period of inactivity or upon receiving a request from a user. The IT Handbook contains a similar control by specifying that controls include automatically logging the workstation out after a period of inactivity and heuristic intrusion detection. Commonality: SP 800-53 recommends usage restrictions and implementation guidance for wireless access. The IT Handbook contains a similar control by specifying that financial institutions determine whether appropriate device and session authentication takes place, particularly for remote and wireless machines. Not applicable: SP 800-53 recommends identifying specific user actions that can be performed on the information system without identification or authentication. According to the FFIEC officials, this control is not applicable because it would be excessive and burdensome to identify user actions within systems that do not require controls to protect sensitive, classified, or nonpublic information. In addition, the Information Security Booklet provides guidance as to how access should be given (i.e., sufficient access required to perform the work to be done). Not applicable: SP 800-53 recommends employing diverse information technologies in the implementation of the information system to reduce the impact of the exploitation of a specific technology. According to the FFIEC officials, this control is not applicable because it could add complexity and management overhead that could lead to mistakes and misconfigurations that could increase overall risk. NRC Regulatory Guide 5.71, Cyber Security Programs for Nuclear Facilities (RG 5.71) and supplementary documents are substantially similar to guidance applicable to federal agencies. According to NRC representatives responsible for NRC’s cybersecurity-related efforts, RG 5.71 sets forth methods that NRC has found acceptable for licensees to use in complying with the requirements of 10 CFR §73.54. Similar to the NIST risk management framework, these methods describe the activities important to an effective cybersecurity program for nuclear power plants. For example, RG 5.71 provides a method to aid in the categorization and identification of digital assets that must be protected from cyber attacks. It also provides a method to address and manage the potential cybersecurity risks of digital assets by applying a defensive architecture and a collection of security controls. Moreover, according to RG 5.71, it is based on standards provided in NIST SP 800-53 and NIST SP 800-82, among others. Further, we determined that RG 5.71 and supplementary documents addressed 178 of 198 SP 800-53 controls, and the NRC representatives deemed the remaining 20 controls to be not applicable to their sector. Although not exactly a one-to-one match, the security controls in RG 5.71 often closely resembled the language and terminology of security controls found in SP 800-53. However, according to NRC, where applicable, the security controls in RG 5.71 have been tailored for nuclear power plants by leveraging NIST guidance in appendix I of SP 800-53 on tailoring security controls for industrial control systems. The NRC representatives provided specific reasons why the 20 controls were not applicable, as illustrated by the following examples: A control is not allowed because it would have a direct impact on the operational integrity of safety functions at a nuclear power plant. A control is not within the scope of NRC’s regulatory authority. A control was not selected because it is not included in the NIST security control baseline for industrial control systems in NIST SP 800-53, Revision 3, Appendix I. Table 6 provides a summary of the comparison between the nuclear sector cybersecurity guidance and federal guidance, including the controls deemed not applicable by sector representatives. Examples of commonalities between the nuclear sector cybersecurity guidance and federal guidance, as well as the controls deemed not applicable, are described below. Commonality: SP 800-53 recommends basic security awareness training to all information system users. RG 5.71 contains a similar control by specifying that, among other things, the licensee or applicant establish, implement, and document training requirements for training programs to provide basic cybersecurity training for facility personnel. Commonality: SP 800-53 recommends protection against supply chain threats by employing defense-in-breadth strategy. RG 5.71 contains a similar control by specifying that the licensee or applicant protect against supply chain threats and vulnerabilities by employing the following measures: establishing trusted distribution paths, validating vendors, and requiring tamper-proof products or tamper-evident seals on acquired products. Commonality: SP 800-53 recommends enforcing a limit of consecutive invalid access attempts by a user. RG 5.71 contains a similar control by specifying that the licensee or applicant ensure that security controls are implemented to limit the number of invalid access attempts by a user. Not applicable: SP 800-53 recommends limiting the number of concurrent sessions for each system account. According to the NRC representatives, the concurrent session control is not applicable because it was determined that implementation of this control presents a safety risk to digital safety systems, or that systems under the scope of NRC regulations cannot support concurrent session control. Not applicable: SP 800-53 recommends protecting information systems from damage resulting from water leakage by providing master shutoff valves that are accessible to key personnel. According to the NRC representatives, as a result of their tailoring process, the control was not selected as part of the final security control baseline in RG 5.71 because systems used at nuclear power plants are designed and built to maintain the safe operation of the plant in the event of flooding. Additionally, plant operators who are licensed by NRC are authorized to manipulate components in the facilities to control their plants. Not applicable: SP 800-53 recommends all capital planning and investment requests include the resources needed to implement the information security program and document all exceptions to this requirement. According to the NRC representatives, this security control is not necessary as licensees, by definition, must have the resources to implement their cybersecurity programs. A wide variety of cybersecurity guidance is available to owners and operators of our nation’s cyber-reliant critical infrastructure. Both required and voluntary guidance has been developed and issued by industry regulators, associations, and other groups that is tailored to the business needs of entities or provides methods to address unique risks or operations. While entities operating in a federal regulatory environment face enforcement mechanisms for not adhering to standards in regulatory requirements, entities not subject to regulation do not face such enforcement mechanisms, but implement such guidance to, among other things, mitigate risks, maintain profits, and meet customer expectations. In carrying out their responsibilities for coordinating efforts to protect the cyber-critical infrastructure, DHS and the other sector-specific agencies have taken steps to disseminate and promote cybersecurity guidance. However, these agencies have not identified the guidance applicable to or widely used in each of their respective critical infrastructure sectors. In addition, most sectors reviewed had not specified available guidance in their respective planning documents, in part because DHS’s planning guidance did not suggest the inclusion of cybersecurity guidance. Given the plethora of guidance available, individual entities within the sectors may be challenged in identifying the guidance that is most applicable and effective in improving their security posture. Greater knowledge of the guidance that is available could help both federal and private sector decision makers better coordinate their efforts to protect critical cyber- reliant assets. Finally, the sector-specific cybersecurity guidance that we compared was substantially similar to guidance applicable to federal agencies. We recommend that the Secretary of Homeland Security, in collaboration with the sector-specific agencies, sector coordinating councils, and the owners and operators of cyber-reliant critical infrastructure for the associated seven critical infrastructure sectors, determine whether it is appropriate to have key cybersecurity guidance listed in sector plans or annual plans and adjust planning guidance accordingly to suggest the inclusion of such guidance in future plans. DHS provided written comments on a draft of our report (see app. III), signed by DHS’s Director of Departmental GAO/OIG Liaison Office. In its comments, DHS concurred with our recommendation and stated that the department will initiate steps to implement it. In particular, DHS stated that it will work with its public and private sector partners to determine whether it is appropriate to have cybersecurity guidance drafted for each sector. DHS also indicated that the National Cyber Security Division will explore these issues with the cross-sector community. NRC also provided written comments on a draft of our report (see app. IV), signed by the Executive Director for Operations. NRC generally agreed with the draft report. DHS, NRC, the Department of Commerce, the Department of the Treasury, EPA, FERC, FFIEC, and HHS, also provided technical comments, which we incorporated, where appropriate. In addition, we provided relevant sections of the draft report to private sector participants. We received technical comments via e-mail from some, but not all, of these parties and incorporated their comments, where 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 appropriate congressional committees; the Secretaries of Commerce, Energy, Health and Human Services, Homeland Security, and the Treasury; Administrator, Environmental Protection Agency; Executive Director, Federal Energy Regulatory Commission; Executive Secretary, Federal Financial Institutions Council; Executive Director for Operations, Nuclear Regulatory Commission; Director, Office of Management and Budget; and other interested congressional and private sector 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 Gregory Wilshusen at (202) 512-6244, or by e-mail at wilshuseng@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Our objectives were to identify (1) cybersecurity guidance for entities within selected critical infrastructure sectors, (2) the extent to which implementation of cybersecurity guidance is enforced and promoted within selected sectors, and (3) areas of commonalities and differences that exist between sectors’ cybersecurity guidance and guidance applicable to federal agencies. We focused our efforts on seven sectors: banking and finance; communications; energy (electricity and oil and natural gas); health care and public health; information technology; nuclear reactors, materials, and waste; and water. We selected these seven sectors because they are cyber-reliant or have a pervasive impact on the public’s health and welfare. This determination was based on our analysis of the critical infrastructure sectors and interviews with agency officials and representatives from the sector coordinating councils. Our findings and conclusions are based on information gathered from the seven critical infrastructure sectors and are not generalizable to a larger population. To identify cybersecurity guidance for entities within the critical infrastructure sectors, we identified and analyzed cybersecurity standards and guidance developed by federal and international standards development communities; cybersecurity policies and requirements developed by regulators for their industry; and specific industry standards, guidance, and practices developed by industry associations or groups. We interviewed sector coordinating council representatives for the seven critical infrastructure sectors to determine the cybersecurity standards used in their specific areas. On the basis of the information gathered, we developed lists of cybersecurity guidance for each sector. We provided those lists to representatives from the respective sector coordinating councils to confirm and update and to verify the applicability of the identified guidance to entities within their respective sectors. To identify the extent to which cybersecurity guidance is enforced within the selected sectors, we gathered and analyzed related GAO reports, federal laws, regulations, and regulatory guidance to determine the various types of enforcement mechanisms that can be employed to ensure compliance. In addition, we interviewed representatives from regulatory entities: the Federal Energy Regulatory Commission, the Federal Financial Institutions Examination Council, the Nuclear Regulatory Commission, the North American Electric Reliability Corporation, and the Department of Health and Human Service’s Office for Civil Rights. We also interviewed representatives from the sector coordinating councils to identify which critical infrastructure sectors have mandatory and enforceable cybersecurity guidance. To determine efforts to identify and promote cybersecurity guidance, we collected and analyzed related federal law and policy to determine the responsibilities of the Department of Homeland Security (DHS) and the other sector-specific agencies for the seven selected sectors. In addition, we collected and analyzed the most current approved sector-specific plans, annual reports, and other related documents for the seven sectors reviewed to determine the extent of cybersecurity guidance included in the plans. Further, to determine DHS and sector-specific agency efforts related to cybersecurity standards, we interviewed sector-specific agency representatives for the seven critical infrastructure sectors to understand their programs and efforts in promoting the use of cybersecurity standards, and then collected and analyzed related supporting evidence. To identify areas of commonalities and differences that exist between sectors’ cybersecurity guidance and guidance applicable to federal agencies, we selected, analyzed, and used National Institute of Standards and Technology (NIST) Special Publication 800-37, Revision 1: Guide for Applying the Risk Management Framework to Federal Information Systems, A Security Life Cycle Approach (February 2010), and NIST Special Publication 800-53, Revision 3: Recommended Security Controls for Federal Information Systems and Organizations (May 2010). On the basis of our analysis of these NIST documents, we identified key elements of managing cyber risk and 198 recommended security controls. To select the sector guidance to compare with guidance applicable to federal agencies, we judgmentally selected three subsectors from three different regulated sectors: the banking and finance (financial depositories); nuclear reactors, materials, and waste (reactors); and energy (bulk power) sectors. For each subsector, sector representatives identified the respective set of guidance as being widely used by entities in the sectors to meet cybersecurity-related regulatory requirements. We compared the sector cybersecurity guidance with NIST’s risk management elements and recommended security controls. After our initial comparison, we interviewed relevant representatives from the regulatory entities and gathered and analyzed supplemental documentation. We conducted this performance audit from October 2010 to December 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. This appendix contains tables listing cybersecurity guidance identified as applicable to entities within the seven critical infrastructure sectors: banking and finance; communications; energy (electricity and oil and natural gas); health care and public health; information technology; nuclear reactors, materials, and waste; and water. These lists should not be considered to include all cybersecurity guidance that may be available or used within the sector and include cybersecurity guidance that has been withdrawn by the publisher. Sector coordinating council representatives for each of the seven critical infrastructure sectors confirmed and provided additional examples, when appropriate, of the See cybersecurity guidance applicable to entities within their sectors.tables 7 through 13 for the specified guidance. Gregory C. Wilshusen, (202) 512-6244 or wilshuseng@gao.gov. In addition to the contact named above, Michael W. Gilmore (Assistant Director), Lon C. Chin, Wilfred B. Holloway, Franklin D. Jackson, Barbarol J. James, Lee McCracken, Krzysztof Pasternak, and John A. Spence made key contributions to this report. | Critical infrastructures are systems and assets critical to the nation's security, economy, and public health and safety, most of which are owned by the private sector. These assets rely on networked computers and systems, thus making them susceptible to cyber-based risks. Managing such risk involves the use of cybersecurity guidance that promotes or requires actions to enhance the confidentiality, integrity, and availability of computer systems. For seven critical infrastructure sectors, GAO was asked to identify (1) cybersecurity guidance for entities within the sectors, (2) the extent to which implementation of this guidance is enforced and promoted, and (3) areas of commonalities and differences between sector cybersecurity guidance and guidance applicable to federal agencies. To do this, GAO collected and analyzed information from responsible private sector coordinating councils; federal agencies, including sector-specific agencies that are responsible for coordinating critical infrastructure protection efforts; and standards-making bodies. In addition, GAO compared a set of guidance in each of three subsectors with guidance applicable to federal agencies. A wide variety of cybersecurity guidance is available from national and international organizations for entities within the seven critical infrastructure sectors GAO reviewed--banking and finance; communications; energy; health care and public health; information technology; nuclear reactors, material, and waste; and water. Much of this guidance is tailored to business needs of entities or provides methods to address unique risks or operations. In addition, entities operating in regulated environments are subject to mandatory standards to meet their regulatory requirements; entities operating outside of a regulatory environment may voluntarily adopt standards and guidance. While private sector coordinating council representatives confirmed lists of cybersecurity guidance that they stated were used within their respective sectors, the representatives emphasized that the lists were not comprehensive and that additional standards and guidance are likely used. Implementation of cybersecurity guidance can occur through a variety of mechanisms, including enforcement of regulations and voluntarily in response to business incentives; however, sector-specific agencies could take additional steps to promote the most applicable and effective guidance throughout the sectors. A number of subsectors within the sectors included in GAO's review, such as electricity in the energy sector, are required to meet mandatory cybersecurity standards established by regulation under federal law or face enforcement mechanisms, such as civil monetary penalties. By contrast, entities not subject to regulation may voluntarily implement cybersecurity guidance to, among other things, reduce risk, protect intellectual property, and meet customer expectations. Federal policy establishes the dissemination and promotion of cybersecurity-related standards and guidance as a goal to enhancing the security of our nation's cyber-reliant critical infrastructure. DHS and the other lead agencies for the sectors selected for review have disseminated and promoted cybersecurity guidance among and within sectors. However, DHS and the other sector-specific agencies have not identified the key cybersecurity guidance applicable to or widely used in each of their respective critical infrastructure sectors. In addition, most of the sector-specific critical infrastructure protection plans for the sectors reviewed do not identify key guidance and standards for cybersecurity because doing so was not specifically suggested by DHS guidance. Given the plethora of guidance available, individual entities within the sectors may be challenged in identifying the guidance that is most applicable and effective in improving their security posture. Improved knowledge of the guidance that is available could help both federal and private sector decision makers better coordinate their efforts to protect critical cyber-reliant assets. Sector cybersecurity guidance that GAO compared in three subsectors within the banking and finance, energy, and nuclear sectors is substantially similar to guidance applicable to federal agencies. Specifically, one set of guidance for each subsector, along with supplementary documents, addressed most risk management steps and most recommended security controls that are specified for federal information systems in guidance from the Commerce Department's National Institute of Standards and Technology. GAO is recommending that the Department of Homeland Security (DHS), in collaboration with public and private sector partners, determine whether it is appropriate to have cybersecurity guidance listed in sector plans. DHS concurred with GAO's recommendation. GAO is recommending that the Department of Homeland Security (DHS), in collaboration with public and private sector partners, determine whether it is appropriate to have cybersecurity guidance listed in sector plans. DHS concurred with GAOs recommendation. |
OMB plays a central role in setting federal financial management policy and guidance. The CFO Act of 1990 established OMB’s Office of Federal Financial Management (OFFM), which has responsibility to provide overall direction and leadership to the executive branch on financial management matters by establishing financial management policies and requirements, and by monitoring the establishment and operation of federal government financial management systems. Among the key issues OFFM addresses in addition to financial management systems, are agency and governmentwide financial reporting, asset management, grants management, improper payments, performance measurement, single audits, and travel and purchase cards. Within OFFM, the Federal Financial Systems Branch is responsible for orchestrating all of the elements of the financial systems governmentwide into a coherent, coordinated architecture. These elements include agency financial management systems and JFMIP standards; interfaces between agency financial systems and other systems that support business processes (e.g., human resources systems, procurement systems, databases supporting performance management); common financial management services, including e-Travel, e-Learning, Contractor Central Registry, Intragovernmental Payment and Collection System, and Electronic Certification System; and governmentwide accounting and other data consolidation systems. Another office in OMB, the Office of Electronic Government and Information Technology, has responsibility for providing overall leadership and direction to the executive branch on electronic government. In particular, this OMB office oversees implementation of IT throughout the federal government, including monitoring and consulting on agency technology efforts; advising the OMB Director on the performance of IT investments, as well as identifying opportunities for joint agency and governmentwide IT projects; and overseeing the development of enterprise architectures within and across agencies, which is being fulfilled through the Federal Enterprise Architecture. This office also shares statutory IT management responsibilities with the Office of Information and Regulatory Affairs, which OMB was required to establish under the Paperwork Reduction Act of 1995. Finally, OMB is the preparer of the President’s budget and provides instructions to executive branch agencies to submit budget-related information in accordance with the requirements of OMB Circular No. A-11, Preparation, Submission and Execution of the Budget. OMB is responsible for reviewing and evaluating IT spending across the federal government and uses the IT spending information submitted by the agencies during the budget formulation process to review requests for agency financial management systems and other IT spending. Major agency IT investments are reported to OMB individually. OMB Circular No. A-11 defines a major IT investment as a system or project that requires special management attention because of its importance to an agency’s mission, or has significant program or policy implications, among other criteria. Financial management systems costing more than $500,000 annually are considered major IT investments. OMB Circular No. A-11 also requires agencies to use Exhibit 300, Capital Asset Plan and Business Case, to describe the business case for the investment, which serves as the primary means of justifying IT investment proposals as well as managing IT investments once they are funded. Best practices are tried and proven methods, processes, techniques, and activities that organizations define and use to minimize risks and maximize chances for success. As we have previously reported, using best practices related to IT acquisitions can result in better outcomes—including cost savings, improved service and product quality, and ultimately, a better return on investment. We and others, such as the Software Engineering Institute (SEI), have identified and promoted the use of a number of best practices associated with acquiring IT systems. For the purposes of this report, we have identified various elements of IT management and categorized them as disciplined processes, human capital and other IT management practices that are critical elements for minimizing the risks related to financial management system implementations. These areas are interrelated and interdependent, collectively providing an agency with a comprehensive understanding both of current business approaches and of efforts (under way or planned) to change these approaches and a means to implement those changes. Understanding the relationships among these areas can help an agency determine how it is applying its resources, analyze how to redirect these resources in the face of change, implement such redirections, and measure success. With this decision-making capability, the agency is better positioned to deploy financial management systems and direct appropriate responses to unexpected changes in its environment. The following sections provide additional background information on the key elements of IT management discussed in this report, including disciplined processes, human capital and other IT management practices. Disciplined processes are fundamental to successful systems implementation efforts and have been shown to reduce the risks associated with software development and acquisition to acceptable levels. A disciplined software development and acquisition process can maximize the likelihood of achieving the intended results (performance) within established resources (costs) on schedule. Although there is no standard set of practices that will ever guarantee success, several organizations, such as the SEI and the Institute of Electrical and Electronic Engineers (IEEE), as well as individual experts, have identified and developed the types of policies, procedures, and practices that have been demonstrated to reduce development time and enhance effectiveness. The key to having a disciplined system development effort is to have disciplined processes in multiple areas, including requirements management, testing, data conversion and system interfaces, configuration, risk and project management, and quality assurance. Effective processes should be implemented in each of these areas throughout the project life cycle because change is constant. Effectively implementing the disciplined processes necessary to reduce project risks to acceptable levels is difficult to achieve because a project must effectively implement several best practices, and inadequate implementation of any one may significantly reduce or even negate the positive benefits of the others. Figure 1 shows how organizations that do not effectively implement the disciplined processes lose the productive benefits of their efforts as a project continues through its development and implementation cycle. Although undisciplined projects show a great deal of what appears to be productive work at the beginning of the project, the rework associated with defects begins to consume more and more resources. In response, processes are adopted in the hopes of managing what later turns out, in reality, to have been unproductive work. Generally, these processes are “too little, too late” because sufficient foundations for building the systems were not done or not done adequately. Experience in both the private sector and the government has shown that projects for which disciplined processes are not implemented at the beginning then must be implemented later, when it takes more time and they are less effective. As shown in figure 1, a major consumer of project resources in undisciplined efforts is rework (also known as thrashing). Rework occurs when the original work has defects or is no longer needed because of changes in project direction. Disciplined organizations focus their efforts on reducing the amount of rework because it is expensive. Fixing a requirements defect after the system is released costs anywhere from 10 to 100 times the cost of fixing it when the requirements are defined. Projects that do not successfully address rework will eventually spend even more effort on rework and the associated processes rather than on productive work. In other words, the project will continually require reworking items. People—human capital—are a critical element to transforming organizations to meet the challenges of the 21st century. Recognizing this, we first added strategic human capital management as a governmentwide high-risk issue in January 2001, and although progress has been made, continued to include it on the latest high-risk list issued in January 2005. Strategic human capital management for financial management projects includes organizational planning, staff acquisition, and team development. Human capital planning is necessary for all stages of the system implementation. It is important that agencies incorporate strategic workforce planning by (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining an organization’s total workforce to meet the needs of the future. This incorporates a range of activities from identifying and defining roles and responsibilities, to identifying team members, to developing individual competencies that enhance performance. It is essential that an agency take the necessary steps to ensure that it has the human resources to design, implement, and operate a financial management system. In addition, organizational change management, which is the process of preparing users for the business process changes that usually accompany implementation of a new system, is another important human capital element. Strategic workforce planning is essential for achieving the mission and goals of financial management system projects. As we have reported, there are five key principles that strategic workforce planning should address: Involve top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan. Determine the critical skills and competencies that will be needed to achieve current and future programmatic results. Develop strategies that are tailored to address gaps in the number, deployment, and alignment of human capital approaches for enabling and sustaining the contributions of all critical skills and competencies. Build the capability needed to address administrative, educational, and other requirements important to support workforce planning strategies. Monitor and evaluate the agency’s progress toward its human capital goals and the contribution that human capital results have made toward achieving programmatic results. Having adequate and sufficient human resources with the requisite training and experience to successfully implement a financial management system is another critical success factor. According to OMB, qualified federal IT project managers are our first line of defense against the cost overruns, schedule slippage, and poor performance that threaten agencies’ ability to deliver efficient and effective services to citizens. In July 2004, OMB issued a memorandum to help agencies comply with fiscal year 2005 budget guidance that instructed agencies to ensure “by September 30, 2004, all major projects are managed by project managers qualified in accordance with CIO Council guidance.” The CIO Council’s Federal IT Project Manager Guidance Matrix and Federal IT Project Management Validation define levels of complexity for IT projects/systems, identify appropriate competencies and experience, suggest education and training sources, and serve as a tool for validating IT project manager credentials. IT project managers are expected to achieve and demonstrate baseline skills in applicable competency areas listed in the Office of Personnel Management (OPM) Interpretive Guidance for Project Manager Positions. The OMB memorandum also required agencies to submit a plan to meet the guidance on project manager qualifications and document the approach, milestones, and schedule. The plans should also follow OPM’s Workforce Planning Model and Human Capital Assessment and Accountability Framework. Changing an organization’s business processes is not an easy task. Managing culture and process change in large, diverse, organizationally and geographically decentralized agencies is a much greater challenge. Frequently, the greatest difficulties lie not in managing the technical or operational aspects of change, but in managing the human dimensions of change. Some experts caution that unless planning and accountability for change management are given a separate focus, the efforts will not be managed well. Management roles in implementing a new system include establishing business goals, realistic expectations, accountability, and leading cultural change necessary to accept the capabilities of a new system. During the implementation phase especially, agency executives must be in the forefront in dealing with the social, psychological, and political resistance to changing the way work is done. Executives must also recognize that their own roles and responsibilities may need to undergo change as well. Weaknesses in other IT management processes also increase the risks associated with financial management system implementation efforts. Developing an enterprise architecture, establishing IT investment management policies, and addressing information security weaknesses are critical to ensuring successful system implementation. OMB Circular No. A-130, which establishes executive branch policies pursuant to the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996 among other laws, requires agencies to use architectures. A well-defined enterprise architecture provides a clear and comprehensive picture of the structure of any enterprise by providing models that describe in business and technology terms how the entity operates today and predicts how it will operate in the future. It also includes a plan for transitioning to this future state. Enterprise architectures are integral to managing large-scale programs. Managed properly, an enterprise architecture can clarify and help optimize the interdependencies and relationships among an organization’s business operations and the underlying IT infrastructure and applications that support these operations. Employed in concert with other important management controls, architectures can greatly increase the chances that organizations’ operational and IT environments will be configured to optimize mission performance. To aid agencies in assessing and improving enterprise architecture management, we issued guidance establishing an enterprise architecture management framework. The underpinning of this framework is a five-stage maturity model outlining steps toward achieving a stable and mature process for managing the development, maintenance, and implementation of an enterprise architecture. IT investment management provides for the continuous identification, selection, control, life-cycle management, and evaluation of IT investments. The Clinger-Cohen Act lays out specific aspects of the process that agency heads are to implement to maximize the value of the agency’s IT investments. In addition, OMB and GAO have issued guidance for agencies to use in implementing the Clinger-Cohen Act requirements for IT investment management. For example, we issued guidance establishing an IT investment management framework. This framework is also a maturity model composed of five progressive stages of maturity that an agency can achieve in its IT investment management capabilities. These stages range from creating investment awareness to developing a complete investment portfolio to leveraging IT for strategic outcomes. The framework can be used both to assess the maturity of an agency’s investment management processes and as a tool for organizational improvement. The Federal Information Security Management Act of 2002 provides the overall framework for ensuring the effectiveness of information security controls that support federal operations and assets and requires agencies and OMB to report annually to the Congress on their information security programs. OMB Circular No. A-130 also requires agencies to protect information commensurate with the risk and magnitude of the harm that would result from the loss, misuse, or unauthorized access to or modification of such information. The reliability of operating environments, computerized data, and the systems that process, maintain, and report these data is a major concern to federal entities that have distributed networks that enable multiple computer processing units to communicate with each other. Such distributed networks increase the risk of unauthorized access to computer resources and possible data alteration. Effective departmentwide information security controls will help reduce the risk of loss due to errors, fraud, and other illegal acts, disasters, or incidents that cause systems to be unavailable. Inadequate security and controls can adversely affect the reliability of the operating environments in which financial management systems and their applications operate. We reviewed numerous prior GAO and IG reports and identified several problems related to agencies’ implementation of financial management systems in three recurring and overarching themes: disciplined processes, human capital and other IT management practices. Simply put, the agencies were not following best practices in these three critical areas. The predictable result of not effectively addressing these three areas has been numerous agency systems throughout the federal government that did not meet their cost, schedule, and performance objectives. We have issued governmentwide reports on other IT management practices including agencies’ enterprise architecture, IT investment management, and information security and therefore will not be addressing those issues further in this report. However, broad-based actions are needed to address the problems repeatedly experienced at the agencies as they continue to struggle to implement new financial management systems. Many of the systems we reviewed had at least one problem in each of the three critical areas. While there was some overlap in these three areas, we selected examples that best illustrate the specific problems in each area. From our review of over 40 prior reports, we identified a number of key problem areas in disciplined processes related to requirements management, testing, data conversion and system interfaces, risk management, and project management activities. Inadequate implementation of disciplined processes can manifest itself in many ways when implementing a financial management system and the failure to properly implement disciplined processes in one area can undermine the work in all the other areas and cause significant problems. Table 2 summarizes and provides examples for some of the problems we identified from prior reports that can be expected when agencies do not effectively implement the disciplined processes necessary to manage their financial management system implementation projects. The following provides more specific details on three of the examples of financial management system implementation problems related to the lack of disciplined processes. In May 2004, we first reported our concerns with the requirements management and testing processes used by the Army in the implementation of the Logistics Modernization Program and the problems being encountered after it became operational in July 2003. At the time of our initial report, the Army decided that future deployments would not go forward until they had reasonable assurance that the deployed system would operate as expected for a given deployment. However, as we reported in June 2005, the Army had not effectively addressed its requirements management and testing problems and data conversion weaknesses had hampered the Army’s ability to address the problems that need to be corrected before the system can be fielded to other locations. For example, the system cannot properly recognize revenue nor bill customers. Data conversion problems resulted in general ledger account balances that were not properly converted to the new system in July 2003, and these differences remained unresolved almost 18 months later. These weaknesses adversely affected the Army’s ability to set the prices for the work performed at the Tobyhanna Army Depot. In addition, data conversion problems resulted in excess items being ordered and shipped to Tobyhanna. As noted in our June 2005 report, three truckloads of locking washers (for bolts) were mistakenly ordered and received, and subsequently returned, because of data conversion problems. As a result of the problems, the Army has implemented error-prone, time-consuming manual workarounds as a means to minimize disruption to critical operations; however, the depot’s financial management operations continue to be adversely affected by systems problems. NASA has struggled to implement a modern integrated financial management system. After two failed efforts over 12 years and about $180 million, NASA embarked on a third effort that is expected to cost about $983 million. We have previously identified problems and made recommendations to NASA related to requirements, testing, and project management as well as problems with human capital and other IT management issues related to this effort. For example, NASA had not implemented quantitative metrics to help gauge the effectiveness of its requirements management process. Such metrics would be particularly important for NASA to address the root causes of system defects and be reasonably assured that its processes would result in a system that meets its business needs. However, in our September 2005 report, we found that overall progress implementing our recommendations had been slow. From our perspective, of the 45 recommendations we made in prior reports, NASA had taken sufficient action to close 3 recommendations and had partially implemented 13, but 29 recommendations remained open. Furthermore, in November 2004, NASA’s independent auditor reported that NASA’s new financial system, which was implemented in June 2003, could not produce auditable financial statements for fiscal year 2004 and did not comply with the requirements of FFMIA. Key areas of concern included the core financial module’s inability to (1) produce transaction-level detail in support of financial statement account balances, (2) identify adjustments or correcting entries, and (3) correctly and consistently post transactions to the right accounts. In August 2004, the VA IG reported that the effect of transferring inaccurate data to its new core financial system at a pilot location interrupted patient care and medical center operations. This raised concerns that similar conversion problems would occur at other VA facilities if the conditions identified were not addressed and resolved nationwide prior to roll out. Some of the specific conditions the IG noted were that contracting and monitoring of the project were not adequate, and the deployment of the new system encountered multiple problems including those related to software testing, data conversion and system interfaces, and project management. When the new financial system was deployed at the pilot location in October 2003, it did not function as project managers had expected because of inaccurate or incomplete vendor and inventory system data. As a result of these problems, patient care was interrupted by supply outages and other problems. The inability to provide sterile equipment and needed supplies to the operating room resulted in the cancelation of 81 elective surgeries for a week in both November 2003 and February 2004. In addition, the operating room was forced to operate at two-thirds of its prior capacity. Because of the serious nature of the problems raised with the new system, VA management decided to focus on transitioning back to the previous financial management software at the pilot location and assemble a senior leadership team to examine the results of the pilot and make recommendations to the VA Secretary regarding the future of the system. Effective human capital management is critical to the success of systems implementations. As we previously reported in our Executive Guide: Creating Value Through World-class Financial Management, having staff with the appropriate skills is key to achieving financial management improvements, and managing an organization’s employees is essential to achieving results. By not identifying staff with the requisite skills to implement such systems and by not identifying gaps in needed skills and filling them, agencies reduce their chances of successfully implementing and operating new financial management systems. For example, in our prior report on building the IT workforce, we found that in the 1990s the initial rounds of downsizing were set in motion without considering the longer-term effects on agencies’ IT performance capacity. Additionally, a number of individual agencies drastically reduced or froze their hiring efforts for extended periods. Consequently, following a decade of downsizing and curtailed investments in human capital, federal agencies face skills, knowledge, and experience imbalances, especially in their IT workforces. Without corrective action, this situation will worsen, especially in light of the numbers of federal civilian workers becoming eligible to retire in the coming years. In this regard, we are emphasizing the need for additional focus on key problem areas we identified from prior reports including strategic workforce planning, human resources, and change management. Examples for some of the human capital management problems we identified in prior reports that hamper the implementation of new financial management systems are summarized in table 3. The following provides more specific details on two of the examples of the types of human capital management problems we found. In May 2002, we first reported that the Customs Modernization Office did not have the people in place to perform critical system acquisition functions and did not have an effective strategy for meeting its human capital needs. Customs had decided to compress its time frame for delivering its new system from 5 to 4 years and was taking a schedule- driven approach to acquiring the system because of the system’s national importance. This exacerbated the level of project risk by introducing more overlap among incremental system releases and stretching critical resources. In our most recent report issued in March 2005, we found that although Customs had developed a staffing plan, it had not been approved and was already out of date because the modernization office subsequently implemented a reorganization that transferred government and contractor personnel to the modernization office. We also observed that changes in roles and responsibilities had the modernization office and the contractor sharing development duties of the new system. Finally, Customs developed a revised organizational change approach with new change management activities, but key actions associated with the revised approach were not planned for implementation because the funding request for fiscal year 2005 did not fully reflect the revised approach. In July 2004, Customs extended delivery of the last release from fiscal year 2007 to fiscal year 2010, adding a new release for screening and targeting, and increasing the life-cycle cost estimate by about $1 billion to $3.1 billion. The new schedule reflected less overlap between future releases. While Customs, which is now under the Department of Homeland Security, has taken important actions to help address release-by-release cost and schedule overruns that we previously identified, we concluded that it was unlikely that these actions would prevent the past pattern of overruns from recurring because the Department of Homeland Security had relaxed system quality standards, so that milestones were being passed despite material system defects, and because correcting these defects will ultimately require the program to expend resources, such as people and test environments, at the expense of later system releases (some of which are now under way). We reported, in September 2004, that staff shortages and limited strategic workforce planning resulted in HHS not having the resources needed to effectively design and operate its new financial management system. HHS had taken the first steps in strategic workforce planning. For example, the Centers for Disease Control and Prevention (CDC), where the first deployment was scheduled, was the only operating division that had prepared a competency report, but a skills gap analysis and training plan for CDC had not been completed. In addition, many government and contractor positions on the implementation project were not filled as planned. For example, an independent verification and validation contractor reported that some key personnel filled multiple positions and their actual available time was inadequate to perform the allocated tasks. As a result, some personnel were overworked, which, according to the independent verification and validation contractor could lead to poor morale. The organization chart for the project showed that the project team was understaffed and that several integral positions were vacant or filled with part-time detailees. While HHS and the systems integrator had taken measures to acquire additional human resources for the implementation of the new financial management system, we concluded that scarce resources could significantly jeopardize the project’s success and lead to several key deliverables being significantly behind schedule. In September 2004, HHS decided to delay its first scheduled deployment at CDC by 6 months in order to address these and other issues identified with the project. We identified a number of key problems related to other IT management practices. Specifically, we found that in planning and developing new financial management systems, agencies had not adequately considered their existing IT management processes and framework. Through our research into IT management best practices and our evaluation of agency IT management performance, we have identified a set of essential and complementary management disciplines. These include key areas where we found problems such as enterprise architecture, investment management, and information security, among others. Using the results of this research and evaluation, we have developed various management frameworks and guides and reported on numerous IT management weaknesses at individual agencies. Table 4 summarizes and provides examples for some of the key problems we found described in prior reports on financial management system implementations related to other IT management areas not previously discussed. The following provides more specific details on two of the examples of other problems related to IT management that have had an impact on financial management system implementation projects. For several years, we have reported that deficiencies in DOD’s enterprise architecture and IT investment management policies are contributing factors to DOD’s stovepiped, duplicative, and nonintegrated systems environment. In May 2004, we reported that we had not seen any significant change in the content of DOD’s architecture or in DOD’s approach to investing billions of dollars annually in existing and new systems. Few actions had been taken to address prior recommendations, which were aimed at improving DOD’s plans for developing the next version of the architecture and implementing the institutional means for selecting and controlling both planned and ongoing business systems investments. In April 2005, we reported that DOD still did not have an effective departmentwide management structure for controlling business investments despite DOD requesting over $13 billion in fiscal year 2005 to operate, maintain, and modernize its existing duplicative business systems. In addition, because DOD lacked a well-defined business enterprise architecture and transition plan, billions of dollars continued to be at risk of being spent on systems that would be duplicative, not interoperable, cost more to maintain than necessary, and would not optimize mission performance and accountability. In July 2005, we reported that despite spending almost 4 years and about $318 million, DOD still did not have an effective architecture program, and as a result its modernization program remained a high risk. We reported, in February 2005, that OPM had implemented selected processes in the areas of systems acquisition, investment management, and information security; however, many processes were not sufficiently developed, were still under development, or were planned for future development. Although OPM had an executive steering committee chaired by the deputy associate director of the Center for Retirement and Insurance Services that acted as an IT investment management board for the new retirement system, program officials were not aware of formal policies or procedures guiding the board’s oversight responsibilities or activities. Agency officials stated that they would define such a governance structure for the retirement system project during the contract award process. In addition, the agency had not yet developed security plans for the licensed technology and data conversion portions of the new system. Agency officials said they did not have detailed security requirements for the licensed technology portion of the new system, although the request for proposals identified the need for high-level security requirements. They planned to develop detailed security requirements after awarding the licensed technology contract to a vendor. Without fully developed security plans and security requirements for the licensed technology and data conversion portions of the new system, OPM increased the risk that both it and its vendors would not meet information security needs for these portions of the program expected to be implemented in fiscal year 2008. As the federal organization with key responsibility for federal financial management systems, OMB has undertaken a number of initiatives related to acquiring and implementing financial management system capabilities. Some of these initiatives are in collaboration with the CIO and CFO Councils and are broad-based attempts to reform financial management operations across the federal government. While reforming federal financial management is an undertaking of tremendous complexity, it presents great opportunities for improvements in financial management system implementations and related business operations. Notably, OMB has developed and continues to evolve governmentwide Federal Enterprise Architecture products and has required a mapping of agency architectures to this federal architecture as part of the budget review process. Another key OMB initiative is referred to as the lines of business and promotes streamlining common systems to enhance the government’s performance and services, such as establishing centers of excellence to consolidate financial management activities for major agencies through cross-servicing arrangements. The advantages of this approach are many, including the implementation of standard business processes and focusing system acquisition, development, and maintenance activities at select agencies or entities with experience that have the necessary resources to reduce the risks associated with such efforts. Furthermore, certain activities and responsibilities performed by JFMIP prior to its termination have been reassigned to OMB’s OFFM, the Financial Systems Integration Office, and a CFO Council Committee providing guidance and oversight. However, as discussed in the next section, we identified four key concepts that are not yet fully developed and integrated in OMB’s initiatives and related processes. Table 5 highlights some of the foremost initiatives under way at OMB and their potential strengths. In 2002, OMB established the Federal Enterprise Architecture Program Management Office to develop a Federal Enterprise Architecture according to a collection of five reference models. These models are intended to facilitate governmentwide improvement through cross-agency analysis and the identification of duplicative investments, gaps, and opportunities for collaboration, interoperability, and integration within and across government agencies. According to OMB, the result will be a more citizen-centered, customer-focused government that maximizes technology investments to better achieve mission outcomes. The Federal Enterprise Architecture reference models are summarized in table 6. In May 2005, the five reference models were combined into the Consolidated Reference Model document to compose a framework for describing important elements of the Federal Enterprise Architecture in a common and consistent way. OMB views the Federal Enterprise Architecture not as a static model, but as a program, built into the annual budget process to repeatedly and consistently improve all aspects of government service delivery. OMB officials acknowledged that they are still mapping out the Federal Enterprise Architecture and making it more robust and recognized that some lines of business have fleshed out their areas in more detail than others. In prior testimony on the Federal Enterprise Architecture, we recognized that OMB and the CIO Council have made important progress, but that hard work lies ahead to ensure that the Federal Enterprise Architecture is appropriately described, matured, and used. The development of the Federal Enterprise Architecture has continued to evolve and OMB has been promoting the adoption of the Federal Enterprise Architecture. For example, for the fiscal year 2007 budget submission, agencies will be required to use predetermined codes to link their major IT investments on Exhibit 53 to the Federal Enterprise Architecture. For fiscal year 2005, agencies were required to use the Federal Enterprise Architecture Performance Reference Model to identify performance measurements for each new major IT investment. As we have previously testified, questions remain regarding the nature of the Federal Enterprise Architecture, the relationship of agency enterprise architectures to the Federal Enterprise Architecture, and the security aspects of the Federal Enterprise Architecture. Therefore, we will not be addressing these issues further from a governmentwide perspective in this report. Building upon the efforts of the Federal Enterprise Architecture program, OMB and designated agency task forces have launched the lines of business initiative. This initiative seeks to develop business-driven common solutions for six lines of business that span across the federal government. OMB and the lines of business task forces plan to use enterprise architecture-based principles and best practices to identify common solutions for business processes or technology-based shared services to be made available to government agencies. Driven from a business perspective rather than a technology focus, the solutions are expected to address distinct business improvements to enhance the government’s performance and services for citizens. The end results of the lines of business efforts are expected to save taxpayer dollars, reduce administrative burden, and significantly improve service delivery. We have long supported and called for such initiatives to standardize and streamline common systems, which can reduce costs and, if done correctly, can also improve accountability. OMB officials from both OFFM and the Electronic Government office told us that they worked collaboratively to develop the financial management line of business along with an interagency task force. The interagency task force recommended the establishment of governmentwide service providers in the areas of financial management and human resources management. The financial management line of business raises a number of issues that have far- reaching implications for the government and private sector application service providers. This concept has commonly been used in the private sector where application service providers provide services such as payroll, sales force automation, and human resource applications to many corporate clients. The interagency task force analysis estimated that savings of more than $5 billion can be expected over a 10-year time frame through consolidation of financial management and human resources systems and the standardization and optimization of associated business processes and functions. To help realize these benefits, OMB evaluated agencies’ business cases submitted as part of the fiscal year 2006 budget process. On the basis of the review, the following four agencies were designated as governmentwide financial management application service providers, which OMB refers to as centers of excellence. Department of the Interior (National Business Center) General Services Administration Department of the Treasury (Bureau of the Public Debt’s Administrative Resource Center) Department of Transportation (Enterprise Services Center) The National Business Center, the General Services Administration, and the Bureau of the Public Debt have significant experience providing financial management services to other federal entities. For a number of years, these entities have provided financial management services— primarily to smaller federal agencies such as the Nuclear Regulatory Commission, the Office of Government Ethics, and the Panama Canal Commission. The Department of Transportation plans to utilize its newly implemented financial management system to provide services to other agencies. OMB officials told us that, at a minimum, centers of excellence must be able to support, or must use, core financial system software that has passed the most recent qualification test of the Financial Systems Integration Office, which is the current entity that performs many of the roles and responsibilities of the former JFMIP Program Management Office as we discuss below. Centers of excellence may provide related maintenance, interfaces with feeder systems, and transaction processing. Other services may also be offered, including hosting and other financial applications such as payroll and travel. OMB also indicated that it plans to explore using private sector application service providers to serve as centers of excellence. OMB expects to manage the migrations of agencies to centers of excellence using the agencies’ business cases submitted as part of the annual budget process. According to OMB, agencies that submit business cases with proposals to develop new financial systems or significantly update or enhance current financial systems are prime candidates for moving to a financial management center of excellence. The general principle OMB plans to follow is that agencies should migrate to a financial management center of excellence when it is cost effective to do so and they have maximized the return on investment in the current system, which averages about 5 to 7 years. OMB officials told us that several major executive branch agencies are considering moving to a financial management center of excellence. In August 2005, OPM was the first large agency to announce its plans to move to a designated center of excellence. At the time of our review, OPM was still in the planning phase; although it had selected the Bureau of the Public Debt as the provider, it did not yet have a project plan. OPM officials recognized that moving to a center of excellence at the beginning of a fiscal year and not converting mid-year was a best practice they planned to follow. In addition, at the time of our review, the Environmental Protection Agency was in the planning and acquisition phase of its Financial System Modernization Project. As part of its best- value determination, the Environmental Protection Agency was considering the designated centers of excellence as well as private sector providers for software, integration, and hosting and had issued a draft request for quotations. Also, OMB officials stated that they helped the National Gallery of Art in preparing its solicitation for a new system, and the agency recently selected a private sector firm as its application service provider. OMB expects that most agencies will move to a center of excellence or private sector firm within the next 7 to 8 years. In OMB Circular No. A-11, for fiscal year 2007 OMB has asked agencies to provide an overview of their current and future financial management systems framework, including migration strategies for moving to a financial management center of excellence. In an effort to eliminate duplicative roles and streamline financial management improvement efforts, the four principals of JFMIP agreed to realign JFMIP’s responsibilities for financial management policy and oversight as described in a December 2004 OMB memorandum. Some of the former responsibilities of JFMIP, such as issuing systems requirements, were to be placed under the authority of OFFM and a renamed CFO Council committee—the Financial Systems Integration Committee. As a result of the realignment, JFMIP ceased to exist as a separate organization, although the principals will continue to meet at their discretion consistent with the Budget and Accounting Procedures Act of 1950 (codified, in part, at 31 U.S.C. §3511(d)). Under the realignment announced in December 2004, the JFMIP Program Management Office was to report to the chair of the CFO Council’s Financial Systems Integration Committee. This reporting relationship subsequently changed. At the request of the OMB Controller, the CFO at the Department of Labor now chairs the Financial Systems Integration Committee and is the leading agency sponsor of the financial management line of business. Two subcommittees were also established under the announced realignment: Configuration Control Subcommittee—to focus on interface Transaction Processing Standardization Subcommittee—to support interagency development of functional requirements for the software certification process. OMB officials indicated that the roles and responsibilities of the two subcommittees under the Financial Systems Integration Committee will likely continue to evolve. However, the full committee will periodically evaluate the subcommittees and whether they are well aligned and still needed or if additional subcommittees are needed. Other significant responsibilities of the former JFMIP Program Management Office, which was previously managed by the JFMIP executive director using funds provided by the CFO Council, were shifted to the Financial Systems Integration Office (FSIO), which was established with staff from the original JFMIP Program Management Office. The FSIO will now report to the FSIO executive director, who will report to the OMB Controller. Before the realignment, the JFMIP Program Management Office was responsible for the testing and certification of commercial off- the-shelf (COTS) core financial systems for use by federal agencies and coordinating the development and publication of functional requirements for financial management systems, among other things. OMB officials expect that the FSIO will continue to focus on core financial systems and still be responsible for certification and testing of core systems, but they plan to evaluate the effectiveness of the certification and testing function. In addition, OMB has recognized the need for standardization and the inclusion of key stakeholders in developing systems requirements and processes, but considers it a long-term goal. The FSIO will develop systems requirements and the Financial Systems Integration Committee will be responsible for advising OFFM on the systems requirements. OFFM will now be responsible for issuing new systems requirements. According to OMB officials, the FSIO is reassessing the realignment plan described in the December 2004 OMB memorandum and recently developed foundational materials including the mission statement, goals, objectives, performance indicators, scope of activities, prioritization of work, budget, organizational chart, and communication plan. According to OMB officials, resources at FSIO will be aligned under the priorities identified and the office will be structured according to the new priorities. The FSIO will identify its needs for additional staff and determine how many are needed and what skill sets are appropriate. The FSIO will continue defining its priorities and evaluating the effectiveness of processes and its plans will continue to evolve. While OMB has taken steps to accomplish the Federal Enterprise Architecture, lines of business, and JFMIP realignment initiatives, as discussed in the next section, it is generally at the early stages of implementation and a firm foundation has not yet been established to address the long-standing problems that have impeded success. The key for federal agencies to avoid the long-standing problems that have plagued financial management system improvement efforts is to address the foremost causes of those problems and adopt solutions that reduce the risks associated with these efforts to acceptable levels. Although OMB has articulated an approach for reforming financial management systems governmentwide under its financial management line of business and JFMIP realignment initiatives, implementing these initiatives will be complex and challenging. OMB has correctly recognized that enhancing the government’s ability to implement financial management systems that are capable of providing accurate, reliable, and timely information on the results of operations needs to be addressed as a governmentwide solution, rather than as individual agency stove-piped efforts designed to meet a given entity’s needs. However, OMB has not yet fully defined and implemented the processes needed to successfully complete these initiatives. Specifically, based on industry best practices, we identified four key concepts that are not yet fully developed and integrated in OMB’s initiatives and related processes. While OMB has addressed certain elements of these best practices in its initiatives, many specific steps are not yet completed. Careful consideration of these four concepts, each one building upon the next, will be integral to the success of OMB’s initiatives and will help break the cycle of failure in implementing financial management systems. The four concepts are (1) developing a concept of operations, (2) defining standard business processes, (3) developing a strategy for ensuring that agencies are migrated to a limited number of application service providers in accordance with OMB’s stated approach, and (4) defining and effectively implementing disciplined processes necessary to properly manage the specific projects. The following sections highlight the key issues to be considered for each of the four areas. What is considered a financial management system? Who will be responsible for developing a governmentwide concept of operations and what process will be used to ensure that the resulting document reflects the governmentwide solution rather than individual agency stove-piped efforts? How will the concept of operations be linked to the Federal Enterprise Architecture? How can the federal government obtain reliable information on the costs of its financial management systems investments? A concept of operations defines how an organization’s day-to-day operations are (or will be) carried out to meet mission needs. The concept of operations includes high-level descriptions of information systems, their interrelationships, and information flows. It also describes the operations that must be performed, who must perform them, and where and how the operations will be carried out. Further, it provides the foundation on which requirements definitions and the rest of the systems planning process are built. Normally, a concept of operations document is one of the first documents to be produced during a disciplined development effort and flows from both the vision statement and the enterprise architecture. According to the IEEE standards, a concept of operations is a user-oriented document that describes the characteristics of a proposed system from the users’ viewpoint. The key elements that should be included in a concept of operations are major system components, interfaces to external systems, and performance characteristics such as speed and volume. In the case of federal financial management systems, another key element for the concept of operations would be a clear definition and scope of the financial management activities to be included. One problem with the current OMB approach for reporting is that systems that have historically been considered part of financial management, such as payroll and inventory management, are not captured under the financial management line of business when a particular agency reports IT investments to OMB as part of the annual budget submission for inclusion in the Budget of the United States Government. This is because the Federal Enterprise Architecture coding structure for agencies to use when transmitting IT investment information to OMB calls for only IT investments that support certain financial system functions to be identified as a financial management system. An effective concept of operations would help identify these omissions. Financial management systems are defined by OMB in Circulars No. A-11 and A-127 in similar terms to that found in statutes such as FFMIA. This definition is also similar to that used by DOD to define a defense business system as provided by the fiscal year 2005 Defense Authorization Act. These various sources generally consider financial management systems to be financial systems and the financial portion of mixed systems that support the interrelationships and interdependencies between budget, cost, and management functions, and the information associated with business activities. A mixed system is an information system that supports both financial and nonfinancial functions of the federal government. At DOD, for example, an estimated 80 percent of the information needed to prepare annual financial statements comes from mixed systems such as logistics, personnel, and procurement systems that are outside of the responsibility of the DOD CFO. In contrast, the Federal Enterprise Architecture’s Business Reference Model defines a financial management system as one that uses financial information to measure, operate, and predict the effectiveness and efficiency of an entity’s activities in relation to its objectives. These differences illustrate that a consistent definition of financial management systems is not being used across the federal government. One of the key challenges faced by OMB when evaluating financial management system implementation efforts is capturing all financial management system investments and their related costs. The fiscal year 2006 budget requests for IT spending totaled about $65.2 billion. Our analysis showed that, of this amount, only $3.9 billion, less than 6 percent, is reflected under the financial management mission as defined by OMB using the definition of a financial management system in its Federal Enterprise Architecture. A more comprehensive analysis of financial management system investments using the definition in OMB Circular No. A-127 that includes mixed systems such as payroll and inventory and including those considered by DOD as business systems brings the total to about $20 billion. Payroll and inventory management systems clearly support financial management activities, but these systems are not included in the financial management line of business within the Federal Enterprise Architecture framework. The payroll and inventory systems are reflected under the human resource management and supply chain management lines of business, respectively. Because of these differing definitions, the total number of systems and the respective costs associated with financial management system implementation efforts are difficult to capture. OMB officials stated that they are currently revising OMB Circular No. A-127 and will consider clarifying the definition to ensure that it is consistent with FFMIA. In addition, an effective concept of operations would help bridge this gap and facilitate the monitoring of the activity related to financial management systems. Addressing this issue would be a key factor in developing a foundation for the lines of business initiative to consolidate federal financial management systems under a limited number of application service providers. An effective concept of operations would describe, at a high level (1) how all of the various elements of federal financial systems and mixed systems relate to each other, and (2) how information flows from and through these systems. Further, a concept of operations would provide a useful tool to explain how financial management systems at the agency and governmentwide levels can operate cohesively. It would be geared to a governmentwide solution rather than individual agency stove-piped efforts. Further, it would provide a road map that can be used to (1) measure progress and (2) focus future efforts. OMB officials told us that they had developed a concept of operations, but did not know when it would be released or if it meets the criteria in the IEEE standards. Because the federal government has lacked such a document, a clear understanding of the interrelationships among federal financial systems and how the application service provider concept fits into this framework has not yet been achieved. While the Federal Enterprise Architecture, when fully populated, could provide some of this perspective, a concept of operations document presents these items from a user’s viewpoint in nontechnical terms. Such a document would be invaluable in getting various stakeholders, including those at the agency and governmentwide levels, the software vendors, and the three branches of the federal government, to understand how the financial systems are expected to operate cohesively and how they fit into “the big picture.” A concept of operations from this perspective would clarify which financial management systems should be operated at an agency level and which ones would be handled at a governmentwide level and how those two would integrate. In addition, it could identify the nature and extent of skills needed to effectively operate these systems. This would play a part in resolving some of the human capital management problems discussed previously. Another key element of a concept of operations is a transition strategy that is useful for developing an understanding of how and when changes will occur. Not only is this needed from an investment management point of view, it is a key element in the human capital problems discussed previously that revolved around change management strategies. Describing how to implement OMB’s approach for outsourcing financial management systems and the process that will be used to deactivate legacy systems that will be replaced or interfaced with a new financial management system are key aspects that need to be addressed in a transition strategy. This, in turn, allows the agencies to begin taking the necessary actions to integrate this approach into their investment management and change management processes. How can governmentwide standard business processes be developed to meet the needs of federal agencies? How can agencies be encouraged to adopt new processes, rather than selecting other methods that result in simply automating old ways of doing business? How will the standard business processes be implemented by the application service providers to provide consistency across government agencies and among the application service providers? What process will be used to determine and validate the processes needed for agencies that have unique needs? Business process models provide a way of expressing the procedures, activities, and behaviors needed to accomplish an organization’s mission and are helpful tools to document and understand complex systems. Business processes are the various steps that must be followed to perform a certain activity. For example, the procurement process would start when the agency defines its needs, issues a solicitation for goods or services and would continue through contract award, receipt of goods and services, and would end when the vendor properly receives payment. The identification of preferred business processes would be critical for standardization of applications and training and portability of staff, as well as for the software vendor community to use for software design and implementation purposes. Without standard processes, the federal government will continue to spend funds to develop individual agency stove-piped efforts that may or may not meet a given entity’s needs. To maximize the success of a new system acquisition, organizations need to consider the redesign of current business processes. As we noted in our Executive Guide: Creating Value Through World-class Financial Management, leading finance organizations have found that productivity gains typically result from more efficient processes, not from simply automating old processes. Moreover, the Clinger-Cohen Act of 1996 requires agencies to analyze the missions of the agency and, based on the analysis, revise mission-related and administrative processes, as appropriate, before making significant investments in information technology used to support those missions. Another benefit of what is often called business process modeling is that it generates better system requirements, since the business process models drive the creation of information systems that fit in the organization and will be used by end users. Other benefits include (1) providing a foundation for agency efforts to describe the business processes needed for unique missions, or to develop subprocesses to support those at the governmentwide level and (2) describing the business processes of the federal government to the vendor community for standardization. While in many cases, government business processes will be identical or very similar to processes used by the private sector, these standards should also describe processes unique to federal accounting. However, according to OMB officials, the lines of business initiative is moving forward even though this important key issue has not yet been addressed. OMB officials believed that for standardized processes, it is important to get buy-in as the processes are developed, and not force the process from the top. OMB officials we talked with recognized that standardization of business processes is important, but they did not want to wait to deploy the financial management line of business initiative until standard business processes had been developed. OMB planned to task the newly created CFO Council Transaction Processing Standardization Subcommittee with the responsibility for developing standard federal business processes. Because this key issue has not been addressed, and the other key issues flow from it, little has been done to address those important considerations. From our perspective, adopting standardized processes is a fundamental step needed for all financial system implementations, but especially for making the financial management line of business initiative successful. Otherwise, we believe that there is a much greater risk of the continued proliferation of nonstandard business processes that would not result in a marked improvement from the current environment. What guidance will be provided to assist agencies in adopting a change management strategy that reduces the risks of moving to the application service provider approach? What processes will be put in place to ensure that agency financial management system investment decisions focus on the benefits of standard processes and application service providers? What process will be used to facilitate the decision-making process used by agencies to select a given provider? How will agencies incorporate strategic workforce planning in the implementation of the application service provider approach? Although OMB has a goal of migrating agencies to a limited number of application service providers within the next 7 to 8 years to deliver the standard business processes, rather than funding individual agency efforts, it has not yet articulated a clear and measurable strategy for achieving this goal. This is important because there has been a historical tendency for agencies and units within agencies to view their needs as urgent and resist standardization. Decisive action will be needed to ensure that agencies adopt the application service provider concept and that agencies do not continue to attempt to develop and implement their own financial management systems. OMB has been proactive since the beginning of the financial management line of business initiative in describing the goals of the initiative by making speeches, discussing the initiative with the media, including it in the President’s budget request, and highlighting it on its Web site. However, there are limited tools and guidance available and OMB has not provided centers of excellence with standard document templates needed to minimize risk, provide assurance, and develop understandings with customers on topics such as service level agreements and concept of operations. A service level agreement is critical for both the application service providers and the agencies to be held accountable for their respective parts of the agreement. Much work remains to develop a change management strategy that addresses key activities needed to minimize the risk associated with the implementation of the financial management line of business initiative. Change management in the context of migrating federal agencies to an application service provider will need to include activities such as (1) developing specific criteria for requiring agencies to migrate to an application service provider rather than attempting to develop and implement their own stove-piped business systems; (2) providing the necessary information for an agency to make a selection of an application service provider; (3) defining and instilling new values, norms, and behaviors within agencies that support new ways of doing work and overcoming resistance to change; (4) building consensus among customers and stakeholders on specific changes designed to better meet their needs; and (5) planning, testing, and implementing all aspects of the transition from one organizational structure and business process to another. According to leading IT organizations, organizational change management is the process of preparing users for the business process changes that will accompany implementation of a new system. An effective organizational change management process includes project plans and training that prepare users for impacts the new system might have on their roles and responsibilities and a process to manage those changes. We have reported on various problems with agencies’ change management including the failure to develop transition plans, reengineer business processes, and limit customization. In addition, one CFO Council member told us that from his perspective systems do not fail, but there is an implementation failure because of (1) ineffective coordination and communication between the CFO and CIO offices, (2) excessive modification of COTS systems, (3) business processes not being reengineered correctly, completely, or timely, and (4) a lack of authority and leadership for the CFO and project management offices to make the implementation work. With regard to establishing criteria for transitioning agencies to an application service provider, we note that providing governmentwide financial services is not a new concept to the federal government. One of the 24 Presidential Electronic Government initiatives is e-payroll, which was intended to consolidate 22 federal payroll systems into 4 federal payroll providers to simplify and standardize federal human resources/payroll policies and procedures to better integrate payroll, human resources, and finance functions. Numerous agencies had targeted their payroll operations for costly modernizations, and according to OMB, by consolidating duplicative payroll modernization efforts, an estimated $1.1 billion can be saved over the next decade in future IT investments given the economies of scale and cost avoidance. Federal agencies already have or will be migrating to one of the four selected payroll providers to process payroll and pay employees. OMB officials told us they learned from the e-payroll initiative that directing and forcing change as they had done with the e-payroll effort was not palatable to federal agencies. The agencies preferred having choices on timing the move and on having options for various providers. As a result, for the financial management line of business initiative, they do not plan to establish a migration path or time table. Further, processes have not been put in place to facilitate agency decisions on selecting a provider or focusing investment decisions on the benefits of standard processes and application service providers. It is not clear how this will impact the adoption of this initiative. Given the pressures to reduce budgets, discipline with respect to following a clear migration path will be essential. Without such a migration path, while some agencies may readily migrate to a center of excellence or application service provider to minimize the tremendous undertaking of implementing or significantly upgrading a financial system, other agencies will likely perpetuate the waste of taxpayer dollars previously described related to failed system implementation efforts. The need for clear criteria on migrating agencies to the financial management line of business initiative is highlighted by the following example. In fiscal year 2004, the Department of Justice embarked on implementing a new core financial system and is not planning to move to a center of excellence. OMB officials stated that they were not requiring Justice to move to a center of excellence because it had unique needs and was already far enough along in its attempt to modernize and consolidate the financial systems used throughout the agency. OMB officials also speculated that Justice might eventually become a center of excellence that focuses on law enforcement agencies and addresses the law enforcement community’s unique needs. According to a supporting document of the Analytical Perspectives, Budget of the United States Government, Fiscal Year 2006, Justice spent about $6.9 million on modernizing its core financial system in fiscal year 2004. Further, Justice planned to spend $23.1 million for modernization during fiscal year 2005, and expects fiscal year 2006 modernization costs to more than triple to $72.5 million. In October 2004, the IG reported that little progress had been made in implementing the new system and continued to report financial management and systems as a top management challenge. Thus, it is not clear why Justice should continue with its financial systems development project when the cost is expected to significantly escalate and significant challenges remain. Further, the application service provider concept will still require that agencies address long-standing human capital problems by incorporating elements of strategic workforce planning such as (1) aligning an organization’s human capital program with its current and emerging mission and programmatic goals and (2) developing long-term strategies for acquiring, developing, and retaining an organization’s total workforce to meet the needs of the future. This includes a range of activities from identifying and defining roles and responsibilities, to identifying team members, to developing individual competencies that enhance performance. To maintain and enhance the capabilities of IT staff, organizations should develop and implement a human capital strategy that, among other things, includes assessing competencies and skills needed to effectively perform IT operations to support agency mission and goals, inventorying the competencies and skills of current IT staff to identify gaps in needed capabilities, and developing and implementing plans to fill the gap between requirements and current staffing. As we have testified, having sufficient numbers of people on board with the right mix of knowledge and skills can make the difference between success and failure. This is especially true in the IT area, where widespread shortfalls in human capital have contributed to demonstrable shortfalls in agency and program performance. According to Building the Work Force Capacity to Successfully Implement Financial Systems, the roles needed on an implementation team are consistent across financial system implementation projects and include a project manager, systems integrator, functional experts, information technology manager, and IT analysts. Many of these roles require the dedication of full-time staff for one or more of the project’s phases. Finally, sustained leadership will be key to a successful strategy for moving federal agencies towards consolidated financial management systems. In our Executive Guide: Creating Value Through World-class Financial Management, we found that leading organizations made financial management improvement an entitywide priority by, among other things, providing clear, strong executive leadership. We also reported that making financial management a priority throughout the federal government involves changing the organizational culture of federal agencies. Although the views about how an organization can change its culture can vary considerably, leadership (executive support) is often viewed as the most important factor in successfully making cultural changes. Top management must be totally committed in both words and actions to changing the culture, and this commitment must be sustained and demonstrated to staff. In addition, a recent best practice guide on shared services stated that it is not enough for management to merely support the financial operations’ shared service implementation—top management must provide the leadership structure to ensure that the transition is successful. Because the tenure of political appointees is relatively short, the current and future administrations must continue a strong emphasis on top-notch financial management. How can existing industry standards and best practices be incorporated into governmentwide guidance related to financial management system implementation efforts, including migrating to an application service provider? What actions will be taken to reduce the risks and costs associated with data conversion and interface efforts? What oversight process will be used to ensure that modernization efforts effectively implement the prescribed policies and procedures? Once the concept of operations and standard business processes have been defined and a migration strategy is in place, individual agencies will have to work closely with the selected application service provider or systems integrator to help ensure that the implementation is successful. Although application service providers may provide a COTS solution, effective implementation and testing processes are still required to ensure that the system delivers the desired functionality on time and within budget. As previously discussed, a partnership between the CIO and CFO offices, as well as with those program management offices responsible for financial or mixed systems such as payroll and inventory, is critical for success. Agencies have frequently struggled to implement key best practices when implementing COTS financial management systems. The key to avoiding these long-standing implementation problems is to provide specific guidance to agencies for financial management system implementations, incorporating the best practices identified by the SEI, the IEEE, the Project Management Institute, and other experts that have been proven to reduce risk in implementing systems. Such guidance should include the various disciplined processes such as requirements management, testing, data conversion and system interfaces, risk and project management, and related activities, which have been problematic in the financial systems implementation projects we reviewed. Disciplined processes have been shown to reduce the risks associated with software development and acquisition efforts to acceptable levels and are fundamental to successful system implementations. The principles of disciplined IT systems development and acquisition of services apply to shared services implementation. A disciplined software implementation process can maximize the likelihood of achieving the intended results (performance) within established resources (costs) on schedule. For example, disciplined processes should be in place to address the areas of data conversion and interfaces, two of the many critical elements necessary to successfully implement a new system that have contributed to the failure of previous agency efforts. The former JFMIP provided guidance on data conversion, and the Configuration Control Subcommittee under the CFO Council’s Financial Systems Integration Committee was tasked with focusing on interface requirements. However, a standard set of practices will be needed to guide the migration from legacy systems to new systems and application service providers. Further details on disciplined processes needed can be found in appendix III. In addition, oversight to help ensure that the disciplined processes are in place and operating as intended will be a critical factor in the success of the implementation of new and consolidated financial management systems. Currently, OMB guidance requires agencies to have qualified project managers and to use earned value management tools for major IT investments. However, OMB only performs limited reviews of agencies’ financial management systems implementations. OFFM officials told us that these reviews vary considerably in scope and that one of their goals is to provide more structure to the reviews. OMB’s review depends on the agency and the phase of the project, and generally does not focus on implementation of the disciplined processes used. Industry experts agree that the best indicator of whether risks have been reduced to an acceptable level is an assessment of the disciplined processes in place. For example, in the area of requirements management, disciplined processes would help ensure (1) the requirements document contains all the requirements identified by the customer, as well as those needed for the definition of the system, (2) the requirements fully describe the software functionality to be delivered, (3) the requirements are stated in clear terms that allow for quantitative evaluation, and (4) traceability among various documents is maintained. Proper oversight would entail verification of these requirements-related disciplined processes. In addition to problems with the structure and scope of OMB’s current system reviews, we noted that OFFM has a staff of only four employees dedicated to reviewing federal executive branch agency projects to implement financial management systems. These four staff also have other time-consuming duties such as developing a coherent, coordinated architecture and issuing federal financial system requirements. As a result, the current level of detail in the existing system reviews is necessarily limited. Moreover, there is limited follow-up by OMB on suggested improvements they have made to agency officials, and there is not any impetus for agencies to implement suggested improvements. For example, OFFM officials told us that they advised an agency that there were numerous disadvantages to deploying a new financial management system mid-year. Nonetheless, the agency deployed the system at mid-year and has faced problems by doing so. The FSIO also has a limited number of staff to perform its numerous financial management policy and oversight activities and is currently reassessing its priorities and available resources. Given the range of OMB’s leadership roles and its relatively small size as part of the Executive Office of the President, it is not realistic to expect OMB to be able to carry out a comprehensive review function. Instead, agencies could be required to have their financial management system projects undergo independent verification and validation reviews to ensure that the projects adequately implemented the disciplined processes needed to manage the risks to acceptable levels. OMB could then review reports produced as a result of the independent verification and validation process to leverage its oversight efforts. Accordingly, OMB could then focus its oversight efforts on the projects with the greatest risks. Because the federal government is one of the largest and most complex organizations in the world, operating, maintaining, and modernizing its financial management systems represent a monumental challenge— technically and cost-wise. The past paradigm must be changed from one in which each federal agency attempts to implement systems that, in many cases, are to perform redundant functions and have all too often resulted in failure, have been delayed, and cost too much. Thus, a more holistic governmentwide approach as OMB has been advocating is necessary to address the key causes of failure. OMB has recognized the seriousness of the problems. Its primary initiative related to the use of a limited number of application service providers is a step in the right direction. This initiative is in the early stage and does not yet include basic elements that are integral to its success. Based on industry best practices, the following four concepts would help ensure a sound foundation for developing and implementing a governmentwide solution for long-standing financial management system implementation failures: (1) developing a concept of operations that ties in other systems, (2) defining standard business processes, (3) developing a strategy for ensuring that agencies are migrated to a limited number of application service providers, and (4) defining and effectively implementing applicable disciplined processes. As pressure mounts to do more with less, to increase accountability, and to reduce fraud, waste, abuse, and mismanagement, and efforts to reduce federal spending intensify, sustained and committed leadership will be a key factor in the successful implementation of these governmentwide initiatives. However, regardless of the approach taken, the adherence to disciplined processes in systems development and acquisition will be at the core of successfully addressing the key causes of financial management system implementation failures. To help reduce the risks associated with financial management system implementation efforts and facilitate the implementation of the financial management line of business and JFMIP realignment initiatives across the government, we recommend that the Director of OMB take the following 18 actions. This would entail placing a high priority on fully integrating into its approach the following concepts and underlying key issues, all of which are related to the fundamental disciplines in systems implementation: Developing a concept of operations. This would include identifying the interrelationships among federal financial systems and how the application service provider concept fits into this framework, prescribing which financial management systems should be operated at an agency level and which should be operated at a governmentwide level and how those would integrate, and defining financial management systems in the Federal Enterprise Architecture to be more consistent with the similar definitions used in FFMIA and OMB Circulars No. A-11 and No. A-127. Defining standard business processes. This would include describing the standard business processes that are needed to meet federal agencies’ needs, developing a process to identify those that are needed to meet unique agency needs, requiring application service providers to adopt standard business processes to provide consistency, and encouraging agencies to embrace new processes. Developing a strategy for ensuring that agencies are migrated to a limited number of application service providers in accordance with OMB’s stated approach. This would include articulating a clear goal and criteria for ensuring agencies are subject to the application service provider concept and cannot continue developing and implementing their own stove-piped systems, establishing a migration path or time table for when agencies should migrate to an application service provider, providing the necessary information for an agency to select an application service provider, and developing guidance to assist agencies in adopting a change management strategy for moving to application service providers. Defining and effectively implementing disciplined processes necessary to properly manage the specific projects. This would include providing specific guidance to agencies on disciplined processes for providing a standard set of practices to guide the migrations from legacy systems to new systems and application service providers, and developing processes to facilitate oversight and review that allow for a more structured review and follow-up of agencies’ financial system implementation projects. We received written comments on a draft of this report from the Controller of OMB, which are reprinted in appendix IV. The Controller agreed with our recommendations and described the approach and steps that OMB is taking to improve financial management system modernization efforts. As OMB moves forward to address the recommendations in our report, it is important that it prioritize its efforts and focus on the concepts and underlying key issues we discussed, such as adequately defining and implementing disciplined processes. We are encouraged that OMB plans to issue additional guidance outlining the fundamental risk-reduction approaches that agencies can implement when acquiring and implementing financial systems. It will be critical that the guidance stresses the importance of this standard set of practices. We continue to believe that careful consideration of all the building blocks and key issues we identified will be integral to the success of OMB’s initiatives. OMB also provided additional oral comments which we incorporated as appropriate. We are sending copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Homeland Security and Governmental Affairs, and other interested congressional committees. We are also sending a copy to the Director of OMB. Copies will also be made available to others upon request. The report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact McCoy Williams, Director, Financial Management and Assurance, who may be reached at (202) 512-9095 or by e-mail at williamsm1@gao.gov, or Keith A. Rhodes, Chief Technologist, Applied Research and Methods, who may be reached at (202) 512-6412 or by e-mail at rhodesk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To determine the key causes for financial management system implementation failures, we conducted database searches of GAO and inspector general (IG) Web sites to identify reports issued by any GAO teams or IGs that could be relevant. We summarized and analyzed prior GAO reports on commercial off-the-shelf financial management system implementations within the last 5 years. We performed a content analysis of the GAO and IG reports to determine if causes for the financial management system implementation problems were included. We discussed the relevant GAO report findings and current status with the key staff that worked on the reports. In addition, we identified other potential data sources, such as key industry groups and well-known national experts for information they had on this topic. We also interviewed key Office of Management and Budget (OMB) officials and had discussions with other interested parties such as Chief Financial Officers (CFO) Council representatives. To identify the significant governmentwide initiatives that are currently under way that impact financial management systems implementation failures, we interviewed key OMB officials and reviewed relevant OMB policies, guidance, and memorandums related to the initiatives. We also interviewed CFO Council representatives to discuss the initiatives to reform federal financial management systems. In addition, we interviewed Office of Personnel Management officials to discuss their plans to migrate to a financial management center of excellence. We also reviewed reports from various authors and governmentwide forums where participants provided their perspectives on governmentwide initiatives. To provide our views on actions that can be taken to help improve the management and control of agency financial management system modernization efforts, we analyzed the GAO and IG reports we had identified as relevant to the topic to highlight the actions called for in those reports. Further, we reviewed material from key industry groups and national experts to identify any potential solutions posed by those groups, lessons learned, and relevant best practices. We took into consideration those governmentwide initiatives that were currently under way and the perspectives provided by authors and participants in governmentwide forums. In addition, during our consultations with various GAO stakeholders, and external groups such as OMB and the CFO Council, we obtained their perspectives on the actions needed to address the problems. We conducted our work in Washington, D.C., from January 2005 through October 2005, in accordance with U.S. generally accepted government auditing standards. We did not evaluate the federal government’s overall IT strategy or whether a particular agency selected the most appropriate financial management system. Because we have previously provided agencies with specific recommendations in individual reports, we are not making additional recommendations to them in this report. We requested comments on a draft of this report from the Director of OMB or his designee. Written comments from OMB are reprinted in appendix IV and evaluated in the Agency Comments and Our Evaluation section. Department of the Treasury Office of Inspector General. The Modernization Program Is Establishing a Requirements Management Office to Address Development and Management Problems. Reference No. 2005-20-023. Washington, D.C.: January 19, 2005. Department of Transportation Office of Inspector General. Consolidated Financial Statements for Fiscal Years 2004 and 2003. Report FI-2005- 009. Washington, D.C.: November 15, 2004. Department of Housing and Urban Development Office of Inspector General. Fiscal Year 2004 Review of Information Systems Controls in Support of the Financial Statements Audit. Report 2005-DP-0001. Washington, D.C.: October 19, 2004. Department of Justice Office of Inspector General. The Drug Enforcement Administration’s Management of Enterprise Architecture and Information Technology Investments. Report 04-36. Washington, D.C.: September 2004. Department of Veterans Affairs Office of Inspector General. Issues at VA Medical Center Bay Pines, Florida and Procurement and Deployment of the Core Financial and Logistics System. Report 04-01371-177. Washington, D.C.: August 11, 2004. Department of Energy Office of Inspector General. Management of the Federal Energy Regulatory Commission’s Information Technology Program. Report DOE/IG-0652. Washington, D.C.: June 2004. Department of Justice Office of Inspector General. The Federal Bureau of Investigation’s Implementation of Information Technology Recommendations. Report 03-36. Washington, D.C.: September 2003. Small Business Administration Office of Inspector General. Audit of SBA’s Acquisition, Development and Implementation of the Joint Accounting and Administrative Management System. Report 3-32. Washington, D.C.: June 30, 2003. Department of Energy Office of Inspector General. Audit Report on Business Management Information System. Report DOE/IG-0572. Washington, D.C.: November 2002. Department of the Interior Office of Inspector General. Developing the Department of the Interior’s Information Technology Capital Investment Process: A Framework for Action. Report 2002-I-0038. Washington, D.C.: August 2002. Department of Defense Office of Inspector General. Development of the Defense Finance and Accounting Service Corporate Database and other Financial Management Systems. Report D-2002-014. Washington, D.C.: November 7, 2001. Department of Transportation Office of Inspector General. Implementing a New Financial Management System. Report FI-2001-074. Washington, D.C.: August 7, 2001. Disciplined processes have been shown to reduce the risks associated with software development and acquisition efforts to acceptable levels and are fundamental to successful system implementations. A disciplined software implementation process can maximize the likelihood of achieving the intended results (performance) within established resources (costs) on schedule. Although a standard set of practices that will guarantee success does not exist, several organizations, such as the Software Engineering Institute (SEI) and the Institute of Electrical and Electronic Engineers (IEEE), and individual experts, have identified and developed the types of policies, procedures, and practices that have been demonstrated to reduce development time and enhance effectiveness. The key to having a disciplined system development effort is to have disciplined processes in multiple areas, including requirements management, testing, data conversion and system interfaces, configuration management, risk management, project management, and quality assurance. Requirements are the specifications that system developers and program managers use to design, develop, and acquire a system. They need to be carefully defined, consistent with one another, verifiable, and directly traceable to higher-level business or functional requirements. It is critical that they flow directly from the organization’s concept of operations (how the organization’s day-to-day operations are or will be carried out to meet mission needs). According to the IEEE, a leader in defining the best practices for such efforts, good requirements have several characteristics, including the following: The requirements fully describe the software functionality to be delivered. Functionality is a defined objective or characteristic action of a system or component. For example, for grants management, a key functionality includes knowing (1) the funds obligated to a grantee for a specific purpose, (2) the cost incurred by the grantee, and (3) the funds provided in accordance with federal accounting standards. The requirements are stated in clear terms that allow for quantitative evaluation. Specifically, all readers of a requirement should arrive at a single, consistent interpretation of it. Traceability among various requirement documents is maintained. Requirements for projects can be expressed at various levels depending on user needs. They range from agencywide business requirements to increasingly detailed functional requirements that eventually permit the software project managers and other technicians to design and build the required functionality in the new system. Adequate traceability ensures that a requirement in one document is consistent with and linked to applicable requirements in another document. The requirements document contains all of the requirements identified by the customer, as well as those needed for the definition of the system. Studies have shown that problems associated with requirements definition are key factors in software projects that do not meet their cost, schedule, and performance goals. Examples include the following: A 1988 study found that getting a requirement right in the first place costs 50 to 200 times less than waiting until after the system is implemented to get it right. A 1994 survey of more than 8,000 software projects found that the top three reasons that projects were delivered late, over budget, and with less functionality than desired all had to do with requirements management. A 1994 study found that, on average, there is about a 25-percent increase in requirements over a project’s lifetime, which translates into at least a 25-percent increase in the schedule. A 1997 study noted that between 40 and 60 percent of all defects found in a software project could be traced back to errors made during the requirements development stage. Testing is the process of executing a program with the intent of finding errors. Because requirements provide the foundation for system testing, they must be complete, clear, and well documented to design and implement an effective testing program. Absent this, an organization is taking a significant risk that substantial defects will not be detected until after the system is implemented. As shown in figure 2, there is a direct relationship between requirements and testing. Although the actual testing occurs late in the development cycle, test planning can help disciplined activities reduce requirements-related defects. For example, developing conceptual test cases based on the requirements derived from the concept of operations and functional requirements stages can identify errors, omissions, and ambiguities long before any code is written or a system is configured. Disciplined organizations also recognize that planning the testing activities in coordination with the requirements development process has major benefits. Although well-defined requirements are critical for implementing a successful testing program, disciplined testing efforts for projects have several characteristics, which include the following: Testers who assume that the program has errors are likely to find a greater percentage of the defects present in the system. This is commonly called the testing mindset. Test plans and scripts that clearly define what the expected results should be when the test case is properly executed and the program does not have a defect that would be detected by the test case. This helps to ensure that defects are not mistakenly accepted. Processes that ensure test results are thoroughly inspected. Test cases that include exposing the system to invalid and unexpected conditions as well as the valid and expected conditions. This is commonly referred to as boundary condition testing. Testing processes that determine if a program has unwanted side effects. For example, a process should update the proper records correctly but should not delete other records. Systematic gathering, tracking, and analyzing statistics on the defects identified during testing. Although these processes may appear obvious, they are often overlooked in testing activities. Data conversion is defined as the modification of existing data to enable them to operate with similar functional capability in a different environment. It is one of the many critical elements necessary to successfully implement a new system. Because of the difficulty and complexity associated with financial systems data conversion, highly skilled staff are needed. There are three primary phases in a data conversion: 1. Pre-conversion activities prior to and leading up to the conversion, such as determining the scope and approach or method, developing the conversion plan, performing data cleanup and validation, ensuring data integrity, and conducting necessary analysis and testing. 2. Cutover activities to convert the legacy data to the new system, such as testing system process and data edits, testing system interfaces (both incoming and outgoing), managing the critical path, supervising workload completion, and reconciliation. 3. Post-installation activities such as verifying data integrity, conducting final disposition of the legacy system data, and monitoring the first reporting cycle. There are also specific issues that apply uniquely to converting data as part of the replacement of a financial system, including identifying specific open transactions and balances to be established, analyzing and reconciling transactions for validation purposes, and establishing transactions and balances in the new system through an automated or manual process. Further, consideration of various data conversion approaches and implications are important. Some considerations to be taken into account for the system conversion are the timing of the conversion (beginning-of- the-year, mid-year, or incremental) and other options such as direct or flash conversions, parallel operations, and pilot conversions. In addition, agencies should consider different data conversion options for different categories of data when determining the scope and time lines such as opting not to conduct a data conversion, processing new transactions and activity only, establishing transaction balances in the new system for reporting converting open transactions from the legacy system, and recording new activity on closed prior year transactions. Validation and adjustment of open transactions and data in the legacy system are essential prerequisites to the conversion process and have often been problematic. When data conversion is done right, the new system can flourish. However, converting data incorrectly has lengthy and long-term repercussions. System interfaces operate on an ongoing basis linking various systems and provide data that are critical to day-to-day operations, such as obligations, disbursements, purchase orders, requisitions, and other procurement activities. Testing the system interfaces in an end-to-end manner is necessary so agencies can have reasonable assurance that the system will be capable of providing the intended functionality. Systems that lack appropriate system interfaces often rely on manual reentry of data into multiple systems, convoluted systems, or both. According to the SEI, a widely recognized model for evaluating the interoperability of systems is the Levels of Information System Interoperability. This model focuses on the increasing levels of sophistication of system interoperability. Efforts at the highest level of this model—enterprise-based interoperability—are systems that can provide multiple users access to complex data simultaneously, data and applications are fully shared and distributed, and data have a common interpretation regardless of format. This is in contrast to the traditional interface strategies that are more aligned with the lowest level of the SEI model. Data exchanged at this level rely on electronic links that result in a simple electronic exchange of data. Configuration Management According to the SEI, configuration management is defined as a discipline applying technical and administrative direction and surveillance to (1) identify and document the functional and physical characteristics of a configuration item, (2) control changes to those characteristics, (3) record and report change processing and implementation status, and (4) verify compliance with specified requirements. The purpose of configuration management is to establish and maintain the integrity of work products. Configuration management involves the processes of identifying the configuration of selected work products that compose the baselines at given points in time, controlling changes to configuration items, building or providing specifications to build work products from the maintaining the integrity of baselines, and providing accurate status and current configuration data to developers, integrators, and end users. The work products placed under configuration management include the products that are delivered to the customer, designated internal work products, acquired products, tools, and other items that are used in creating and describing these work products. For COTS systems, configuration management focuses on ensuring that changes to the requirements or components of a system are strictly controlled to ensure the integrity and consistency of system requirements or components. Two of the key activities for configuration management include ensuring that (1) project plans explicitly provide for evaluation, acquisition, and implementation of new, often frequent, product releases and (2) modification or upgrades to deployed versions of system components are centrally controlled, and unilateral user release changes are precluded. Configuration management recognizes that when using COTS products, it is the vendor, not the acquisition or implementing organization, that controls the release of new versions and that new versions are frequently released. Risk and opportunity are inextricably related. Although developing software is a risky endeavor, risk management processes should be used to manage the project’s risks to acceptable levels by taking the actions necessary to mitigate the adverse effects of significant risks before they threaten the project’s success. If a project does not effectively manage its risks, then the risks will manage the project. Risk management is a set of activities for identifying, analyzing, planning, tracking, and controlling risks. Risk management starts with identifying the risks before they can become problems. If this step is not performed well, then the entire risk management process may become a useless exercise since one cannot manage something that one does not know anything about. As with the other disciplined processes, risk management is designed to eliminate the effects of undesirable events at the earliest possible stage to avoid the costly consequences of rework. After the risks are identified, they need to be analyzed so that they can be better understood and decisions can be made about what actions, if any, will be taken to address them. Basically, this step includes activities such as evaluating the impact on the project if the risk does occur, determining the probability of the event occurring, and prioritizing the risk against the other risks. Once the risks are analyzed, a risk management plan is developed that outlines the information known about the risks and the actions, if any, which will be taken to mitigate those risks. Risk monitoring is a continuous process because both the risks and actions planned to address identified risks need to be monitored to ensure that the risks are being properly controlled and that new risks are identified as early as possible. If the actions envisioned in the plan are not adequate, then additional controls are needed to correct the deficiencies identified. Effective project management is the process for planning and managing all project-related activities, such as defining how components are interrelated, defining tasks, estimating and obtaining resources, and scheduling activities. Project management allows the performance, cost, and schedule of the overall program to be continually measured, compared with planned objectives, and controlled. Project management activities include planning, monitoring, and controlling the project. Project planning is the process used to establish reasonable plans for carrying out and managing the software project. This includes (1) developing estimates of the resources needed for the work to be performed, (2) establishing the necessary commitments, and (3) defining the plan necessary to perform the work. Effective planning is needed to identify and resolve problems as soon as possible, when it is the cheapest to fix them. According to one author, the average project expends about 80 percent of the time on unplanned rework—fixing mistakes that were made earlier in the project. Recognizing that mistakes will be made in a project is an important part of planning. According to this author, successful system development activities are designed so that the project team makes a carefully planned series of small mistakes to avoid making large, unplanned mistakes. For example, spending the time to adequately analyze three design alternatives before selecting one results in time spent analyzing two alternatives that were not selected. However, discovering that a design is inadequate after development can result in code that must be rewritten, at a cost greater than analyzing the three alternatives in the first place. This same author notes that a good rule of thumb is that each hour a developer spends reviewing project requirements and architecture saves 3 to 10 hours later in the project. Project monitoring and control help to understand the progress of the project and determine when corrective actions are needed based on the project’s performance. Best business practices indicate that a key facet of project management and oversight is the ability to effectively monitor and evaluate a project’s actual performance, cost, and schedule against what was planned. In order to perform this critical task, the accumulation of quantitative data or metrics is required and can be used to evaluate a project’s performance. An effective project management and oversight process uses quantitative data or metrics to understand matters such as (1) whether the project plan needs to be adjusted and (2) oversight actions that may be needed to ensure that the project meets its stated goals and complies with agency guidance. For example, an earned value management system is one metric that can be employed to better manage and oversee a system project. An earned value management system attempts to compare the value of work accomplished during a given period with the work scheduled for that period. With ineffective project oversight, management can only respond to problems as they arise. Agency management can also perform oversight functions, such as project reviews and participation in key meetings, to help ensure that the project will meet the agency needs. Management can use independent verification and validation reviews to provide it with assessments of the project’s software deliverables and processes. Although independent of the developer, verification and validation is an integral part of the overall development program and helps management mitigate risks. This core element involves having an independent third party—such as an internal audit function or a contractor that is not involved with any of the system implementation efforts—verify and validate that the systems were implemented in accordance with the established business processes and standards. Doing so provides agencies with needed assurance about the quality of the system, which is discussed in more detail in the following section. Quality assurance is defined as a set of procedures designed to ensure that quality standards and processes are adhered to and that the final product meets or exceeds the required technical and performance requirements. Quality assurance is a widely used approach in the software industry to improve upon product delivery and the meeting of customer requirements and expectations. The SEI indicates that quality assurance should begin in the early phases of a project to establish plans, processes, standards, and procedures that will add value to the project and satisfy the requirements of the project and the organizational policies. Quality assurance provides independent assessments, typically performed by an independent verification and validation or internal audit team, of whether management process requirements are being followed and whether product standards and requirements are being satisfied. Some of the widely used quality assurance activities include defect tracking, technical reviews, and system testing. Defect tracking–keeping a record of each defect found, its source, when it was detected, when it was resolved, how it was resolved (fixed or not), and so on. Technical reviews–reviewing user interface prototypes, requirements specifications, architecture, designs, and all other technical work products. System testing–executing software for the purpose of finding defects, typically performed by an independent test organization or quality assurance group. According to one author, quality assurance activities might seem to result in a lot of overhead, but in actuality, exactly the opposite is true. If defects can be prevented or removed early, a significant schedule benefit can be realized. For example, studies have shown that reworking defective requirements, design, and code typically consumes 40 to 50 percent of the total costs of software development projects. An effective quality assurance approach is to detect as many defects as possible as early as possible to keep the costs of corrections down. However, enormous amounts of time can be saved by detecting defects earlier than during system testing. Appendix IV: Comments from the Office of Management and Budget o Facilitate stronger internal controls that ensure integrity in accounting and other o Reduce costs by providing a competitive alternative for agencies to acquire, develop, implement, and operate financial management systems through shared service solutions; o Standardize systems, business processes and data elements; and o Provide for seamless data exchange between and among Federal agencies by implementing a common language and structure for financial information and system interfaces. 3. What are the critical milestones that must be accomplished in order to achieve the vision and goals of the FMLOB? Federal agencies have begun implementing the FMLOB initiative by actively migrating to shared service providers and initiating solutions to integrate financial data among and between agency business systems. Nothing in this memorandum changes the expectation that agencies will continue to take all the necessary steps (in the earliest possible timeframes) to meet FMLOB objectives. The milestones described below, therefore, are intended to facilitate, not delay, agency efforts. As depicted in Attachment 1, the critical milestones of the FMLOB can be broken down into three stages – (i) transparency and standardization; (ii) competitive environment and seamless data integration; and (iii) results. Stage 1: Transparency and Standardization. In order to enable a competitive environment where agencies have more options and leverage in choosing a financial system, and in order to facilitate seamless integration of financial data among agency business systems, additional transparency and standardization is required. Transparency: In determining the best options available when modernizing financial systems, the Federal financial community must have clarity on how to evaluate the performance and cost of shared service alternatives (i.e., Centers of Excellence (COE)) as well as clarity on what steps Federal agencies are expected to undertake in order to migrate to a COE. As described in more detail below, a COE is a shared service solution where a single entity provides financial management services for multiple organizations. In order to achieve additional transparency, two specific projects (with associated milestones) will be undertaken: Establishment of Common Performance Measures – This project will result in standard quality and cost measures for agencies to benchmark and compare the performance of financial system alternatives. Development of Migration Planning Guidance – This project will result in comprehensive guidance that helps Federal agencies describe, prepare for, and manage an agency’s migration to a COE. This guidance will also include a definition of the full range of services to be provided by all COEs and a description of the “rules of 2 engagement,” including templates for service level agreements outlining provider and client responsibilities. Standardization: In order to mitigate the cost and risk of migrations to a COE and to ensure that financial data can be shared across agency business systems, the Federal government must ensure greater standardization of business processes, interfaces, and data. To this end, two specific projects (with associated milestones) will be undertaken: Development of Standard Business Processes – This project will result in government- wide common business rules, data components, and policies for funds control, accounts payable, accounts receivable, and fixed assets. Creation of a Common Government-wide Accounting Code – This project will result in a uniform accounting code structure, layout, and definitions. Once established, all agencies will be expected to adopt these common processes on a schedule agreed upon between the agency and OMB. See Attachment 2 for additional details on the priority projects related to the transparency and standardization initiatives described above. Stage 2: Competitive Environment and Seamless Data Integration. In order to enable improved performance of financial systems, the FMLOB envisions more competitive alternatives for financial systems and an environment where financial data can be more easily compared and aggregated across agencies. Competitive Environment: To enable improved cost, quality, and performance of financial systems, Federal agencies must have competitive options available for financial systems. The COE framework is intended to help achieve these results. A COE is a shared service solution where a single entity provides financial management services for multiple organizations. When the FMLOB is successful, there will be a limited number of stable and high performing COEs that provide competitive alternatives for agencies investing in financial system modernizations. The economies of scale and skill of a COE will allow it to provide Federal agencies with a lower risk, lower cost, and increased service quality alternative for financial system modernization efforts. Notably, a competitive environment is sustainable if Federal agencies have the ability to migrate from one solution to a more competitive or better performing alternative that is offered. The transparency and standardization efforts described above will lay the foundation for facilitating better portability of agency systems from one solution to another. Seamless Data Integration: The standardization efforts, associated with Stage 1 of the FMLOB initiative, will enable financial data to be easily compared and aggregated across agencies. For 3 example, the development of a common government-wide accounting code will assist in the intra-governmental reconciliation process by requiring that all common types of financial data be accounted for in a similar format. A common structure will also enable easier transmission of financial reports to OMB and Treasury and assist these central agencies with aggregating similar-type data on a government-wide basis. Seamless and standardized data exchange will enable the government to streamline operations through more efficient information management and increased data accuracy. In addition, seamless data integration will reduce the costs and risks of establishing interfaces between agency business systems. By requiring standard core business processes, rules, data definitions, and a common government-wide accounting code, interfacing systems, such as travel, will not have to be specifically designed for each agency. This will save agencies money and enable them to more easily migrate between different system solutions. Stage 3: Results. When the FMLOB is fully realized, agencies’ data will be more timely and accurate for decision-making and there will be improved government-wide stewardship and accounting. More timely and accurate data will result from the standardization and seamless data integration efforts, including the implementation of centralized interfaces between core financial systems and other systems. These efforts will focus on promoting strong internal controls and ensuring the integrity of accounting data. The easy exchange of data between federal agencies will increase federal managers’ stewardship abilities. There will also be a reduction of government-wide information technology costs and risks. These benefits will be the result of shared-service solutions, also assisted by the standardization and seamless data integration efforts. Shared-service solutions will enable economies of scale by centrally locating, or consolidating, solution assets and reusing Federal and commercial subject matter expertise through common acquisitions, interface development, and application management. The reduction in the number of agencies implementing their own systems will reduce the risks, and associated costs, of systems implementations. 4. What governance structure will be in place to ensure accountability for successful completion of priority FMLOB initiatives? As depicted in Attachment 3, FSIO will have direct responsibility for completing priority projects under the FMLOB. OMB, in consultation with the Financial Systems Integration Committee (FSIC) of the CFO Council, will provide oversight and guidance to FSIO on priorities and expected performance in meeting these priorities. OMB will continue its role as Executive Sponsors of the FMLOB. The FSIC chair will be the lead agency sponsor for the FMLOB. A liaison from the CIO community and the Executive Director of FSIO will serve on the FSIC and support the FSIC chair in his/her responsibilities as they relate to the FMLOB. Going forward, FSIO will coordinate the collection and expenditure of FMLOB funds. 4 The FSIC will assist OMB in evaluating and monitoring FSIO’s progress in completing FMLOB projects and provide feedback to OMB and FSIO. As appropriate, members of the FSIC will participate in working groups to assist FSIO with completing deliverables. The FSIC will evaluate its current subcommittee structure to assess whether changes are needed to best meet these objectives. The updated governance structure ensures that the FSIO, FMLOB, and the FSIC do not operate in separate stovepipes. In addition, responsibility for work products will now rest with FSIO, where full time dedicated staff will be held accountable for achieving FMLOB milestones. 5. What is the status of the realignment of JFMIP to FSIO? In December of 2004, the JFMIP Principals voted to modify the roles and responsibilities of the JFMIP Program Office, now FSIO. As a result, OMB and the FSIC were given an increased management and oversight role in the activities of FSIO. OMB and the FSIC have worked closely with FSIO staff to update FSIO’s mission statement and define FSIO’s scope of activities and priorities for FY 2006. In terms of mission and scope, FSIO has three major areas of responsibilities: (a) continuing its primary role of core financial system requirements development, testing, and certification; (b) providing support to the Federal financial community by taking on special priority projects as determined by the OMB Controller, CFO Council, and the FSIO Executive Director, and (c) conducting outreach through the annual financial management conference and other related activities. Most importantly, the projects that FSIO undertakes will directly reflect the priorities of the CFO Community and OMB. As noted above, the priority projects to be undertaken in the near term will relate to the transparency and standardization initiatives of the FMLOB. Other projects that were previously under FSIO’s purview – acquisition, budget formulation, and property system requirements – have been transitioned to the Chief Acquisition Council, the Budget Officers Advisory Council, and the Federal Real Property Council, respectively, for their consideration and completion. Also, effective January 2006, the FSIO office will be transferred from the General Service Administration’s (GSA) Office of the Chief Financial Officer to the Office of Government-wide Policy, Office of Technology Strategy (OTS). There are several significant benefits of this move: lower administrative cost through shared resources (rent, supplies, equipment, etc.) permanent SES in place to provide leadership to FSIO staff access to immediate resources and expertise on IT, administrative management, contract management, testing, etc. fits well with current mission and stakeholder focused model of OTS 5 6. What specific actions are expected of Federal agencies? As described above, a central goal of the FMLOB is that financial system investments will be at lower risk and lower cost as agencies leverage the economies offered by shared service solutions (i.e., COEs). To this end, OMB has instituted a policy that agencies seeking to modernize their financial system must either be designated a public COE or must migrate to a COE (public, private, or a combination of both). Although exceptions to this policy will be made in limited situations when an agency demonstrates compelling evidence of a best value and lower risk alternative, it is OMB’s intent to avoid investments in “in-house” solutions wherever possible so that the shared service framework can fully achieve potential and anticipated returns. To the extent we require any specific action on your part to carry out the priority initiatives and milestones outlined above, we will communicate such requests through subsequent memos from OMB or the FSIC. 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The common accounting code structure will: code structure will: code structure will: code structure will: code structure will: code structure will: menu of services offered by menu of services offered by menu of services offered by menu of services offered by menu of services offered by menu of services offered by COEs; COEs; COEs; COEs; COEs; COEs; project plan templates; project plan templates; project plan templates; project plan templates; project plan templates; project plan templates; service level agreement service level agreement service level agreement service level agreement service level agreement service level agreement templates; templates; templates; templates; templates; templates; rules of engagement (i.e., relevant rules of engagement (i.e., relevant rules of engagement (i.e., relevant rules of engagement (i.e., relevant rules of engagement (i.e., relevant rules of engagement (i.e., relevant contractual and competitive criteria contractual and competitive criteria contractual and competitive criteria contractual and competitive criteria contractual and competitive criteria contractual and competitive criteria involved in migration) involved in migration) involved in migration) involved in migration) involved in migration) involved in migration) due diligence checklist (clarified due diligence checklist (clarified due diligence checklist (clarified due diligence checklist (clarified due diligence checklist (clarified due diligence checklist (clarified and updated); and updated); and updated); and updated); and updated); and updated); comparison of approaches on comparison of approaches on comparison of approaches on comparison of approaches on comparison of approaches on comparison of approaches on public vs. private solutions; public vs. private solutions; public vs. private solutions; public vs. private solutions; public vs. private solutions; public vs. private solutions; migration risk areas (interfaces, migration risk areas (interfaces, migration risk areas (interfaces, migration risk areas (interfaces, migration risk areas (interfaces, migration risk areas (interfaces, data conversion and clean up, data conversion and clean up, data conversion and clean up, data conversion and clean up, data conversion and clean up, data conversion and clean up, testing, financial reporting, change testing, financial reporting, change testing, financial reporting, change testing, financial reporting, change testing, financial reporting, change testing, financial reporting, change to business processes); and to business processes); and to business processes); and to business processes); and to business processes); and to business processes); and human capital planning. human capital planning. human capital planning. human capital planning. human capital planning. human capital planning. Project Description: Develop Project Description: Develop Project Description: Develop Project Description: Develop Project Description: Develop Project Description: Develop a standard set of business a standard set of business a standard set of business a standard set of business a standard set of business a standard set of business practices for core financial practices for core financial practices for core financial practices for core financial practices for core financial practices for core financial management functions (funds, management functions (funds, management functions (funds, management functions (funds, management functions (funds, management functions (funds, payments, receipts, fixed payments, receipts, fixed payments, receipts, fixed payments, receipts, fixed payments, receipts, fixed payments, receipts, fixed assets) to be adopted by all assets) to be adopted by all assets) to be adopted by all assets) to be adopted by all assets) to be adopted by all assets) to be adopted by all federal agencies. 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The document/model will include: document/model will include: document/model will include: document/model will include: document/model will include: document/model will include: sequenced activities for core sequenced activities for core sequenced activities for core sequenced activities for core sequenced activities for core sequenced activities for core business processes; business processes; business processes; business processes; business processes; business processes; data objects participating in a data objects participating in a data objects participating in a data objects participating in a data objects participating in a data objects participating in a business activity; business activity; business activity; business activity; business activity; business activity; relationships among the relationships among the relationships among the relationships among the relationships among the relationships among the objects as they exist in the objects as they exist in the objects as they exist in the objects as they exist in the objects as they exist in the objects as they exist in the actual business activities; actual business activities; actual business activities; actual business activities; actual business activities; actual business activities; data elements and definitions data elements and definitions data elements and definitions data elements and definitions data elements and definitions data elements and definitions stored about these objects; stored about these objects; stored about these objects; stored about these objects; stored about these objects; stored about these objects; and and and and and and business rules governing business rules governing business rules governing business rules governing business rules governing business rules governing these objects. these objects. these objects. these objects. these objects. these objects. In addition to the contacts named above, Kay Daly, Assistant Director; Chris Martin, Senior-Level Technologist; Francine DelVecchio; Mike LaForge; and Chanetta Reed made key contributions to this report. DOD Business Systems Modernization: Navy ERP Adherence to Best Business Practices Critical to Avoid Past Failures. GAO-05-858. Washington, D.C.: September 29, 2005. Financial Management: Achieving FFMIA Compliance Continues to Challenge Agencies. GAO-05-881. Washington, D.C.: September 20, 2005. Business Modernization: Some Progress Made toward Implementing GAO Recommendations Related to NASA’s Integrated Financial Management Program. GAO-05-799R. Washington, D.C.: September 9, 2005. Business Systems Modernization: Internal Revenue Service’s Fiscal Year 2005 Expenditure Plan. GAO-05-774. Washington, D.C.: July 22, 2005. DOD Business Systems Modernization: Long-standing Weaknesses in Enterprise Architecture Development Need to Be Addressed. GAO-05-702. Washington, D.C.: July 22, 2005. Army Depot Maintenance: Ineffective Oversight of Depot Maintenance Operations and System Implementation Efforts. GAO-05-441. Washington, D.C.: June 30, 2005. DOD Business Systems Modernization: Billions Being Invested without Adequate Oversight. GAO-05-381. Washington, D.C.: April 29, 2005. Internal Revenue Service: Assessment of the Fiscal Year 2006 Budget Request. GAO-05-566. Washington, D.C.: April 27, 2005. Information Technology: OMB Can Make More Effective Use of Its Investment Reviews. GAO-05-276. Washington, D.C.: April 15, 2005. Information Technology: Customs Automated Commercial Environment Program Progressing, but Need for Management Improvements Continues. GAO-05-267. Washington, D.C.: March 14, 2005. Office of Personnel Management: Retirement Systems Modernization Program Faces Numerous Challenges. GAO-05-237. Washington, D.C.: February 28, 2005. DOD Systems Modernization: Management of Integrated Military Human Capital Program Needs Additional Improvements. GAO-05-189. Washington, D.C.: February 11, 2005. Department of Defense: Further Actions Are Needed to Effectively Address Business Management Problems and Overcome Key Business Transformation Challenges. GAO-05-140T. Washington, D.C.: November 18, 2004. Business Systems Modernization: IRS’s Fiscal Year 2004 Expenditure Plan. GAO-05-46. Washington, D.C.: November 17, 2004. Financial Management: Improved Financial Systems Are Key to FFMIA Compliance. GAO-05-20. Washington, D.C.: October 1, 2004. Financial Management Systems: HHS Faces Many Challenges in Implementing Its Unified Financial Management System. GAO-04- 1089T. Washington, D.C.: September 30, 2004. Financial Management Systems: Lack of Disciplined Processes Puts Implementation of HHS’ Financial System at Risk. GAO-04-1008. Washington, D.C.: September 23, 2004. Information Technology: DOD’s Acquisition Policies and Guidance Need to Incorporate Additional Best Practices and Controls. GAO-04-722. Washington, D.C.: July 30, 2004. Department of Defense: Financial and Business Management Transformation Hindered by Long-standing Problems. GAO-04-941T. Washington, D.C.: July 8, 2004. Information Security: Agencies Need to Implement Consistent Processes in Authorizing Systems for Operation. GAO-04-376. Washington, D.C.: June 28, 2004. DOD Business Systems Modernization: Billions Continue to Be Invested with Inadequate Management Oversight and Accountability. GAO-04- 615. Washington, D.C.: May 27, 2004. Information Technology: The Federal Enterprise Architecture and Agencies’ Enterprise Architectures Are Still Maturing. GAO-04-798T. Washington, D.C.: May 19, 2004. National Aeronautics and Space Administration: Significant Actions Needed to Address Long-standing Financial Management Problems. GAO-04-754T. Washington, D.C.: May 19, 2004. DOD Business Systems Modernization: Limited Progress in Development of Business Enterprise Architecture and Oversight of Information Technology Investments. GAO-04-731R. Washington, D.C.: May 17, 2004. Information Technology: Early Releases of Customs Trade System Operating, but Pattern of Cost and Schedule Problems Needs to Be Addressed. GAO-04-719. Washington, D.C.: May 14, 2004. Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity (Version 1.1). GAO-04-394G. Washington, D.C.: March 2004. Information Technology Management: Governmentwide Strategic Planning, Performance Measurement, and Investment Management Can Be Further Improved. GAO-04-49. Washington, D.C.: January 12, 2004. Human Capital: Key Principles for Effective Strategic Workforce Planning. GAO-04-39. Washington, D.C.: December 11, 2003. Business Modernization: NASA’s Challenges in Managing Its Integrated Financial Management Program. GAO-04-255. Washington, D.C.: November 21, 2003. Business Modernization: NASA’s Integrated Financial Management Program Does Not Fully Address Agency’s External Reporting Issues. GAO-04-151. Washington, D.C.: November 21, 2003. Business Modernization: Disciplined Processes Needed to Better Manage NASA’s Integrated Financial Management Program. GAO-04-118. Washington, D.C.: November 21, 2003. Information Technology: Architecture Needed to Guide NASA’s Financial Management Modernization. GAO-04-43. Washington, D.C.: November 21, 2003. Information Technology: Leadership Remains Key to Agencies Making Progress on Enterprise Architecture Efforts. GAO-04-40. Washington, D.C.: November 17, 2003. DOD Business Systems Modernization: Important Progress Made to Develop Business Enterprise Architecture, but Much Work Remains. GAO-03-1018. Washington, D.C.: September 19, 2003. Business Systems Modernization: IRS Has Made Significant Progress in Improving Its Management Controls, but Risks Remain. GAO-03-768. Washington, D.C.: June 27, 2003. Business Modernization: Improvements Needed in Management of NASA’s Integrated Financial Management Program. GAO-03-507. Washington, D.C.: April 30, 2003. Department of Housing and Urban Development: Status of Efforts to Implement an Integrated Financial Management System. GAO-03-447R. Washington, D.C.: April 9, 2003. Information Technology: A Framework for Assessing and Improving Enterprise Architecture Management (Version 1.1). GAO-03-584G. Washington, D.C.: April 2003. DOD Business Systems Modernization: Continued Investment in Key Accounting Systems Needs to be Justified. GAO-03-465. Washington, D.C.: March 28, 2003. DOD Business Systems Modernization: Improvements to Enterprise Architecture Development and Implementation Efforts Needed. GAO-03- 458. Washington, D.C.: February 28, 2003. Customs Service Modernization: Automated Commercial Environment Progressing, but Further Acquisition Management Improvements Needed. GAO-03-406. Washington, D.C.: February 28, 2003. Customs Service Modernization: Third Expenditure Plan Meets Legislative Conditions, but Cost Estimating Improvements Needed. GAO-02-908. Washington, D.C.: August 9, 2002. DOD Financial Management: Important Steps Underway but Reform Will Require a Long-term Commitment. GAO-02-784T. Washington, D.C.: June 4, 2002. Customs Service Modernization: Management Improvements Needed on High-Risk Automated Commercial Environment Project. GAO-02-545. Washington, D.C.: May 13, 2002. Tax Administration: IRS Continues to Face Management Challenges in its Business Practices and Modernization Efforts. GAO-02-619T. Washington, D.C.: April 15, 2002. Business Systems Modernization: IRS Needs to Better Balance Management Capacity with Systems Acquisition Workload. GAO-02-356. Washington, D.C.: February 28, 2002. Human Capital: Building the Information Technology Workforce to Achieve Results. GAO-01-1007T. Washington, D.C.: July 31, 2001. Business Systems Modernization: Results of Review of IRS’ March 2001 Expenditure Plan. GAO-01-716. Washington, D.C.: June 29, 2001. Information Technology: DLA Should Strengthen Business Systems Modernization Architecture and Investment Activities. GAO-01-631. Washington, D.C.: June 29, 2001. Customs Service Modernization: Results of Review of First Automated Commercial Environment Expenditure Plan. GAO-01-696. Washington, D.C.: June 5, 2001. Information Technology: Architecture Needed to Guide Modernization of DOD’s Financial Operations. GAO-01-525. Washington, D.C.: May 17, 2001. District of Columbia: Weaknesses in Financial Management System Implementation. GAO-01-489. Washington, D.C.: April 30, 2001. Tax Systems Modernization: Results of Review of IRS’ Third Expenditure Plan. GAO-01-227. Washington, D.C.: January 22, 2001. Tax Systems Modernization: Results of Review of IRS’ August 2000 Interim Spending Plan. GAO-01-91. Washington, D.C.: November 8, 2000. Indian Trust Funds: Improvements Made in Acquisition of New Asset and Accounting System But Significant Risks Remain. GAO/AIMD-00- 259. Washington, D.C.: September 15, 2000. Tax Systems Modernization: Results of Review of IRS’ March 7, 2000, Expenditure Plan. GAO/AIMD-00-175. Washington, D.C.: May 24, 2000. Executive Guide: Creating Value Through World-class Financial Management. GAO/AIMD-00-134. Washington, D.C.: April 2000. Indian Trust Funds: Interior Lacks Assurance That Trust Improvement Plan Will Be Effective. GAO/AIMD-99-53. Washington, D.C.: April 28, 1999. Federal Information System Controls Audit Manual, Volume I: Financial Statement Audits. GAO/AIMD-12.19.6. Washington, D.C.: January 1999. District of Columbia: Status of Efforts to Develop a New Financial Management System. GAO/AIMD-97-101R. Washington, D.C.: July 9, 1997. Information Security: Opportunities for Improved OMB Oversight of Agency Practices. GAO/AIMD-96-110. Washington, D.C.: September 24, 1996. | Billions of dollars have been spent governmentwide to modernize financial management systems that have often exceeded budgeted cost, resulted in delays in delivery dates and did not provide the anticipated system functionality when implemented. GAO was asked to identify (1) the key causes for financial management system implementation failures, and (2) the significant governmentwide initiatives currently under way that are intended to address the key causes of financial management system implementation failures. GAO was also asked to provide its views on actions that can be taken to help improve the management and control of agency financial management system modernization efforts. GAO's work has linked financial management system implementation failures to three recurring themes: (1) disciplined processes, (2) human capital management, and (3) other information technology (IT) management practices. The predictable result of not effectively addressing these three areas has been numerous agency systems throughout the federal government that did not meet their cost, schedule, and performance objectives. Problems related to disciplined processes included requirements management, testing, data conversion and system interfaces, and risk and project management. Human capital management issues included strategic workforce planning, human resources, and change management. Other areas of IT management identified as problems included enterprise architecture, investment management, and information security. The Office of Management and Budget (OMB) has undertaken a number of initiatives to reduce the risks associated with acquiring and implementing financial management systems and addressing long-standing financial management problems. Some of these initiatives are in collaboration with others and are broad-based attempts to reform financial management operations governmentwide. First, OMB has developed and continues to evolve Federal Enterprise Architecture products and has required a mapping of agency architectures to this federal architecture. Another key OMB initiative is referred to as the financial management line of business which established centers of excellence to consolidate financial management activities for major agencies through cross-servicing arrangements. Finally, certain financial management activities and responsibilities have been reassigned to OMB, the Financial Systems Integration Office, and a Chief Financial Officers Council Committee. OMB's initiatives for reforming financial management systems governmentwide could help address the key causes of system implementation failures, but further actions are needed to fully define and implement the processes necessary to successfully complete these initiatives. OMB has correctly recognized the need to implement financial management systems as a governmentwide solution, rather than individual agency stove-piped efforts designed to meet a given entity's needs. Based on industry best practices, GAO believes that four concepts are integral to OMB's approach and key to successfully implementing financial management systems: a concept of operations provides the foundation, standard business processes promote consistency, a strategy for implementing the financial management line of business, and disciplined processes to help ensure successful implementations. GAO recognizes that implementing these concepts is a complex undertaking and raises a number of issues that have far-reaching implications for the government and private sector application service providers. |
Rural communities often have small or aging drinking water and wastewater systems. The need for a water project can arise for multiple reasons, including replacing or upgrading outdated or aging equipment that does not treat water to meet water quality standards and systems that do not produce water to meet new treatment standards. For example, arsenic is often present naturally in groundwater, and to meet new federal arsenic standards for drinking water, many rural communities using groundwater as a drinking water source will have to improve their drinking water systems to remove arsenic. EPA estimates that drinking water and wastewater infrastructure for small communities over the next several decades could cost more than $100 billion. This section describes (1) federal funding for drinking water and wastewater infrastructure projects in rural communities; (2) the process for applying for these federal funds, including the requirements state and federal agencies must ensure rural communities meet under the National Environmental Policy Act; and (3) our prior work on coordination among federal agencies and rural water infrastructure programs. The federal government administers a number of programs that assist rural communities in developing water and wastewater systems and complying with federal regulations, with EPA’s drinking water and clean water SRF programs and USDA’s RUS program providing the most funding. Communities typically pay for drinking water and wastewater infrastructure through the rates charged to users of the drinking water and wastewater systems. Large communities serve many people and can spread the cost of infrastructure projects over these numerous users, which makes projects more affordable. Small or rural communities have fewer users across which to spread rate increases, making infrastructure projects less affordable and these communities more reliant on federal funding to help lower the cost of projects through lower interest rates or grants that do not need to be repaid. The Safe Drinking Water Act and the Clean Water Act authorize the Drinking Water SRF and Clean Water SRF programs, respectively, as well as EPA’s authority to regulate the quality of drinking water provided by community water supply systems and the discharge of pollutants into the nation’s waters. Under the Safe Drinking Water Act, EPA sets standards to protect the nation’s drinking water from contaminants, such as lead and arsenic. In 1996, amendments to the act established the drinking water SRF program to provide assistance for publicly and privately owned drinking water systems. Under the Drinking Water SRF program, states make loans and are required to provide a certain percentage of funding in loan assistance to communities of less than 10,000. The Clean Water Act is intended to maintain and restore the physical, chemical, and biological integrity of our surface waters, such as rivers, lakes, and coastal waters. In 1987, amendments to the Clean Water Act established the Clean Water SRF program to provide assistance to publicly owned wastewater treatment facilities. Using the federal funds EPA provides to capitalize the state SRF programs, states provide loans to communities for drinking water and wastewater treatment projects. In order to qualify, states must contribute an amount equal to 20 percent of the federal capitalization grant. States that qualify for funding are responsible for administering their individual SRF programs, and communities of any size can apply for assistance. Loans are generally provided at below-market interest rates, saving communities money on interest over the long term. As communities repay the loans, the states’ funds are replenished, enabling them to make loans to other eligible drinking water and wastewater projects, and creating a continuing source of assistance for communities. See figure 1 for a description of the state Drinking Water and Clean Water SRF program funding sources. Nationwide, there are almost 52,000 publicly and privately owned drinking water systems and 16,000 publicly owned wastewater treatment facilities. USDA’s RUS administers a water and wastewater loan and grant program for rural communities with populations of 10,000 or less. The program is designed to address public health concerns in the nation’s rural areas by providing funding for new and improved drinking water and wastewater infrastructure. RUS provides a mix of loan and grant funding to communities that have been denied credit through normal commercial channels. Like the SRF programs, the RUS program makes loans at below-market rates to save communities interest over time but, unlike the SRF programs, the RUS program can make loans for up to 40 years, which helps lower communities’ annual repayment costs. In addition, communities do not need to repay funds received as grants, further helping to reduce the overall financial burden they incur upon a water project’s completion. To determine the amount of loans and grants a community receives, RUS assesses the potential increase in the water or sewer user rate needed to repay the loan. RUS provides grants to communities when necessary to reduce user rates to a level that the agency determines to be reasonable. Other federal agencies have programs that provide funds for drinking water and wastewater infrastructure, including HUD’s Community Development Block Grant program and the Department of Commerce’s Economic Development Administration’s Public Works and Economic Development Program. Under HUD’s program, communities use block grants for a broad range of activities to provide suitable housing in a safe living environment, including water and wastewater infrastructure. Thirty percent of block grant funds are allocated by formula to states for distribution to communities of 50,000 or less. Drinking water and wastewater needs compete with other public activities for funding and, according to HUD officials, account for about 10 percent of all block grant funds nationally. Economic Development Administration’s Public Works and Economic Development Program provides grants to small and disadvantaged communities to construct public facilities, including drinking water and wastewater infrastructure, to alleviate unemployment and underemployment in economically distressed areas. In addition, the U.S. Army Corp of Engineers and the Department of the Interior’s Bureau of Reclamation provide financial assistance for some large drinking water and wastewater projects, but these projects must be authorized by Congress prior to construction. In addition to these federal programs, some states have created their own programs to provide assistance for drinking water and wastewater infrastructure. For example, the North Carolina Rural Economic Development Center provides infrastructure loans for communities in the state’s rural counties. In Montana, the Treasure State Endowment Program provides grants to make drinking water and wastewater projects more affordable for the state’s communities. The state SRF programs and the RUS program each have their own application process through which communities can apply for funding, although the application processes generally include similar steps: (1) completing an application that asks for, among other things, basic demographic, legal, and financial information associated with the project; (2) developing a preliminary engineering report that provides basic design specifications and other technical information for the project; and (3) conducting an environmental analysis that considers the environmental effects of the proposed project and alternatives. The state agencies responsible for EPA’s SRF programs and USDA state offices review these documents, prioritize the projects based on agency-determined criteria, provide comments to communities on how their applications can be improved, and ultimately approve or reject the request for funding. Communities can choose to apply for funding to different federal and state programs at any stage during the process. In some cases, the SRF and RUS programs will work together to jointly fund the same project if the project is too large for one agency to fund, or if it will make the project more affordable for the community. If their requests are approved, communities design the projects, obtain construction bids, contract to build the projects, and are reimbursed by the funding agency. Communities usually hire a consulting engineer to develop the preliminary engineering reports and conduct the environmental analyses for a project. In addition, EPA and USDA pay for technical service providers that communities can use to help them understand and apply for their programs. Communities can also get assistance from local planning districts, which are voluntary associations of county and municipal governments that provide development assistance to their membership. A preliminary engineering report describes the proposed project, including its purpose, features of the proposed location, condition of any existing facilities, alternative approaches considered, design features, and costs. Figure 2 shows the application process and timeline that is generally followed for both EPA and RUS programs. The state SRF and RUS state-level programs review the likely environmental effects of projects they are considering funding using different levels of environmental analysis. These reviews occur either under the National Environmental Policy Act of 1969 (NEPA) for the RUS program, or for the SRF programs, under a state environmental review process similar to NEPA. EPA regulations define the necessary elements of these state “NEPA-like” reviews. Typically, a proposed water or wastewater project is subject to an environmental assessment or, in the rare case that the project is likely to significantly affect the environment, a more detailed environmental impact statement. If, however, the agency determines that activities of a proposed project fall within a category of activities the agency has determined has no significant environmental impact—a determination called a categorical exclusion—then the project applicant or the agency, as appropriate, generally does not have to prepare an environmental assessment or environmental impact statement. Because many community water and wastewater infrastructure projects either upgrade or replace existing infrastructure, projects rarely result in significant environmental impacts, and NEPA requirements can be satisfied through an environmental assessment or a categorical exclusion. In addition, in some cases, the funding agency may help complete the environmental analysis documents for a planned project. Our previous work has raised questions regarding sufficient coordination between drinking water and wastewater infrastructure funding programs, despite federal efforts to improve coordination at the state and local level. In December 2009, we reported that EPA, USDA, and other agencies that fund drinking water and wastewater infrastructure for rural communities along the U.S.-Mexico border, lacked coordinated policies and processes and did not efficiently coordinate their programs, priorities, or funding. Specifically, without efficient coordination, applicants faced significant administrative burdens that, in some cases, resulted in project delays because the programs required separate documentation to meet the same requirements and did not consistently coordinate in selecting projects. For example, an engineer in Texas told us that one community applying for funding had to pay $30,000 more in fees because the engineer had to complete two separate sets of engineering documentation for EPA and USDA. As we stated in our December 2009 report, the applicant could have saved these funds had EPA and USDA established uniform engineering requirements. To resolve such inefficiencies, we suggested Congress consider establishing an interagency mechanism, such as a task force, of federal agencies working in the border region. One of the responsibilities of this task force would be to work with state and local officials to develop standardized applications and environmental review and engineering documents, to the extent possible, for the federal and state agencies working in the border region. Similarly, our October 2005 report discusses collaboration and practices that federal and state agencies can engage in to enhance and sustain interagency collaboration. In the report, we define collaboration as any joint activity that is intended to produce more public value than could be produced when organizations act alone. According to the report, agencies can enhance and sustain interagency collaboration by engaging in one or more of the following practices: define and articulate a common outcome; establish mutually reinforcing or joint strategies; identify and address needs by leveraging resources; agree on roles and responsibilities; establish compatible policies, procedures, and other means to operate develop mechanisms to monitor, evaluate, and report on results; reinforce agency accountability through agency plans and reporting; and reinforce individual accountability for collaborative efforts through performance management systems. For a number of these practices, the report states that nonfederal partners, key clients, and stakeholders need to be involved in decision making. Additionally, a number of important factors, such as leadership, trust, and organizational culture, are necessary elements for a collaborative relationship. Consistent with the findings of our October 2005 report, the 1997 joint memorandum signed by EPA, USDA, and HUD encourages cooperation in developing strategic plans for each agency’s program and encourages cooperation among program managers at the state level to remove as many barriers as possible in program regulations or policy. In addition, the memorandum encourages the development of common practices across agencies, including regularly communicating and leveraging funds to make the most efficient use of available resources. Moreover, the memorandum encourages the signing agencies to prepare common documents, including one environmental analysis per project, that meet all the federal and state agencies’ requirements. This memorandum is similar to governmentwide NEPA regulations and various guidance issued by the Council on Environmental Quality, which emphasize the need for coordination among federal and state agencies on environmental and other requirements. Most recently, the council issued a March 2012 guidance that encourages federal agencies to cooperate with state, tribal, and local governments so that one document satisfies as many applicable environmental requirements as practicable. In addition, the guidance encourages federal agencies to enhance coordination under NEPA by designating a lead agency responsible for conducting an environmental analysis. Furthermore, according to the guidance, a federal agency preparing an environmental analysis should consider adopting another federal agency’s environmental analysis if it addresses the proposed action and meets the standards for an adequate analysis under NEPA and the adopting agency’s NEPA guidance. Drinking water and wastewater infrastructure funding is fragmented among the three programs we reviewed—EPA’s Drinking Water and Clean Water SRF programs and USDA’s RUS program. As a result, overlap can occur when communities with populations of 10,000 or less apply to one of the SRF programs and the RUS program. For the 54 projects we reviewed in the five states we visited, this overlap did not result in duplicate funding or funding for the same activities on the same project. Specifically, for 42 projects that we reviewed, the state SRF programs or the RUS program funded the projects individually, and for the remaining 12 projects that we reviewed, the state SRF and RUS programs each contributed a portion of the overall project cost because none of the programs could cover the full cost individually, according to community officials. However, we identified potentially duplicative efforts by communities to complete funding applications and related documents for both agencies. Overlap can occur among the state SRF and RUS programs because they can each direct funding to communities with populations of 10,000 or less. As a result, these communities are eligible to apply for funding from more than one of these programs. For example, communities of 10,000 or less can apply to the state Clean Water SRF and RUS programs for funds to install or upgrade wastewater treatment plants and sewer lines. In addition, communities of 10,000 or less can apply to the state Drinking Water SRF and RUS programs for funds to install, repair, improve, or expand treatment facilities, storage facilities, and pipelines to distribute drinking water. The state SRF and RUS programs have funded projects in communities with populations of less than 10,000 in recent years, according to our analysis of SRF and RUS data from July 1, 2007, through June 30, 2011. Specifically, over this time frame, communities with populations of 10,000 or less received $3.2 billion, or 36 percent of total Drinking Water SRF funding. Similarly, such communities received $6.3 billion, or 24 percent of total Clean Water SRF funding. In accordance with its mission, the RUS program has directed all of its funding for drinking water and wastewater infrastructure projects to such communities, for a total of $11 billion from October 1, 2006, through September 30, 2011. The amount of program funding overlap between the state SRF and RUS programs varies among the states, with some states showing greater overlap than others. State Drinking Water SRF program funding overlap with the RUS program ranged from 7 percent in Rhode Island to 93 percent in Virginia, and state Clean Water SRF program funding overlap with the RUS program ranged from 8 percent in California to 74 percent in Pennsylvania. Additional information about variations in program funding overlap is provided in appendix II. Overlap in program funding could lead agencies to fund the same project, resulting in the potential for duplication. However, for the state SRF and RUS programs, the majority of projects we reviewed in the five states were funded by either one of the SRF programs or the RUS program, in conjunction with other federal or state program funds, such as HUD’s Community Development Block Grant program, Montana’s Treasure State Endowment Program, and programs from the North Carolina Rural Economic Development Center. Table 1 shows the funding awards for community projects in states we visited. In the five states we visited— Colorado, Montana, North Carolina, Pennsylvania, and South Dakota—42 of the 54 projects we reviewed received funding from the SRF or RUS programs, in addition to other sources. In addition to the 42 projects that were separately funded by the state SRF or RUS programs, 12 projects we reviewed received funding from both the SRF and RUS programs (see table 2 for funding details). Our analysis of these projects showed the programs did not pay for the same activities with their funding, and according to state and community officials, the joint funding for a community’s project was beneficial and warranted. Specifically, according to federal, state, and community officials we interviewed, jointly funded projects tended to be relatively expensive projects that exceeded one or the other agency’s ability to fund independently or that needed additional funding to make the project affordable for community residents. Following are examples: Washington, Pennsylvania, population approximately 3,500, sought funding from both the Clean Water SRF and RUS programs, and other programs, for its nearly $21 million sewer project to install over 200,000 feet of sewer lines. The community initially sought funding from the Clean Water SRF program, but then decided to seek additional funding from the RUS program after realizing the project exceeded available funding from the SRF program, according to the consulting engineer the community used. The Clean Water SRF program provided $10.3 million, and the RUS program provided $5.5 million. Hertford, North Carolina, population approximately 2,200 sought funding from the Drinking Water SRF and RUS programs for its project to expand drinking water capacity by drilling wells, installing water supply lines, expanding the water treatment plant, and constructing an elevated storage tank. Similar to the Washington, Pennsylvania, project, community officials said that the Hertford project was too expensive for a single agency to fund. The Drinking Water SRF program provided $2.6 million toward the project, and the RUS program provided $772,000. Faulkton, South Dakota, population approximately 800, sought funding from the Drinking Water SRF, the RUS program, and the Community Development Block Grant program to replace water pipelines and install a water tower. The town applied to multiple programs to receive grants to help ensure that the project would be affordable to its residents. The Drinking Water SRF program provided a loan in the amount of $500,000 and immediately forgave the balance of the loan, effectively providing these funds at no cost to the community. The RUS program provided $2.1 million in funds to this project, including grant funds, which helped keep the project affordable. The Community Development Block Grant program provided approximately $519,000 in additional funds, and the community put forth $149,000. Program overlap among the state SRF and RUS programs can result in potential duplication of communities’ efforts to prepare funding applications and related documents, including preliminary engineering reports and environmental analyses, according to our analysis of project documents and interviews with engineers and community officials in the five states we visited. In these states, as with others, the state SRF and RUS programs require the communities to submit a preliminary engineering report and an environmental analysis as part of their loan applications. Preliminary engineering reports submitted by communities to the SRF and RUS programs contained many of the same components, but the format and the level of detail required varied. Table 3 shows the similar or common components included in these preliminary engineering reports of four projects we reviewed. We judgmentally selected an example from one community in each state that had at least one jointly funded project or that had applied to both programs for funding, and that prepared preliminary engineering reports. As table 3 shows, the preliminary engineering reports for both programs asked for similar information such as project location, community growth and population, existing facilities, alternative approaches to the project, and environmental and technical details of the project. The preliminary engineering reports prepared for the RUS program also included information on debt service and short-lived assets—those assets that have a planned life less than the repayment period of the loan—while the SRF engineering reports did not include such information. Engineers and community officials we interviewed in some states told us that they prepare separate preliminary engineering reports for each agency when a community applies for funding from both agencies, which can increase costs to the communities. Specifically, officials and engineers in some states told us the requirements for USDA’s RUS preliminary engineering report are generally more rigorous. They stated that these reports contain similar information but with different formats and levels of detail. Examples are as follows: In North Carolina, engineers and a technical service provider we interviewed told us that the state SRF and RUS formats for the preliminary engineering reports differed significantly in format but contained much of the same information. State officials told us the state SRF programs do not typically accept preliminary engineering reports completed for the state-level RUS program because they try to maintain a common format to enable efficient review. Similarly, the state-level RUS program officials said that they do not accept reports completed for the state SRF programs. In Colorado, an engineer for several projects we reviewed told us that the engineering firm had to complete preliminary engineering reports for both the state SRF programs and the RUS program even though the reports had similar formats and information. In South Dakota, engineers told us that to minimize effort, time, and cost to the community, they prepare preliminary engineering reports to meet state SRF, RUS, and other program requirements even if the community does not initially seek funds from all of these programs. These engineers said doing so helps minimize the additional effort it would take to revise the report at a later time if the community decided to seek additional funds. According to another engineer, if the preliminary engineering report is completed to meet just the SRF programs’ requirements, the firm will require additional time and money to meet the additional preliminary engineering report requirements necessary to apply for funding through the RUS program. Montana and Pennsylvania take a different approach than the other three states we visited as follows: Montana has a uniform preliminary engineering report accepted by most federal and state agencies. Engineers said that the agencies ask for some different information, which they gather in amendments to the report instead of having communities submit similar information multiple times. In Pennsylvania, officials from state SRF and state-level RUS programs said they encourage communities to apply to either the SRF or RUS programs and do not often jointly fund projects. Officials from both programs told us that when they do fund projects jointly, they try to accept one another’s documents to avoid duplicating them. We also found similarities in the environmental analyses submitted by communities to the SRF and RUS programs for four of the projects in the states we visited. According to our review of environmental analyses submitted to the state SRF and RUS programs—we judgmentally selected one in each of four communities and states that had jointly funded projects or applied to both programs for funding—each environmental analysis followed a similar overall format and contained many of the same components, but the level of analysis and the level of detail needed to satisfy federal and state requirements varied. Table 4 shows the overall format and similar components for these environmental analyses. The agencies ask for information on many of the same components, including purpose and need, alternatives analysis, and environmental consequences. The extent to which communities duplicate their environmental analyses for each program varies by state, depending on the extent to which water and wastewater infrastructure programs in the state accept each other’s work or use each other’s documents. In Colorado, North Carolina, and South Dakota, the communities can submit the final approved environmental analyses prepared for the RUS program to the SRF programs, which eliminates one of the documents they have to prepare. However, in these states, the state-level RUS program will not typically accept the analysis prepared for the SRF program because the state analyses are less rigorous, according to RUS officials. In Pennsylvania, the state programs have agreed to uniform environmental requirements, and the communities therefore submit the same document to both programs. Communities may be required to submit additional information, as needed, to meet requirements specific to each program. In Montana, the state SRF programs prepare an environmental analysis for the community that is primarily based on information that the community submits in the preliminary engineering report, but the community prepares the environmental analysis that it submits to the state RUS program. Furthermore, in some cases, the state programs may require the same type of environmental analysis for a project but, in other cases, the state programs may require different levels of environmental analysis—such as a categorical exclusion. For example, for a single wastewater project, the town of Conrad, Montana, completed an environmental analysis for the state-level RUS program, while the state SRF program completed the environmental analysis for the town. In contrast, Pagosa Springs, Colorado, submitted an environmental checklist to the state SRF program for its wastewater project and received a categorical exclusion but had to submit an environmental analysis for the application it submitted to the state-level RUS program for the same project. Variation exists across states despite NEPA regulations stating that federal agencies should eliminate duplication with state and local procedures by providing for joint preparation of environmental analyses or by adopting appropriate environmental analyses. According to state SRF officials, state-level RUS officials do not always accept state analyses because NEPA regulations under the RUS program are rigid and because some state RUS officials are not flexible in their interpretation of the requirements for environmental analyses. State RUS officials, however, told us that environmental analyses by some state environmental programs are not sufficient to meet federal NEPA standards, making it difficult for them to accept these environmental analyses. Potentially duplicative application requirements, including preliminary engineering reports and environmental analyses, may make it more costly and time-consuming for communities to complete the application process. For example, if consulting engineers have to provide similar, or even the same, information, in two different engineering reports or environmental analyses, their fees to the community may be higher. Engineers we interviewed estimated that preparing additional preliminary engineering work could cost anywhere from $5,000 to $50,000 and that the cost of an environmental analysis could add as little as $500 to a community’s costs or as much as $15,000. Moreover, having to complete separate preliminary engineering reports or environmental analyses may delay a project because of the additional time required to complete and submit these documents. State officials in Montana told us that coordination between federal and state programs and the implementation of uniform application requirements could reduce the time it takes an applicant to complete a rural water infrastructure project by up to half. Our review of five states and local communities in those states showed that EPA and USDA have taken some actions to coordinate their programs and funding at the federal and state level to help meet the water infrastructure needs of rural communities, but not others specified in the 1997 memorandum. Because these federal programs are implemented at the state level, efforts to coordinate between the agencies primarily occur among state officials managing the SRF and other water infrastructure programs, the RUS state-level offices, and the communities whose projects they fund. In some cases, inconsistent coordination at the state level has led to potential duplication for communities applying for funding and inefficiencies in program funding. EPA and USDA, at the federal level, and the state SRF and RUS state-level offices, have taken some actions to coordinate but have not taken others that could help avoid duplication of effort by communities applying for project funding. Recognizing the importance of coordinating the SRF and RUS programs at the state level, EPA and USDA agencies have taken some actions at the federal level to encourage coordination between the state-level programs and communities but not other actions specified in the 1997 memorandum. The 1997 joint memorandum signed by EPA and the USDA sought to improve coordination among federal and state agencies as they help fund community projects. It identified four major actions that state and state-level federal offices can take to improve coordination and reduce inefficiencies and potential duplication of effort. These actions are consistent with several of the leading practices we identified in our October 2005 report on interagency collaboration. These actions are as follows: Cooperate in preparing planning documents. The memorandum encourages state SRF and RUS programs to cooperate in preparing planning documents, including operating, intended use, and strategic plans that are required under each agency’s programs. The memorandum says that the federal and state programs should endeavor to incorporate portions of each agency’s planning documents to minimize duplication of planning efforts. This action is consistent with two leading practices for interagency collaboration identified in our previous work— defining and articulating common outcomes and developing joint strategies—through which partner agencies can overcome significant differences in agency missions and cultures, and align their activities and resources to accomplish common goals. Cooperate to remove policy and regulatory barriers. The memorandum states that agencies should cooperate in removing as many barriers to coordination as possible in program regulations or policy by, for example, coordinating project selection systems and funding cycles. This action is consistent with a leading practice for interagency collaboration identified in our previous work—promoting compatible policies and procedures. Cooperate on project funding. The joint memorandum encourages state SRF and state-level RUS officials to meet on a regular basis to cooperate in determining what projects will receive funding and which program should fund which project, and to discuss the possibility of jointly funding projects when necessary. This action is consistent with two of the leading practices for interagency collaboration identified in our previous work— agreeing upon roles and responsibilities and leveraging resources. Through such actions, federal and state agencies funding water and wastewater infrastructure can clarify which agencies will be responsible for taking various steps and for organizing joint and individual agency efforts and thereby obtain benefits that they would not have realized by working individually. Cooperate in preparing environmental analyses and meeting other common federal requirements. The joint memorandum states that, whenever possible, agencies should cooperate on federal requirements that are common across agencies—environmental analyses and other common documents, such as preliminary engineering reports—in order to create one comprehensive application package per project. This action is consistent with our leading practice for interagency collaboration of establishing compatible policies and procedures for operating across agency boundaries. Through such an action, federal and state agencies would seek to make policies and procedures more compatible. In February 2012, EPA, USDA, and several other federal and state agencies created a working group to examine the feasibility of developing uniform guidelines for preliminary engineering report requirements. The group plans to develop a draft outline for uniform preliminary engineering report guidelines by September 2012 and has received numerous examples and comments from participating states. According to RUS officials, however, once the draft outline is developed it must be reviewed by participating state and federal agencies before it is considered final, and the final outline could be delayed if agency review and response times are slow. In addition, EPA and USDA have taken action at the federal level to help the states coordinate better and make programs more efficient for communities applying for funding. Specifically, EPA and USDA coordinate at the federal level to encourage states to emphasize coordination between their SRF programs and RUS, as well as with local communities. According to EPA and USDA officials, to inform state officials and communities about the programs and funding opportunities available in their respective states, the federal agencies participate in conferences and workshops, conduct Webinars, and sponsor training. The federal agencies also issue guidance to their programs. For example, EPA issued a report in 2003 providing case studies and innovative approaches on how state SRF programs could better coordinate with other programs with similar purposes. In addition, in June 2011, EPA and USDA signed a Memorandum of Agreement to work together to help communities implement innovative strategies and tools to achieve short- and long-term water and wastewater infrastructure sustainability. Among other things, the memorandum encourages the agencies to share and distribute resources and tools to communities that promote long-term sustainability and to provide training and information that encourages the adoption and adaptation of effective water infrastructure management strategies. The actions that EPA and USDA have taken to date, such as providing guidance in the 1997 memorandum, have helped states and state-level federal agencies to coordinate generally but have not facilitated better coordination at the state level in more specific ways. In particular, the federal agencies have not taken actions, highlighted in the 1997 memorandum, to develop common documents for communities to apply to different funding programs. For example, EPA and USDA have not created a working group or taken similar action to work with other federal and state officials to develop a uniform environmental analysis. Making environmental analyses more compatible would be consistent with the March 2012 Council on Environmental Quality guidance on eliminating duplication in federal NEPA efforts. Similar to the 1997 joint memorandum, Council of Environmental Quality NEPA regulations and guidance encourage coordination between state and federal agencies in preparing environmental documents to reduce the time and cost required to make federal permitting and review decisions while improving outcomes for communities and the environment. According to agency officials, the agencies have not taken such action because they believe they have coordinated sufficiently. According to EPA officials, the states conduct NEPA-like analyses but are not required to meet the same NEPA requirements as federal agencies, and EPA cannot therefore dictate what documents the states use. In addition, USDA officials said that the RUS program’s NEPA guidance documents already encourage state-level RUS offices to coordinate with the state SRF programs to accept RUS’s environmental analyses, as appropriate and consistent with guidance from the Council on Environmental Quality. Without agreement to use common environmental analyses, however, rural communities could continue to spend more effort and resources to meet application requirements for improving their water and wastewater infrastructure. In the five states we visited, the state-level programs varied in the actions they took to coordinate their water and wastewater infrastructure programs consistent with the 1997 joint memorandum. In some states, the state SRF and RUS programs have developed innovative ways to coordinate and remove barriers to coordination consistent with the 1997 memorandum but, in other states, the state SRF and RUS programs have been less successful, leading to potential duplication for communities applying for funding and inefficiencies in program funding. Table 5 shows the extent of actions to coordinate taken by the state SRF programs and state-level RUS programs in the five states we visited. Some community officials we met with suggested that, for the drinking water and wastewater infrastructure programs, good coordination among state officials would involve meeting on a regular basis to cooperate in determining what projects would receive funding, thereby leveraging agency funds that are increasingly limited. In the five states we visited, the state SRF and state-level RUS programs varied in the number and types of action they had taken to coordinate, as described in the memorandum. However, the state-level programs did not take actions to cooperate in preparing planning documents. The extent of actions taken by the five states consistent with the memorandum are as follows: Cooperate in preparing planning documents. In the states we visited, state SRF and RUS programs do not regularly coordinate when developing agency-specific planning documents. State SRF officials identify the projects that apply to their program in planning documents called intended use plans. In these plans, the states rank projects using state-determined criteria following EPA guidance, such as environmental and health concerns. Similarly, state-level RUS officials develop funding plans in which they separately rank projects applying to their program using national criteria that focus primarily on economic development, as well as environmental and health concerns. Cooperate to remove policy and regulatory barriers. The state SRF and RUS programs in three of the states we visited had cooperated to remove policy barriers to coordination, such as differences in funding cycles. Specifically, in those states, federal and state officials meet regularly to ensure funding cycles are aligned to avoid unnecessary project delays. For example, in South Dakota, the state’s SRF and other state water and wastewater infrastructure funding programs have the same funding cycles and application timelines, which are administered by one agency. State and local officials told us that having the state funding programs aligned made it easier to navigate differences in funding cycles with RUS and other federal funding programs operating in the state. In addition, Montana officials created a working group to share information across state water and wastewater infrastructure programs and coordinate funding cycles. State and local officials in Montana said that regular coordination between federal and state officials on individual projects helped manage programmatic differences, such as differing funding cycles, to avoid lengthy delays in funding projects. Officials and engineers in both states said that the benefits of these joint efforts included reductions in community costs and administrative burdens for submitting applications and related documents, as well as reductions in the federal and state agencies’ time in reviewing the documents. Other states have not worked to remove policy and regulatory barriers to coordination. For example, state and local officials in North Carolina told us that differences in application processes and funding cycles for the federal and state programs, including state SRF programs and the RUS program, increased the complexity and cost of applying for funding. Multiple agencies in the state that fund drinking water and wastewater infrastructure projects, including the SRF programs, have different funding cycles, so that communities have to apply separately to each program and at different times to make the project affordable. State and local officials in Colorado told us that they faced similar barriers. Cooperate on project funding. Officials in all the states we visited meet at various times during the year, although some meet more frequently and discuss project funding in greater detail. Officials in Montana and South Dakota told us that they meet regularly to discuss upcoming projects, project applications, and coordination of funding, when possible. For example, officials from federal and state drinking water and wastewater funding programs in the Montana working group share information and discuss current projects and communities applying for funding. Community representatives said that state SRF program officials hold monthly meetings between the applicant and other state and federal funders to ensure that adequate funding is available to keep the project moving forward and to resolve any differences between the community and the federal and state programs providing funding. Similarly, in South Dakota, officials for the state SRF and RUS programs told us that they discuss project applications routinely and work closely with officials from local planning districts who, in turn, use their expertise working with federal and state programs to help communities apply for funding. In Pennsylvania, the state SRF and state-level RUS programs coordinate early in the application process by (1) conducting joint outreach sessions with communities interested in applying for drinking water and wastewater project funding and (2) directing communities to the program that better fits their needs, according to state officials we spoke with. State-level officials and engineers we spoke with identified improvements in the efficiency and effectiveness of the programs because the officials direct communities to the program that best fits their needs or provides the best opportunity for a successful application. Officials in Colorado and North Carolina also meet but do not regularly discuss project funding or the communities that have applied for funding, and said that they have experienced lapses in program efficiency and effectiveness, such as loss of federal funding for the state. Officials in both states told us coordination is complicated by communities not disclosing that they have applied to other state or federal programs for funding. Specifically, according to federal and state officials, in some cases, communities and the consulting engineers representing them will sign a funding agreement with either the state SRF or state-level RUS program but continue to seek additional grant or subsidized loan funding from other state and federal programs to get additional grant funding or better loan terms. State SRF and state-level RUS program officials in North Carolina and Colorado told us that not disclosing multiple funding sources can lead to inefficiencies when state SRF program officials and state-level RUS officials are unaware that a community has applied to both programs. Specifically, state-level officials who administer the RUS program in North Carolina and Colorado reported having to or expecting to deobligate a total of more than $20 million that they had committed to fully fund projects because they were unaware that the state SRF programs had committed to fully fund the same projects. The state-level RUS program in North Carolina expects to have to deobligate funding for three projects totaling about $4.9 million in loan and grant funding, and the RUS program in Colorado had to deobligate funding for seven projects totaling $15.6 million. The two RUS state offices could not meet internal agency deadlines to fully obligate their available funds and, as a result, had to return these funds to the RUS headquarters pool. State officials in North Carolina recently developed a uniform cover sheet for all state drinking water and wastewater funding program applications that asks communities to disclose other sources of funding. However, in our review of the uniform cover sheet, applicants are not asked to provide information on funding requested from RUS and other federal drinking water and wastewater funding programs. Cooperate in preparing environmental analyses documents and other common federal requirements. In our visits to Montana and Pennsylvania, we learned that federal and state programs, including the state SRF and RUS programs, have coordinated to streamline the application process in their states. For example, in Montana, these programs coordinated to develop uniform application materials and preliminary engineering report requirements that are accepted by all federal and state water and wastewater infrastructure programs in the state. Similarly, in Pennsylvania, program officials agreed upon uniform environmental analyses that are accepted by all programs, which reduce the cost and time for completing applications. Other states we visited have not agreed on uniform application requirements. According to federal and state officials in Colorado, North Carolina, and South Dakota, the state SRF and RUS programs have not developed documents with common formats and requirements for drinking water and wastewater infrastructure projects because of difficulty in integrating multiple program requirements. Specifically, state and local officials said that much of the information required in the environmental analyses was the same, but that agencies could not agree on a standard format and level of detail. For example, state SRF and RUS program officials in Montana told us they had tried, but were unable, to develop a uniform format for the presentation of their environmental analyses even though they had done so for their preliminary engineering reports. Furthermore, officials in Colorado and North Carolina expressed concern that having uniform documents that incorporated both state SRF and RUS program requirements would slow the application processes for all three programs and make them more costly. Specifically, officials administering both of the state SRF programs were concerned that, by adopting a format compatible with RUS policies and procedures, they would make the state SRF application process more onerous. Rural communities rely on federal grants and loans to meet their water and wastewater infrastructure needs and to keep their drinking water and sewer user rates affordable. It is therefore important to make the most efficient use of limited federal funds to help as many communities as possible and to eliminate potential duplication of effort by communities when they apply for funds. EPA and USDA recognized in a 1997 memorandum that it is necessary to more effectively and efficiently coordinate the SRF and RUS programs at the state level through four major actions: in preparing planning documents, removing policy and regulatory barriers, meeting regularly to discuss project funding, and preparing common environmental analyses and other common federal requirements. In addition, EPA and USDA have taken actions to encourage states to improve coordination over the past 15 years. Specifically, recent actions by EPA and USDA, such as their efforts to inform state officials and communities about the programs and funding opportunities by participating in conferences and workshops, conducting Webinars, and sponsoring training, as well as creating a working group to examine the possibility of developing guidelines to assist states in developing uniform preliminary engineering reports to meet requirements for federal and state programs, are encouraging and will help communities. However, the guidelines have not yet been completed, and EPA and USDA have not initiated a similar effort to develop guidelines for uniform environmental analyses that can be used to meet federal and state requirements. Without uniform documents, rural communities face a continuing burden and additional costs when applying for federal funds to improve their water and wastewater infrastructure. The state-level programs in the five states we reviewed varied in the number and types of actions they had taken to coordinate across the four key areas in the 1997 memorandum. Some state-level programs have developed innovative ways to coordinate and remove barriers to coordination, but in other states, the programs have been less successful, warranting stronger federal attention. Moreover, the state-level programs did not take actions to cooperate in preparing planning documents in any of the states. Until the state-level programs are regularly coordinating across the four key areas in the 1997 memorandum, including when developing planning documents, they will continue to risk potential program inefficiencies. Additional delays in taking actions to help improve such coordination could prevent EPA and USDA from more effectively and efficiently providing limited resources to needy communities. To improve coordination and to reduce the potential for inefficiencies and duplication of effort, we recommend that the Secretary of Agriculture and the Administrator of EPA take the following three actions: ensure the timely completion of the interagency effort to develop guidelines to assist states in developing their own uniform preliminary engineering reports to meet federal and state requirements; work together and with state and community officials to develop guidelines to assist states in developing uniform environmental analyses that could be used, to the extent appropriate, to meet state and federal requirements for water and wastewater infrastructure projects; and work together and with state and community officials through conferences and workshops, Webinars, and sponsored training to reemphasize the importance of coordinating in all four key areas in the 1997 memorandum. We provided EPA and USDA with a draft of this report for their review and comment, and both agencies provided written comments. EPA neither agreed nor disagreed with our first two recommendations but concurred with the third. USDA neither agreed nor disagreed with any of our recommendations. EPA’s comments are provided in appendix III and USDA’s comments are provided in appendix IV. Both agencies made technical comments that we incorporated as appropriate. In addition, we sent relevant portions of this report to state or federal officials responsible for administering the state SRF programs and state-level RUS programs for their review and technical comment. In its comments on our first recommendation, that the agencies complete their efforts to develop uniform requirements for preliminary engineering reports, EPA stated that it supported the intent of the recommendation but noted it does not have the authority to require states to adopt a required format and that some states may not utilize it. EPA recommended that we replace the word “requirements” with the word “format.” USDA also indicated that EPA and HUD have no authority to require state governments to use a particular preliminary engineering report outline and requested that we therefore change the word “requirements” to the word “guidelines.” We recognize and agree that states have discretion to develop their own requirements for their SRF programs. In making our recommendations, we did not intend to limit states’ discretion in adopting their own preliminary engineering report requirements. However, we continue to believe that the federal agencies could do more to help states identify common requirements for their own uniform preliminary engineering report documents. We changed our recommendation to reflect that the states do have discretion and that the federal agencies should develop guidelines to help the states develop uniform preliminary engineering report requirements. In its comments on our second recommendation, to develop uniform requirements for environmental analysis documents, EPA stated that in principle it agreed with our recommendation but said it is not realistic to develop a one-size-fits-all approach. EPA said that developing the “essential elements” for environmental analyses should achieve the same outcome and requested that we change the word “requirements” to “essential elements.” USDA stated that it did not necessarily disagree with the intent of the recommendation but noted that EPA has limited authority to dictate specific requirements to states implementing the SRF program. It also identified several procedural and policy hurdles including the fact that USDA’s NEPA requirements are typically more stringent than the reviews under the SRF programs. USDA stated that it would work with EPA to discuss the concept of unified reviews and identify what would be required to achieve such reviews. USDA suggested that the Council on Environmental Quality could be called on to facilitate a working group between federal water and wastewater infrastructure funding programs on NEPA implementation. In making our recommendation, we did not intend to limit states’ discretion in adopting their own requirements for environmental analyses. We changed the wording of our recommendation to clarify that the agencies would develop guidelines to assist states in developing common requirements for environmental analyses. We also note that USDA’s suggestion for the Council on Environmental Quality to facilitate a working group seems reasonable but did not make this part of our recommendations because we did not review the Council on Environmental Quality as part of our work. EPA concurred with our third recommendation, that the agencies work together and with state and community officials in all four key areas of the 1997 memorandum, while USDA neither agreed nor disagreed with the recommendation. EPA said that our report showed that little overlap existed between the programs but that state-level coordination should be encouraged more broadly. USDA said that it had no control over communities that choose to change funding sources to a state SRF program after accepting funding from the state-level RUS programs. We understand that communities have the discretion to change funding sources if better loan and grant terms are available, but strong coordination can help the agencies know when communities are applying to other programs and what other communities might need funding. Such coordination, envisioned in the 1997 memorandum, can avoid the loss of funds from states with high needs and other inefficiencies identified in this report. Furthermore, as EPA confirmed in its comments, state-level coordination can be encouraged more broadly to help other state and federal water and wastewater infrastructure funding programs better leverage limited state and federal funds. Finally, in its general comments on the draft report, USDA commented on GAO’s use of a relatively small sample of states for this review and that the RUS programs in those states were experiencing a transition in leadership and had not had time to develop relationships and learn other agencies’ programs. We selected states that had high rural water and wastewater infrastructure needs and a range of experience coordinating their water and wastewater infrastructure funding programs. We clearly state in the report that the sample is small and that our results cannot be generalized to all states. We recognize that the experience and trust established through long-term relationships is critical to the establishment of good coordination between federal and state programs. However, given the amount of time the memorandum has been in place, we believe that if good coordination between state SRF and state-level RUS programs had been established prior to the transition in state-level RUS leadership, it would have facilitated a smoother transition, and many of the challenges identified in our report may have been avoided. We will send copies of this report to the Administrator of EPA, the Secretary of Agriculture, the appropriate congressional committees, 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 members have any questions about this report, please contact me at (202) 512-3841 or trimbled@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of this report examine (1) the potential for fragmentation, overlap, and duplication between the Environmental Protection Agency’s (EPA) Drinking Water and Clean Water State Revolving Fund (SRF) programs and the U.S. Department of Agriculture’s (USDA) Rural Utilities Service (RUS) Water and Wastewater Disposal program, both of which address water and wastewater infrastructure needs in rural communities, and (2) the extent to which these programs coordinate with each other at the federal and state level to help meet the water infrastructure needs of rural communities. We selected these programs for this review because they provided the highest amount of federal funds to water and wastewater infrastructure projects, which include projects in rural communities—defined for this report as communities with populations of 10,000 or less—in fiscal year 2011. The federal government has not established a formal or consistent definition of what constitutes a rural community; however, RUS defines a rural community as having a population of 10,000 or less. EPA, although it does not define communities as rural, gathers data on funding to communities of various sizes, including communities with populations of 10,000 or less. For both agencies, communities can include entities such as towns, cities, or counties, which make the decision whether to apply for funding from the programs. In some cases, regional water utilities or other utility associations can apply on behalf of a community or a group of communities. Using this definition allowed us to obtain and analyze similar data from both agencies. To address both objectives, we reviewed government reports, statutes, regulations, guidance, budgets, and other relevant documents to identify federal support for rural water infrastructure programs and specifically the support provided by the Clean Water SRF, Drinking Water SRF, and RUS programs. In addition, we interviewed officials from EPA and USDA and from relevant nonprofit organizations, including the environmental finance center at Boise State University and the Council of Infrastructure Financing Authorities to collect financial and other information on the extent of fragmentation, overlap, duplication, and coordination among these rural water funding programs, as well as the current challenges facing rural communities. We then selected a nongeneralizable sample of five states to visit—Colorado, Montana, North Carolina, Pennsylvania, and South Dakota—to review the extent of fragmentation, overlap, and duplication among the EPA and USDA programs and the extent of coordination among the programs at the state level. The information from this sample cannot be generalized to all states but provides illustrative examples of their experiences in applying for funding from the EPA and USDA programs. We conducted site visits to these states to observe federally funded projects, discuss the funding process, and discuss community experiences applying for funding from the EPA and USDA programs. In each state, we judgmentally selected a nongeneralizable sample of communities to visit and projects to observe by analyzing lists of water and wastewater infrastructure projects we obtained from state SRF and state-level RUS program officials, and obtaining recommendations from officials we interviewed. We used the lists of projects to identify communities and projects that had applied for or received funding from the state SRF and RUS programs, or both. We reviewed a total of 54 projects in a total of 31 communities across five states, all of which had experience in applying for funds for a drinking water or wastewater project, or both, from the SRF or RUS programs. As with the state sample, the information from the communities and projects we selected cannot be generalized to other communities and projects but provide illustrative examples. To address the first objective, we assessed fragmentation between the Clean Water SRF, Drinking Water SRF, and RUS programs by examining statutes, regulations, and guidance relevant to the programs. To determine overlap between the programs, we calculated the proportion of SRF funding that was allocated to communities with populations of 10,000 or less for state fiscal years 2007 through 2011 (state fiscal years generally start in July and end in June). We used data from EPA’s National Information Management System (NIMS), which collects and summarizes data on Clean Water and Drinking Water SRF program funding directed to communities of populations of all sizes, including communities with populations of 10,000 or less by states—the same size of communities toward which RUS directs its funding. We conducted interviews with EPA officials to assess the reliability of the NIMS data and found it reliable for our purposes of identifying state SRF funding for communities with populations of 10,000 or less. We compared this proportion of SRF funding with total RUS funding provided from USDA’s accounting system. We interviewed RUS officials about how these funding data are maintained and determined that it was reliable for our purposes of identifying USDA funding for communities with populations of 10,000 or less. To determine the potential for duplication at the project and activity level, we collected funding data for projects that had been funded by the state SRF programs, the state-level RUS programs, or both, as well as funding data from the communities we visited or whose officials we spoke with. In addition, we spoke with state SRF, state-level RUS, and community officials and consulting engineers to assess the extent to which projects were funded separately by state SRF or state-level RUS programs, or were jointly funded by these programs, and what activities were conducted. Duplication occurs when two or more agencies or programs are engaged in the same activities or provide the same services to the same recipients; however, in some instances, duplication may be warranted because of the magnitude or nature of the federal effort. Further, we collected and analyzed application materials—preliminary engineering reports and environmental analyses—from communities if the community had a project that was jointly funded by both the SRF and RUS programs or had applied to both programs for the same project. On the basis of this criterion, we obtained preliminary engineering reports for four projects in four states and environmental analyses for four projects in the same four states. To analyze the documents, we identified the components of each document and compared them with the others to determine those that were similar and different. We spoke with consulting engineers in those communities to determine whether the communities were required to submit separate documents with similar information to both programs. Because of the limited size of each sample, the results of our analysis are not generalizeable to all such documents. To address the second objective, we reviewed documents and initiatives, including a 1997 joint memorandum signed by EPA and USDA promoting better coordination between the state SRF and state-level RUS programs and interviewed headquarters officials at EPA and USDA to identify national efforts to encourage better coordination at the state level. To analyze whether EPA and USDA efforts and initiatives incorporated leading practices for interagency collaboration, we compared guidance in the 1997 memorandum with our prior work on practices that can help federal agencies enhance and sustain collaboration. In the states we visited, to determine how closely the state SRF and state-level RUS programs coordinate and whether their efforts to coordinate are consistent with the 1997 memorandum, we reviewed state-level guidance and documentation from state coordinating bodies and interviewed state- level SRF and RUS program officials, community officials, consulting engineers, and technical assistance providers. We identified actions taken by states that were consistent with actions identified in the 1997 memorandum and assessed whether these fulfilled the actions identified in the memorandum using “yes” to indicate the action was fully taken, “no” to indicate that it was not taken at all, and “partial” to indicate the action had not been fully taken. We selected the five states we visited using a multistep process and several sources of information: funding needs for rural areas; geographic location; and level of coordination between state and community partners. We first narrowed the number of states we could visit to 15 states by analyzing EPA and USDA data on funding needs. To do so, we determined the relative level of funding needed in each state using the following data, by state, for communities with populations of 10,000 or less: (1) per capita needs for drinking water infrastructure, (2) per capita needs for clean water infrastructure, (3) drinking water infrastructure needs as a percentage of total state drinking water needs, (4) clean water infrastructure needs as a percentage of total state clean water needs, (5) the number of backlogged RUS water and wastewater infrastructure project requests, and (6) the total amount of RUS loan and grant funding requested for the backlogged projects. We obtained and analyzed these six categories of data from EPA’s Drinking Water and Clean Water Needs Assessment reports, and USDA’s data on backlog of funding applications. To assess the reliability of EPA’s data, we reviewed the agency’s quality control efforts over the data. To assess the reliability of the USDA data, we interviewed RUS officials on how they obtained and verified the data. We determined that both sets of data were sufficiently reliable for our purposes of selecting a sample of states to visit. Because not all states had complete data, we created three groups of states for analysis: 35 states had full data, or data for all 6 categories; 11 states had partial data, or data for 4 of the 6 categories; and 4 states had mixed data that we determined was not sufficient to analyze. Because the amount of data varied for each group, we determined that we would sample from each group separately. Next, for the 35 states that provided complete data, we ranked the states from highest to lowest (numbering the highest 1 and so on) within each of the six categories, basing the ranking on either percentage or dollars, depending on the category. We then identified the top 10 states in each category, selected the 10 states that appeared in three or more of the six categories and added the scores across the six categories for each state. We then conducted a very similar process for the 11 states that had partial data, except that we identified the states with the top five highest values in each of the four categories of data and then selected the three states that appeared in at least three of the four categories. This parallel analysis gave us 10 states from the full data group and 3 states from the partial data group. We then selected 2 states from the third group of states, which had mixed data available, on the basis of their physical size and the fact that they had the most data available in the group. We further narrowed down the number of states we could visit using geographic dispersion as a criterion. We located the 15 states selected through our analysis of funding data in six Department of Census divisions and selected five that were ranked first according to the six categories. We also selected 2 states from the partial-data group and one state from the mixed-data group, for a total of 8 states. From the eight remaining states, we selected Colorado, Montana, North Carolina, Pennsylvania, and South Dakota to visit based on the extent of coordination among the state SRF and RUS programs and the communities they served. We called the state SRF and RUS state-level officials to discuss whether the programs met and how frequently they jointly funded projects. We considered the range of coordination in each of the eight states to judgmentally select the five states we visited. We conducted this performance audit from September 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 6 provides information on the percentages and amounts of funding provided, by state, through EPA’s Drinking Water and Clean Water SRF programs to communities with populations of 10,000 or less. In addition to the individual above, Susan Iott, Assistant Director; John Barrett; Elizabeth Beardsley; Mark Braza; Elizabeth Curda; Richard Johnson; Micah McMillan; Sara Ann Moessbauer; Dan Royer; Tina Sherman; Carol Herrnstadt Shulman; and Kiki Theodoropoulos made key contributions to this report. | Many rural communities with populations of 10,000 or less face challenges in financing the costs of replacing or upgrading aging and obsolete drinking water and wastewater infrastructure. EPA and USDA oversee the three largest federally funded drinking water and wastewater funding programs for these communities. In response to Pub. L. No. 111-139, which directs GAO to identify and report on duplicative goals or activities in the federal government, this report examines the (1) potential for fragmentation, overlap, and duplication between EPA and USDA drinking water and wastewater infrastructure programs and (2) extent to which these agencies coordinate at the federal and state level to fund community water infrastructure projects. GAO analyzed relevant laws and regulations and program data and documents. GAO also visited five states based on high rural funding needs and geographic location (Colorado, Montana, North Carolina, Pennsylvania, and South Dakota) to meet with federal, state, and community officials and visit projects. GAO recommends that EPA and USDA complete guidelines to help states develop uniform preliminary engineering reports, develop guidelines to help states develop uniform environmental analyses, and reemphasize the importance of statelevel coordination. EPA neither agreed nor disagreed with GAO's first two recommendations and concurred with the third. USDA neither agreed nor disagreed with the recommendations. Funding for rural water and wastewater infrastructure is fragmented across the three federal programs GAO reviewed, leading to program overlap and possible duplication of effort when communities apply for funding from these programs. The three federal water and wastewater infrastructure programs--the Environmental Protection Agency's (EPA) Drinking Water and Clean Water State Revolving Fund (SRF) programs and the U.S. Department of Agriculture's (USDA) Rural Utilities Service (RUS) Water and Waste Disposal program--have, in part, an overlapping purpose to fund projects in rural communities with populations of 10,000 or less. For the 54 projects GAO reviewed in the five states it visited, this overlap did not result in duplicate funding, that is funding for the same activities on the same projects. However, GAO identified the potential for communities to complete duplicate funding applications and related documents when applying for funding from both agencies. In particular, some communities have to prepare preliminary engineering reports and environmental analyses for each program. GAO's analysis showed--and community officials and their consulting engineers confirmed--that these reports usually contain similar information but have different formats and levels of detail. Completing separate engineering reports and environmental analyses is duplicative and can result in delays and increased costs to communities applying to both programs. EPA and USDA have taken some actions to coordinate their programs and funding at the federal and state levels to help meet the water infrastructure needs of rural communities, but GAO's review in five states showed that their efforts have not facilitated better coordination at the state level in more specific ways. EPA and USDA signed a joint memorandum in 1997 encouraging state-level programs and communities to coordinate in four key areas: program planning; policy and regulatory barriers; project funding; and environmental analyses and other common federal requirements. As of July 2012, EPA and USDA had taken action at the federal level to help the states coordinate better and make programs more efficient for communities applying for funding. For example, EPA and USDA had formed a working group to draft uniform guidelines for preliminary engineering report requirements, but this effort is not yet complete. However, the agencies have not taken action to help states develop uniform environmental analysis requirements, as called for in the 1997 memorandum. Without uniform requirements, communities face a continuing burden and cost of applying for federal and state funds to improve rural water and wastewater infrastructure. Coordination in the four key areas varied across the five states GAO visited. For example, state and federal officials in Montana created a drinking water and wastewater working group to coordinate project funding and to resolve regulatory barriers such as different funding cycles between the programs. In addition, state and federal officials in Pennsylvania coordinated to develop uniform environmental analysis requirements. However, in North Carolina and Colorado, state-level programs did not coordinate well initially about project funding, which resulted in the state-level programs planning to pay for the same projects. The programs were able to avoid paying for the same projects, but state-level RUS programs have or expect to deobligate almost $20 million committed to these projects and return the funding to USDA. Further delays in coordinating programs could prevent funds from reaching needy communities. GAO recommends that EPA and USDA complete guidelines to help states develop uniform preliminary engineering reports, develop guidelines to help states develop uniform environmental analyses, and reemphasize the importance of state-level coordination. EPA neither agreed nor disagreed with GAOs first two recommendations and concurred with the third. USDA neither agreed nor disagreed with the recommendations. |
Nanotechnology is generally defined as the ability to understand and control matter at the nanoscale (between 1 and 100 nanometers), in order to create materials, devices, and systems with fundamentally new properties and functions specific to that scale. For example, opaque materials, such as copper, become transparent at the nanoscale and inert materials, such as platinum and gold, become chemical catalysts. With the capacity to control and manipulate matter at this scale, nanotechnology promises advances in areas such as new drug delivery systems, more resilient materials and fabrics, stronger materials at a fraction of the weight, more efficient energy conversion, and dramatically faster computer chips. To guide federal development of this technology, the National Nanotechnology Initiative (NNI) was established in fiscal year 2001 to support long-term research and development aimed at accelerating the discovery, development, and deployment of nanoscale science, engineering, and technology. The NNI is a multiagency program involving nanotechnology-related activities of the 25 federal agencies currently participating, including the National Science Foundation (NSF), the Department of Defense, the Department of Energy, the National Institutes of Health (NIH), and the National Institute of Standards and Technology (NIST). See table 1 for a complete listing of federal agencies participating in the NNI as of December 2007. Federal support for nanotechnology research totaled about $1.3 billion in fiscal year 2006. Cumulatively through fiscal year 2006, federal agencies have devoted over $5 billion to nanotechnology research since the NNI’s inception. While not all of the NNI’s participating agencies conduct or sponsor research, in fiscal year 2006, 13 agencies had budgets dedicated to nanotechnology research and development. Eight of these 13 agencies devoted some of their research resources to studying the environmental, health, and safety (EHS) risks of nanotechnology. Of these eight agencies, five—EPA, NIH, NIOSH, NIST, and NSF—accounted for almost 96 percent of the research focused on EHS risks in fiscal year 2006. NSF alone accounted for about 56 percent of all federal EHS risk research in fiscal year 2006. See figure 1 for a break out of research funds used by agency. A number of research and regulatory agencies support research to advance knowledge and information about the potential EHS risks of nanotechnology: The National Institute for Occupational Health and Safety (NIOSH) is a research agency within the Department of Health and Human Services (HHS) that concentrates its research on topics related to human health. NIOSH’s research results in recommendations for preventing work-related injuries, illnesses, and death. It therefore focuses on studies that will improve scientists’ ability to identify potential adverse occupational health effects of nanomaterials. At NIH, another HHS research agency that concentrates on human health, nanotechnology research is generally focused on the development of medical applications and the protection of public health, including research to examine the interaction of nanomaterials with biological systems. Consistent with its mission to advance measurement science, standards, and technology to enhance economic security and improve our quality of life, the National Institute of Standards and Technology (NIST), an agency in the Department of Commerce, develops the measurement techniques required to better characterize potential impacts of nanotechnology. The National Science Foundation (NSF) has the broadest research portfolio relative to nanotechnology and supports research to help meet its mission to promote the progress of science and engineering. With regard to EHS risks, NSF sponsors research to develop new methods to characterize nanoparticles and investigate the environmental implications and toxicity of nanomaterials. In addition, NSF sponsors a network of research centers that focus on a range of EHS issues including occupational safety during nanomanufacturing and the interaction of nanomaterials and cells. In addition to these research agencies, a number of regulatory agencies also have an interest in developing information about the potential EHS risks of nanotechnology: The Environmental Protection Agency (EPA), which is both a research and regulatory agency, is tasked with protecting human health and the environment. As a result, EPA determined that it needed to develop a better understanding of the potential human health and environmental risks from exposure to nanoscale materials and is therefore focusing its research efforts in this area, among others. The Food and Drug Administration (FDA), another HHS agency, is generally responsible for overseeing the safety and effectiveness of drugs and devices for humans and animals, and of biological products for humans. The agency also is generally responsible for overseeing the safety of color additives, cosmetics, and foods, including food additives and dietary supplements. As a result, FDA is interested in understanding the potential risks posed by nanomaterials used in products under its jurisdiction. The Occupation Safety and Health Administration (OSHA) is a Department of Labor agency whose mission is, in part, to ensure the safety and health of workers by setting and enforcing standards and encouraging continual improvement in workplace safety and health. OSHA is interested in information that would aid in the application of existing health standards—including hazard communication, respiratory protection programs, and laboratory standards—to nanotechnology operations and help determine the need for new standards or guidance products. The mission of the U.S. Consumer Product Safety Commission (CPSC) is to protect the public from unreasonable risks of serious injury or death from more than 15,000 types of consumer products, including some that may be manufactured with nanomaterials. The NNI is managed within the framework of the National Science and Technology Council’s (NSTC) Committee on Technology. The NSTC is an organization through which the President coordinates science and technology policies across the federal government. The NSTC is managed by the Director of the Office of Science and Technology Policy (OSTP), who also serves as the Science Advisor to the President. The NSTC’s Committee on Technology established the Nanoscale Science, Engineering, and Technology (NSET) subcommittee to coordinate communication between the federal government’s multiagency nanoscale research and development programs. The NSET subcommittee is composed of representatives from any agencies that choose to participate in the NNI (as of January 2008, 25 agencies are involved) and serves as the primary interagency coordination mechanism for nanotechnology-related research. Supporting the NSET subcommittee, the National Nanotechnology Coordinating Office (NNCO) provides day-to-day technical guidance and administrative assistance to prepare multiagency planning, budget, and assessment documents. In addition, the NSET subcommittee has established a number of working groups to help better focus interagency attention and activity on specific issues, such as the Nanotechnology Environmental and Health Implications (NEHI) working group. This group was designed to provide for exchange of information among participating agencies; facilitate the identification, prioritization, and implementation of research; and promote communication to other federal and nonfederal entities. The NEHI working group also coordinates U.S. participation in international activities, including the programs of the Organisation for Economic Co-operation and Development. Currently, NEHI membership consists of 16 research and regulatory agencies. See figure 2 for the NNI’s structure. Under the NNI, each agency funds research and development projects that support its own mission as well as the NNI’s goals. While agencies share information on their nanotechnology-related research goals with the NSET subcommittee and NEHI working group, each agency retains control over its decisions on the specific projects to fund. While the NNI was designed to facilitate intergovernmental cooperation and identify goals and priorities for nanotechnology research, it is not a research program. It has no funding or authority to dictate the nanotechnology research agenda for participating agencies. The NNI used its fiscal year 2000 strategic plan and its subsequent updates to delineate a strategy to support long-term nanoscale research and development, among other things. A key component of the 2000 plan was the identification of nine specific research and development areas— known as “grand challenges”—that highlighted federal research on applications of nanotechnology with the potential to realize significant economic, governmental, and societal benefits. Examples of potential breakthroughs cited in this strategic plan included developing materials that are 10 times stronger, but significantly lighter, than steel to make vehicles lighter and more fuel efficient; improving the speed and efficiency of computer transistors and memory chips by factors of millions; and developing methods to detect cancerous tumors that are only a few cells in size using nanoengineered contrast agents. In 2004, the NNI updated its strategic plan and described its goals as well as the investment strategy by which those goals were to be achieved. Consistent with the 21st Century Nanotechnology Research and Development Act, the NNI established major subject categories of research and development investment, called program component areas (PCA), that cut across the interests and needs of the participating agencies. These seven areas replaced the nine grand challenges and other nanotechnology investment areas that the agencies had previously used to categorize their nanotechnology research. Six of the seven areas are focused on the discovery, development, and deployment of nanotechnology. The seventh, societal dimensions, consists of two subareas—research on environmental, health, and safety; and education and research on ethical, legal, and other societal aspects of nanotechnology. The EHS portion of the societal dimensions PCA accounted for over $37 million in fiscal year 2006. See figure 3 for a break out of research funds used, by PCA. PCAs are intended to provide a means by which the NSET subcommittee, OSTP, the Office of Management and Budget (OMB), Congress, and others may be informed of the relative federal investment in these key areas. PCAs also provide a structure by which the agencies that fund research and development can better direct and coordinate their activities. In response to increased concerns about the potential EHS risks of nanotechnology, in fiscal year 2005, the NSET subcommittee and the agencies agreed to separately report their research funding for each of the two components of the societal dimensions PCA. The December 2007 update of the NNI’s strategic plan reaffirmed the program’s goals, identified steps to accomplish those goals, and formally divided the societal dimensions PCA into two separate PCAs—”environment, health, and safety” and “education and societal dimensions.” Beginning with the development of the fiscal year 2005 federal budget, agencies have worked with OMB to identify funding for nanoscale research that would be reflected in the NNI’s annual Supplement to the President’s Budget. Specifically, OMB issued guidance that consisted of a definition of nanoscale research and a notice that OMB would work with agencies to identify data for each of the PCAs. OMB analysts reviewed aggregated, rather than project-level, data on research funding for each PCA to help ensure consistent reporting across the agencies. Agencies also relied on definitions of the specific PCAs developed by the NSET subcommittee to determine the appropriate area in which to report research funding. Neither NSET nor OMB provided guidance on whether or how to apportion funding for a single research project to more than one PCA, if appropriate. However, representatives from both NSET and OMB stressed that the agencies were not to report each research dollar more than once. Although the NNI reported that federal agencies in fiscal year 2006 devoted $37.7 million—or about 3 percent of the total of all nanotechnology research funding—to research that primarily focused on studying the EHS risks of nanotechnology, we found that about 18 percent of the EHS research reported by the NNI cannot actually be attributed to this purpose. This was largely due to a reporting structure that did not lend itself to categorizing particular types of projects and limited guidance provided to the agencies by the NNI on how to consistently report EHS research. In addition to research reported as being primarily focused on the EHS risks of nanotechnology, some agencies conduct research that is not reflected in the EHS totals provided by the NNI either because they are not considered federal research agencies or because the primary purpose of the research was not to study EHS risks. Overall, 3 percent—or $37.7 million—of the approximately $1.3 billion dedicated for nanotechnology research funding in fiscal year 2006 was reported as being devoted to studying the EHS risks of nanotechnology. Our review of data on agency funding for 119 projects that were underway in fiscal year 2006 largely confirmed the figures reported by the NNI. Specifically, all but one of the five individual agencies reported the same or greater funding to us than what the NNI reported for fiscal year 2006. EPA reported slightly less to us than it did to the NNI. Largely these discrepancies resulted from timing differences in the date the NNI needed the data and the date agency officials finalized their review of fiscal year spending. For example, NIOSH reported $470,000 more to us because it had not included funding for a few projects in its report to the NNI, according to agency officials. Other differences resulted from rounding. As would be expected, our review of the descriptive information on EHS projects found that those agencies with missions directly related to protecting the environment or human health and safety devoted a greater percentage of their nanotechnology research budgets to studying EHS risks. For example, in fiscal year 2006, NIOSH reported devoting 100 percent of its fiscal year 2006 nanotechnology research funds to support 23 projects to study EHS risks. These projects focused primarily on worker safety and exposure, such as gathering data on workplace exposure to nanomaterials and evaluating the extent to which particle size affects the toxicity of inhaled nanomaterials. Similarly, EPA reported devoting 82 percent of its nanotechnology research budget to study EHS risks. This research included human health-focused projects to examine the toxicity of manufactured nanomaterials at the molecular and cellular level, as well as environmentally focused projects to evaluate how nanomaterials disperse and change under different environmental conditions and the extent to which nanomaterials accumulate in the bodies of various animal species. In contrast, we found that agencies with broader missions devoted a smaller portion of their nanotechnology research funds to study EHS issues. For example, NIST, an agency oriented toward measurement science and standards, dedicated 3 percent of its nanotechnology research budget to EHS risks in fiscal year 2006. The majority of its research funding focused on such PCAs as fundamental phenomena and processes; nanoscale devices and systems; and instrumentation research, metrology, and standards. Similarly, NSF dedicated 6 percent of its fiscal year 2006 nanotechnology research funds on research related to EHS risks as compared with 41 percent focused on fundamental phenomena and processes. In fiscal year 2008, funding for both EHS-related research and nanoscale research in general is projected to grow. Overall nanotechnology research is projected to increase in fiscal year 2008 to about $1.4 billion, or an increase of 20 percent over fiscal year 2005 figures. Funding for EHS- related research is expected to increase to approximately $59 million, an increase of 68 percent over fiscal year 2005 levels. As a result, EHS research would grow to about 4 percent of projected nanotechnology research in fiscal year 2008. About 18 percent of the total research dollars reported by the agencies as being primarily focused on the study of nanotechnology-related EHS risks in fiscal year 2006 cannot actually be attributed to this purpose. Specifically, our analysis found that 22 of the 119 projects funded by five federal agencies were not primarily related to studying EHS risks. These 22 projects accounted for about $7 million of the total that the NNI reported as supporting research primarily focused on EHS risks. Almost all of these projects—20 out of 22—were funded by NSF, with the two additional projects funded by NIOSH. See table 2 for our analysis of the nanotechnology research projects reported as being primarily focused on EHS risks. We found that the primary purpose of many of these 22 projects was to explore ways to use nanotechnology to remediate environmental damage or to identify environmental, chemical, or biological hazards. For example, a number of NSF projects explored the use of nanotechnology to improve water or gaseous filtration systems. In other cases, NSF-funded research was targeted toward developing nanotechnology-based applications to remediate soil or water contamination. In addition, many of the projects NSF reported as having a primary purpose to study EHS risks were part of its efforts to build a national research infrastructure capable of supporting a wide range of nanotechnology-related research. Specifically, NSF sponsors 16 Nanoscale Science and Engineering Centers, many of which devote a portion of their research efforts to EHS risk-related projects. In these cases, NSF apportioned a segment of the Center funding to the EHS category to account for this research. At NIOSH, both projects that we identified as not being primarily focused on studying EHS risks were focused on using nanotechnology to mitigate workplace risks, such as developing advanced sensors that incorporate nanotechnology to detect the presence of toxic gases in the workplace. We found that the miscategorization of these 22 projects resulted largely from a reporting structure for nanotechnology research that does not easily allow agencies to recognize projects that use nanotechnology to improve the environment or enhance the detection of environmental contaminants, and from the limited guidance available to the agencies on how to consistently report EHS research. From fiscal years 2001 to 2004, the NSET subcommittee categorized federal research and development activities into nine categories, known as “grand challenges,” that included one focused on “nanoscale processes for environmental improvement.” Agencies funded and researchers initiated work on many of these 22 projects under the grand challenges categorization scheme. Starting in fiscal year 2005, NSET adopted a new categorization scheme for agencies to report their nanotechnology research. The new scheme, which was based on PCAs, eliminated the environmental improvement applications research category. Instead, agencies were asked to fund and report research designed to address or understand the risks associated with nanotechnology, as part of the societal dimensions PCA. In essence, the new scheme shifted the focus from applications-oriented research to research focused on the EHS implications of nanotechnology. However, under the new scheme, agencies no longer had a way to categorize environmentally focused research that had been initiated. As a result, NSF and NIOSH characterized these projects as EHS focused for lack of a more closely related category to place them in, according to program managers. Furthermore, neither NSET nor OMB provided agencies guidance on to how to apportion the dollars for a single project to more than one program component area, when appropriate. This is especially significant for broad, multiphase research projects, such as NSF’s support to develop networks of research facilities with the capability to address a range of nanotechnology-related topics. Of the five agencies we reviewed, only NSF apportioned funds for a single project to more than one PCA. In addition to research reported to the NNI as being primarily focused on the EHS risks of nanotechnology, some agencies conduct research that is not reflected in the EHS totals provided by the NNI either because they are not considered federal research agencies or because the primary purpose of the research was not to study EHS risks. For example, FDA, which does not have a specific research budget and does not generally track nanotechnology research spending, used a portion of its operating funds in fiscal years 2004 through 2007 to undertake 15 research projects to evaluate the potential health risks of nanomaterials in the products that it regulates. One such project focused on sunscreens that contain nanosized particles of titanium dioxide to better understand their potential to be absorbed into the body through the skin. Another project is designed to study the toxicological and immunological responses to nanoparticles that may be used in therapeutic drugs. A fundamental understanding of potential risks will help FDA develop guidance and make future regulatory decisions regarding the manufacture and use of FDA-regulated products using these materials, according to program managers. In addition, as noted in the NNI’s annual Supplement to the President’s Budget, some agencies conduct research that results in information highly relevant to EHS risks but that was not primarily directed at understanding or addressing those risks and therefore is not captured in the EHS total. For example, NIH has research underway to develop drug delivery mechanisms that use nanotechnology. While the primary purpose of such research is to develop medical applications using nanotechnology, the research also provides information on how toxic the nanomaterials are, whether they accumulate in body tissues, and how they interact with the body at the cellular and molecular level. Agencies report funding data for such research in other PCAs, such as nanoscale devices and systems, rather than the EHS area. In addition, NIST conducts an array of nanotechnology research to accurately quantify the properties of nanomaterials and determine their size, shape, and chemical composition. This type of information is needed to understand and measure nanomaterials to ensure safe handling and protection against potential health or environmental hazards. However, NIST reports the funding data for such research under other PCAs such as instrumentation research, metrology, and standards. Ongoing agency and NEHI working group efforts to identify and prioritize needed research related to the potential EHS risks of nanotechnology appear reasonable but have not as yet resulted in a comprehensive research strategy to guide EHS research across agencies. We found that the EHS risk research undertaken in fiscal year 2006 addressed a range of EHS topics, was generally consistent with both agency- and NEHI- identified research priorities, and focused on the priority needs within each category to varying degrees. We determined that each agency’s nanotechnology research priorities generally reflect its mission. For example, the priorities identified by FDA and CPSC are largely focused on the detection and safety of nanoparticles in the commercial products they regulate. On the other hand, EHS research priorities identified by NSF reflect its broader mission to advance science in general, and include a more diverse range of priorities, such as the safety and transport of nanomaterials in the environment, and the safety of nanomaterials in the workplace. All eight agencies in our review have processes in place to identify and prioritize the research they need related to the potential EHS risks of nanotechnology. Most agencies have developed task forces or designated individuals to specifically consider nanotechnology issues and identify priorities, although the scope and exact purpose of these activities differ by agency. EPA, for example, formed a Nanomaterial Research Strategy Team to craft a long-term, focused plan to guide all of the agency’s nanotechnology research. The strategy, which identifies EPA’s research priorities around four key themes and seven scientific questions, is based in part on the agency’s 2007 “Nanotechnology White Paper” that described scientific issues the agency should consider to help ensure safe development of nanotechnology and to understand the potential risks. At other agencies, particularly those that have little or no funding for nanotechnology research, specific individuals throughout the agency have been tasked to identify and prioritize EHS research needs. For example, CPSC has assigned individual staff responsible for different aspects related to consumer product safety, such as health scientists, to monitor trends in the use of nanomaterials in such products, which helps inform the agency’s nanotechnology research priorities. Once identified, agencies communicate their EHS research priorities to the public and to the research community in a variety of ways, including publication in agency documents that specifically address nanotechnology issues, agency strategic plans or budget documents, agency Web sites, and presentations at public conferences or workshops. In addition to the efforts of individual agencies, the NSET subcommittee has engaged in an iterative prioritization process through its NEHI working group, although this process is not yet complete. First, in 2006, NEHI identified but did not prioritize five broad research categories and 75 more specific subcategories of needs where additional information was considered necessary to further evaluate the potential EHS risks of nanotechnology. The report identified these five general research categories as (1) Instrumentation, Metrology, and Analytical Methods; (2) Nanomaterials and Human Health; (3) Nanomaterials and the Environment; (4) Health and Environmental Exposure Assessment; and (5) Risk Management Methods. Second, following efforts to obtain public input on its 2006 report, NEHI released another report in August 2007, in which it distilled the previous list of 75 unprioritized specific research needs into a set of five prioritized needs for each of the five general research categories. The NEHI working group has used these initial steps to identify the gaps between the needs and priorities it has identified and the research that agencies have underway. According to agency and NNI officials, once this gap analysis is complete, NEHI will formulate a long-term, overarching EHS research strategy. According to the August 2007 report, the proposed strategy will list NEHI’s final research priorities, describe current federal EHS research, document the unmet needs, identify opportunities for interagency collaboration, and establish a process for periodic review. As envisioned, the EHS research strategy will serve as guidance for individual agencies as they develop their own research agendas and make funding decisions. NEHI plans to complete this overarching research strategy and issue a report in early 2008, according to NNI officials. Despite the fact that a comprehensive research strategy for EHS research has yet to be finalized, the prioritization processes taking place within individual agencies and the NNI appear so far to be reasonable. Numerous agency officials said their agency’s EHS research priorities were generally reflected both in the NEHI working group’s 2006 research needs and 2007 research prioritization reports. Our comparison of agency nanotechnology priorities to the NNI’s priorities corroborated their statements. Specifically, we found that all but one of the research priorities identified by individual agencies could be linked to one or more of the five general research categories. For example, OSHA’s need for toxicity data and information related to exposure is reflected in the two general research categories of Health and Environmental Exposure Assessment and Nanomaterials and Human Health. According to agency officials, the alignment of agency priorities with the general research categories is particularly beneficial to the regulatory agencies, such as CPSC and OSHA, which do not conduct their own research, but rely instead on research agencies for data to inform their regulatory decisions. In addition, we found that the primary purposes of agency projects underway in fiscal year 2006 were generally consistent with both agency priorities and the NEHI working group’s research categories. Of these 97 projects, 43 were focused on Nanomaterials and Human Health, including all 18 of the projects funded by NIH. In addition, EPA, NIOSH, and NSF each undertook research for this general research category. EPA and NSF funded all 25 projects related to Nanomaterials and the Environment. These two general research categories accounted for 70 percent of all projects focused on EHS risks. Reflective of its relatively large EHS research budget and broad mission, NSF sponsored projects in each of the five general research categories. In contrast, all the research projects NIST sponsored were related to Instrumentation, Metrology, and Analytical Methods. Agency research addressed each of the five general research categories and focused on the priority needs within each category to varying degrees. With the exception of the Human Health category, for which all specific needs were considered a top priority, 43 percent of projects addressed the two highest-priority needs in each category and 37 percent addressed the two lowest-priority needs. For example, 8 of the 11 projects in the Instrumentation, Metrology, and Analytic Methods category focused on the highest-priority need to “develop methods to detect nanomaterials in biological matrices, the environment, and the workplace.” In contrast, of the 25 projects related to Nanomaterials and the Environment, 3 addressed the highest-priority need in the category—”understand the effects of engineered nanomaterials in individuals of a species and the applicability of testing schemes to measure effects”—and 11 addressed the fourth- ranked priority—”determine factors affecting the environmental transport of nanomaterials.” Moreover, although the NEHI working group considered the five specific research priorities related to human health equally important, 19 of the 43 projects focused on a single priority— ”research to determine the mechanisms of interaction between nanomaterials and the body at the molecular, cellular, and tissular levels.” See table 3 for a summary of projects by agency and specific NEHI research priority. Despite the fact that the NEHI working group’s priorities reflect individual agency priorities, some environmental and industry groups have called for a more top-down and directed approach to the NNI’s prioritization efforts. In various congressional testimonies and in written comments on the NEHI working group’s draft reports, some groups have suggested that the NNI adopt a stronger, more autonomous role in setting the federal EHS research agenda. Some of these groups suggest that the NNI should have the authority to direct participating agencies to undertake research in specific EHS areas, its own budget authority, and the ability to shift EHS research dollars among the agencies. Proponents believe that this more centralized approach would help ensure that a cohesive EHS research strategy is implemented in a timely manner and that sufficient resources are dedicated to the highest-priority research. However, such a strategy may not be consistent with historical approaches used to set federal research priorities and would be difficult to implement given how federal research currently is funded. Federal expenditures for research and development are regular budget items and are contained, along with other types of expenditures, within the budgets of more than 20 federal agencies. For some of these agencies, research is a major activity, and for others, it is a smaller part of a much larger set of programs. Centralizing nanotechnology research expenditures in a single existing agency or new agency would be difficult to achieve. In addition, agency officials we spoke with were generally satisfied with the current bottom- up, consensus-based approach. Moreover, they said the process has benefited from the in-depth expertise each agency has developed. For example, NIH played a large role in shaping the priorities for Nanomaterials and Human Health; NIST was heavily involved with Instrumentation, Metrology, and Analytical Methods; and NIOSH was a major contributor to the development of priorities for Health and Environmental Exposure Assessment. Some officials acknowledged that while the current approach has limitations, it benefits from the input of a broader range of stakeholders. According to one official, information bubbles up through the NNI structure and is utilized to inform and create a top-down vision, which then serves to guide agency funding decisions. Agency and NNI processes to coordinate research and other activities related to the potential EHS risks of nanotechnology have been generally effective, and have resulted in numerous interagency collaborations. In fact, all eight agencies in this review have collaborated on multiple occasions with other NEHI-member agencies on activities related to the EHS risks of nanotechnology. These EHS-related activities are consistent with the expressed goals of the larger NNI—to promote the integration of federal efforts through communication, coordination, and collaboration. The NEHI working group is at the center of this effort. Regular NEHI working group meetings, augmented by informal discussions, have provided a venue for agencies to exchange information on a variety of topics associated with EHS risks, including their respective research needs and opportunities for collaborations. Interagency collaboration has taken many forms, including joint sponsorship of EHS-related research and workshops, the detailing of staff to other NEHI working group agencies, and various other general collaborations or memoranda of understanding. For example, FDA, NIST, and NIH’s Nanotechnology Characterization Laboratory have initiated formal agreements to collaborate on research to characterize the physical and biological properties of nanomaterials used in cancer diagnosis and treatment. An FDA official said that this arrangement was developed primarily through discussions that occurred as a result of the agencies’ participation in NEHI. Participation in NEHI has helped facilitate other types of interagency collaborations including a 2007 memorandum of understanding between EPA and NSF to create and fund research at a virtual Center for the Environmental Implications of Nanotechnology, detailing a CPSC toxicologist to a research laboratory office at EPA, and sponsoring international conferences on nanotechnology and occupational health by all NNI agencies, led by NIOSH, in 2005, 2006, and 2007. See table 4 for more examples of interagency collaboration. Furthermore, the NEHI working group has adopted a number of practices GAO has previously identified as essential to helping enhance and sustain collaboration among federal agencies. For example, NEHI’s 2005 “Terms of Reference” clearly defined its purpose and objectives and delineated roles and responsibilities for group members. Furthermore, collaboration through multiagency grant announcements and jointly sponsored workshops has served as a mechanism to leverage limited resources to achieve increased knowledge about potential EHS risks. Despite the general effectiveness of its collaboration efforts, the NEHI working group has not yet completed an overarching strategy to help align the agencies’ EHS research efforts. A completed strategy, combined with the results of the research needs prioritization process, also will serve as a means to monitor, evaluate, and report on the progress of meeting EHS research needs. In the meantime, the NNI’s annual Supplements to the President’s Budget have described the agencies’ activities related to EHS issues, among other things, and provided a mechanism to reinforce agency accountability and performance. Finally, all agency officials we spoke with expressed satisfaction with their agency’s participation in the NEHI working group, specifically, the coordination and collaboration on EHS risk research and other activities that have occurred as a result of their participation. Many officials described NEHI as unique among interagency efforts in terms of its effectiveness. Given limited resources, the development of ongoing relationships between agencies with different missions, but compatible nanotechnology research goals, is particularly important. NIH officials commented that their agency’s collaboration with NIST to develop standard reference materials for nanoparticles may not have occurred as readily had it not been for regular NEHI meetings and workshops. In addition, NEHI has effectively brought together research and regulatory agencies, which has enhanced planning and coordination. Many officials noted that participation in NEHI has frequently given regulators the opportunity to become aware of and involved with research projects at a very early point in their development, which has resulted in research that better suits the needs of regulatory agencies. Participation in NEHI is particularly important for agencies like CPSC, FDA, and OSHA that do not have dedicated budgets for nanotechnology research. Many officials also cited the dedication of individual NEHI working group representatives, who participate in the working group in addition to their regular agency duties, as critical to the group’s overall effectiveness. A number of the members has served on the body for several years, providing stability and continuity that contributes to a collegial and productive working atmosphere. In addition, because nanotechnology is relatively new with many unknowns, these officials said the agencies are excited about advancing knowledge about nanomaterials and contributing to the informational needs of both regulatory and research agencies. Furthermore, according to some officials, there is a shared sense among NEHI representatives of the need to apply lessons learned from the development of past technologies, such as genetically modified organisms, to help ensure the safe development and application of nanotechnology. Nanotechnology is likely to affect many aspects of our daily lives in the future as novel drug delivery systems, improved energy storage capabilities, and stronger, lightweight materials are developed and made available to the public. However, for a technology that may become ubiquitous, it is essential to consider the potential risks of using nanotechnology in concert with its potential benefits. The first steps are to identify what is not known about the properties of nanomaterials and what must be known about how these materials interact with our bodies and our environment. The NNI, through its NEHI working group, has begun a process to identify and prioritize both the research needed to better understand potential EHS risks and the gaps between what research is underway and the highest-priority needs. Essential to this process is consistent, accurate, and complete information on the amount of agency research designed to address and understand EHS risks. However, this information is not currently available because the totals reported by the NNI include research that is more closely related to uses of nanotechnology, rather than the risks nanotechnology may pose. Furthermore, agencies currently have limited guidance on how to report projects with more than one research focus across program component areas, when appropriate. As a result, the inventory of projects designed to address these risks is inaccurate and cannot ensure that agencies direct their future research investments appropriately. We recommend that the Director, OSTP, in consultation with the Director, NNCO, and the Director, OMB, provide better guidance to agencies regarding how to report research that has a primary focus to understand or address environmental, health, and safety risks of nanotechnology. We provided CPSC, FDA, EPA, NIH, NIOSH, NIST, NSF, OSHA, and OSTP with a copy of this report for review and comment. OSTP generally concurred with the report’s findings and agreed to review the manner in which agencies respond to the current guidance at future NSET meetings. In addition, the Department of Health and Human Services, on behalf of FDA, NIH, and NIOSH, said that the report clearly addressed the three charges that GAO was given and they provided technical comments which we incorporated as appropriate. In its comments, NIST said the report was fair and balanced. EPA, CPSC, NSF, and OSHA neither agreed nor disagreed with our report, and EPA and CPSC provided technical comments that we incorporated as appropriate. See appendices I, II, and III for agency comment letters from OSTP, HHS, and NIST, respectively. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees and Members of Congress, the Secretary of Commerce, Secretary of Health and Human Services, the CPSC Commissioner, the EPA Administrator, the FDA Commissioner, the NIH Director, the NIOSH Director, the NIST Director, the NSF Director, the OSHA Administrator, and the OSTP Director. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In addition to the contact person named above, Cheryl Williams (Assistant Director), Nancy Crothers, Elizabeth Erdmann, David Lutter, and Rebecca Shea made key contributions to this report. | The National Nanotechnology Initiative (NNI), administered by the Office of Science and Technology Policy (OSTP), is a multiagency effort intended to coordinate the nanotechnology-related activities of 25 federal agencies that fund nanoscale research or have a stake in the results. Nanotechnology is the ability to control matter at the scale of a nanometer--one billionth of a meter. A key research area funded by some federal agencies relates to potential environmental, health, and safety (EHS) risks that may result from exposure to nanoscale materials. Because of concerns about federal efforts to fund and prioritize EHS research, GAO was asked to determine (1) the extent to which selected agencies conducted such research in fiscal year 2006; (2) the reasonableness of the agencies' and the NNI's processes to identify and prioritize such federal research; and (3) the effectiveness of the agencies' and the NNI's process to coordinate this research. GAO reviewed quantitative and qualitative data from five federal agencies that provided 96 percent of fiscal year 2006 funding for EHS research. The NNI reported that in fiscal year 2006,federal agencies devoted $37.7million--or 3 percent of the $1.3 billion total nanotechnology research funding--to research that was primarily focused on the EHS risks of nanotechnology. However, about 20 percent of this total cannot actually be attributed to this purpose; GAO found that 22 of the 119 projects identified as EHS-related by five federal agencies in fiscal year 2006 were not focused on determining the extent to which nanotechnology poses an EHS risk. Instead, the focus of many of these projects was to explore how nanotechnology could be used to remediate environmental damage or to detect a variety of hazards. GAO determined that this mischaracterization is rooted in the current reporting structure which does not allow these types of projects to be easily categorized and the lack of guidance for agencies on how to apportion funding across multiple topics. In addition to the EHS funding totals reported by the NNI, federal agencies conduct other research that is not captured in the totals. This research was not captured by the NNI because either the research was funded by an agency not generally considered to be a research agency or because the primary purpose of the research was not to study EHS risks. Federal agencies and the NNI are currently in the process of identifying and prioritizing EHS risk research needs; the process they are using appears reasonable overall. For example, identification and prioritization of EHS research needs is being done by the agencies and the NNI. The NNI also is engaged in an iterative prioritization effort through its Nanotechnology Environmental and Health Implications (NEHI) working group. NEHI has identified five specific research priorities for five general research categories, but it has not yet completed the final steps of this process, which will identify EHS research gaps, determine specific research needed to fill those gaps, and outline a long-term, overarching EHS research strategy. GAO found that the focus of most EHS research projects underway in fiscal year 2006 was generally consistent with agency priorities and NEHI research categories and that the projects focused on the priority needs within each category to varying degrees. The anticipated EHS research strategy is expected to provide a framework to help ensure that the highest priority needs are met. Agency and NNI processes to coordinate activities related to potential EHS risks of nanotechnology have been generally effective. The NEHI working group has convened frequent meetings that have helped agencies identify opportunities to collaborate on EHS risk issues, such as joint sponsorship of research and workshops to advance knowledge and facilitate information-sharing among the agencies. In addition, NEHI has incorporated several practices that are key to enhancing and sustaining interagency collaboration, such as leveraging resources. Finally, agency officials GAO spoke with expressed satisfaction with the coordination and collaboration on EHS risk research that has occurred through NEHI. They cited several factors they believe contribute to the group's effectiveness, including the stability of the working group membership and the expertise and dedication of its members. |
GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after the transmittal of the president’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31 each year, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. As the nation’s chief law enforcement agency, Justice is charged with, among other things, enforcing laws in the public interest and playing a key role in protecting the public from violence and criminal activity, such as drug smuggling and acts of terrorism. With a fiscal year 2001 budget of over $24 billion and a staff of about 111,000, including attorneys, investigators, and agents, Justice is a multifaceted organization whose functions range from securing the nation’s borders to helping state and local agencies improve their capacity to prevent and control crime. Justice’s responsibilities are divided among a number of major components, including the Drug Enforcement Administration (DEA), the Federal Bureau of Investigation (FBI), INS, the Office of Justice Programs (OJP), and the United States Marshals Service (USMS). This section discusses our analysis of Justice’s performance in achieving the selected key outcomes and the strategies it has in place, particularly strategic human capital management and information technology, when appropriate, for accomplishing these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. Overall progress made by Justice toward achieving less drug- and gang- related violence is difficult to ascertain because (1) three of nine performance measures did not have fiscal year 2000 targets to measure success and (2) Justice fell short of achieving its performance targets for four measures. Justice did not set fiscal year 2000 performance targets for its performance related to dismantling Asian criminal enterprises, dismantling Eurasian criminal enterprises, and cases in Indian Country.Justice did not set performance targets for these measures because it considered two of the measures to be new measures, and for the number of cases in Indian Country, Justice did not want to set performance levels because it believes that setting performance targets could cause the public to perceive law enforcement as engaging in “bounty hunting” or pursuing arbitrary targets merely for the sake of meeting particular goals. In addition, even though Justice indicated that the performance measures for dismantling Asian and Eurasian criminal enterprises were new measures, these same measures were included in Justice’s fiscal year 1999 performance report (albeit Eurasian was called Russian then). Justice fell short of achieving the performance targets for four measures. For example, although close, Justice did not meet its performance target to perform 4.81 million criminal background checks. Justice reported that it had perfomed 4.49 million criminal background checks. Also, Justice did not meet its performance target to prevent 140,244 persons with criminal backgrounds from purchasing firearms. Justice reported it had prevented 71,890 ineligible persons from purchasing firearms. In its explanation of why it did not meet these performance targets, Justice noted that the reported targets for these measures were based on the assumption that all states and territories would be full participants in the National Instant Criminal Background Check System (NICS) program. Justice reported that only 27 states have become full participants since NICS began in November 1998. In an April 2000 report, we reported that the states generally are better positioned than the FBI to conduct background checks and that there are potential barriers to states participating in NICS. Justice’s performance report does not articulate the implications of potential barriers if the intent is for all states to participate. Although close, Justice also did not meet its performance measure to initiate 20,000 new Interpol cases or enter into 10 new mutual legal assistance treaties with other countries. Justice reported that in fiscal year 2000, it had initiated 19,549 new Interpol cases and entered into 8 treaties. Justice noted that it had not met its performance targets for these measures because there are a number of outside entities (such as, state liaison offices, foreign governments, the State Department, the White House, and the U.S. Senate) that have key roles in these efforts and that Justice has limited control over actions of these entities. However, Justice did not discuss any actions that it might take to mitigate the effects of external factors. Our February 1999 report also suggested that to improve the usefulness of annual plans, agencies show how strategies will be used to achieve goals that include describing approaches to leverage or mitigate the effects of external factors on the accomplishment of performance goals. For each performance measure, Justice included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. There were data limitations associated with four of the databases used with the performance measures. Two of the data limitations appear to be more of a clarification rather than a limitation. The other two data limitation explanations were more significant. One limitation noted that a significant number of criminal history records were not complete and that state and local agencies and the courts needed to update and complete the records in a more timely manner. The performance report did not indicate actions or steps that might be taken to mitigate the data limitations with state and local agencies and the courts in order to improve the data’s reliability. For the other limitation, Justice reported that the current reporting system for the number of Interpol cases was severely limited. However, Justice reported that in fiscal year 2001 the database and procedures were to be validated for accuracy and redesigned for efficiency and that a comprehensive and flexible reporting system to extract the statistics from the database was to be developed. Justice’s strategies and initiatives to achieve less drug- and gang-related violence generally seem reasonable and clear. However, Justice could improve its performance strategies by exploring potential coordination efforts that might be used to mitigate external factors and by considering the use of performance evaluations to better assess its progress toward achieving the outcome. For example, on the basis of its fiscal year 2000 performance, Justice modified its fiscal year 2001 performance target from 5.05 million to 4.54 million for the number of criminal background checks performed. Modifying the performance target in the short term is a reasonable step; however, Justice may want to discuss what it has considered in response to only 27 states participating in the NICS since it began in November 1998 and whether other strategies to assist states are needed to achieve the outcome. As mentioned earlier, Justice did not have performance targets for one measure because of concerns about pursuing targets merely for the sake of meeting a goal. We suggest that Justice could compare the relative effectiveness of programs using a program evaluation approach to provide an indication of its progress towards achieving its goals. Specifically, Justice has a goal to provide enforcement assistance and training to tribal governments to combat and reduce the incidence of violent crime on Indian Reservations, especially crime related to gang activity. This is a performance measure for which Justice did not provide performance targets and that Justice reported the number of cases in Indian Country. A program evaluation for this goal could compare the difference in gang activity on reservations where assistance and training is provided with reservations where assistance and training have not been provided. While program evaluations will also be hampered by the lack of underlying data about the drug- and gang-related violence, they might provide some indications of the comparative effectiveness of different interdiction programs. Overall progress made by Justice toward achieving a reduction in the availability and/or use of illegal drugs is difficult to ascertain because it did not have fiscal year 2000 performance targets for two of five measures, and the relationship of one measure to the outcome was not clear. Justice did not have a performance target for measures related to drugs removed and its efforts to seize, dismantle, and dispose of clandestine laboratories. Justice indicated that the measure of the amount of drugs removed is to be discontinued because it does not adequately assess performance and is not results oriented. Justice explained that DEA could not estimate the amount of drugs to be removed by type because these vary from case to case. Rather, Justice reported that DEA seeks to investigate cases that will have the greatest impact on drug trafficking, drug-related crime, and violence and that drug seizures are merely a by-product of those investigations. Regarding not setting targets for its efforts to seize, dismantle, and dispose of clandestine laboratories, as previously noted, Justice does not want the public to perceive that it is pursuing arbitrary targets for the sake of meeting particular goals. Also, we noted that Justice’s fiscal year 2000 actual performance of 1,888 clandestine laboratories seized, dismantled, and disposed had decreased from its fiscal year 1999 actual performance of 2,024. According to Justice, it receives leads from state and local agencies or concerned citizens regarding the location of clandestine laboratories. The number of leads vary from year to year which results in a variance in the number of seizures in a given year. In addition, the performance report did not explain how positive responses for inquiries to Justice’s El Paso Intelligence Center (EPIC) contributes toward achieving the outcome to reduce the availability of drugs. As previously noted, we believe the usefulness of annual reports and plans could be improved by better articulating a results-orientation that would include explanatory information on goals and measures. Justice fell short of achieving the performance targets for three measures. Justice fell somewhat short on its performance target to improve intelligence gathering. Specifically, Justice reported it had 22,624 inquiries to EPIC resulting in positive responses instead of the performance target of 24,602 inquiries. Justice reported that it did not meet its performance measure for the number of EPIC inquiries resulting in positive responses because EPIC did not receive as many requests for information as anticipated. Other unmet performance measures were to identify and dismantle major drug trafficking organizations. Specifically, Justice’s performance target was to identify 250 and dismantle 50 U.S.-based drug organizations. Justice reported that the FBI identified 201 major drug trafficking organizations and dismantled 12. Justice attributed this shortfall to the FBI overestimating what could be accomplished based on resource constraints. Justice also indicated that the Organized Crime Drug Enforcement Task Force (OCDETF) had a base reduction of agents and support staff at the end of fiscal year 2000 and that this would affect FBI’s ability to identify and dismantle major drug trafficking organizations in fiscal year 2001. Accordingly, the performance targets for fiscal year 2001 were revised. In a July 1999 report, we stated that DEA did not have performance targets for disrupting and dismantling drug trafficking organizations. In the absence of such targets, it is difficult to assess DEA’s overall effectiveness in achieving its strategic goals. In our July 1999 report, we recommended that the Attorney General direct the DEA Administrator to work closely with Justice and the Office of National Drug Control Policy to develop measurable DEA performance targets for disrupting and dismantling drug trafficking organizations consistent with the performance targets in the National Drug Control Strategy. In response to our recommendation, DEA (1) developed a new strategic plan, which was approved in May 2000; (2) participated in a Justice work group to define the terms “disrupt” and “dismantle”; and (3) formed an internal GPRA Work Committee to assess and develop a feasible management approach to identify and establish quantifiable performance targets. Justice indicated in its fiscal year 2000 performance report that, under DEA’s new strategic plan, DEA developed another performance measure—percent of major drug trafficking organizations disrupted or dismantled—and is developing a process to capture information and data to report on this measure. Justice anticipates, however, that the system will take between 2 and 3 years to be fully operational. Similar to the previous outcome, Justice’s performance report included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. Except as noted above about DEA developing a new process for capturing data on the percent of major drug trafficking organizations disrupted or dismantled, none of the performance measures noted any data limitations. Justice’s strategies and initiatives to reduce the availability and/or use of drugs generally seem reasonable and clear. Fiscal year 2001 performance targets were revised based on performance results in fiscal year 2000. Although Justice generally explained why it did not meet certain targets and revised those targets downward, its strategies do not articulate what Justice will do differently to achieve its unmet goals in the future. In addition, the strategies did not discuss determining the underlying reason for EPIC not receiving as many requests for information as anticipated—a piece of knowledge that might improve upon the relevancy, appropriateness, and usefulness of the performance measure and contribute to determining whether other measures might be more useful. Furthermore, Justice did not include specific strategies or goals for mitigating the implications of FBI and OCDETF resource constraints, including human capital management issues. Although Justice’s performance plan identifies agencies that have crosscutting activities related to reducing the availability and/or use of drugs, the plan does not discuss efforts in relation to achieving the outcome. For example, the plan has FBI performance measures and expects future DEA performance measures on dismantling drug trafficking organizations, but the plan does not adequately explain how joint planning and coordination will contribute to achieving the overall outcome to reduce illegal drug availability and/or use. According to Justice, interagency cooperation is key to successful drug enforcement, and Justice reported that it has developed a number of programs through which investigators can coordinate. However, the plan does not include strategies for enhancing or measuring the contribution of these programs to the overall achievement of the outcome. In our February 1999 report, we note that the listing of current programs and initiatives that were often included in agencies plans were useful for providing an understanding of what agencies do. However, presentations that more directly explain how programs and initiatives achieve goals would be most helpful to congressional and other decisionmakers in assessing the degree to which strategies are appropriate and reasonable. Overall progress made by INS towards providing timely, consistent, fair, and high-quality services was difficult to fully gauge because the measures did not enable us to assess progress toward achieving this planned outcome. For example, the performance measures on the number of naturalization cases adjudicated, the percent of naturalization and benefit applications found on line, and the number of these applications filed on line do not indicate whether users of INS services are receiving timely, consistent, fair, and high-quality services. Regarding the performance target for achieving a 99-percent level of compliance with INS’ quality standards for naturalization applications, the performance report did not clearly explain what is covered in these standards. Therefore, it is unclear whether compliance with these standards is an indication of timely, consistent, fair, and high-quality services. Again, we believe that opportunities exist for Justice to improve the usefulness of its annual report and plan by better articulating a results-orientation that would include explanatory information on goals and measures. Justice reported that it had not met its performance target for an average case processing time of 6 months for naturalization applications, instead reporting an average case processing time of 8 months during fiscal year 2000. Justice did not explicitly discuss the reason for missing the performance target for average case processing time, but implied that it was a resource issue. Specifically, Justice reported that during peak periods at the end of the year, INS met the targeted 6-month processing time for naturalization applications by shifting resources from other services to increase production. On the basis of its fiscal year 2000 performance, INS expects to achieve a case processing time of 9 months in fiscal year 2001 for naturalization applications. Furthermore, historical data in Justice’s performance report shows that improvement has been made to reduce the average case processing time for naturalization applications from 27 months in fiscal year 1998 to 8 in fiscal year 2000. Similar to the previous outcomes, Justice’s performance report included a brief explanation about data collection and storage, data validation and verification, and any known data limitations. Justice’s performance report indicated data limitations and efforts to improve the accuracy and timeliness of the data. For example, Justice reported that in fiscal year 2001 INS’ naturalization case capability will be fully deployed under its Computer Linked Application Information System (CLAIMS 4) and will allow data for these cases to be fully automated and case-based, providing for timely and accurate data. In a May 2001 report, we said that aliens face long waits for a resolution to their case and have difficulty obtaining accurate information on how long they can expect to wait. We reported that INS did not know how long it took to process aliens’ applications because the agency’s automated application data were incomplete and unreliable. Specifically, we reported that INS’ available servicewide automated systems contained unreliable data and its districts did not have automated systems for tracking many types of applications. We pointed out that, in the absence of information on actual processing times, INS had been estimating processing times, but that the usefulness of the estimation method was limited. We recommended, and Justice agreed, that INS develop the capability to begin to calculate and report actual processing times for applications as soon as reliable automated data are available from its servicewide systems, CLAIMS 3 and CLAIMS 4. Justice’s performance report states that on the basis of its fiscal year 2000 performance, it expects to meet the corresponding 2001 targets for average case processing times of 9 months for naturalization applications and 14 months for adjustment of status applications and expects to meet the 2001 performance target of 99 percent compliance with quality standards for naturalization applications. Justice strategies and initiatives do not sufficiently discuss achieving the outcome to provide timely, consistent, fair, and high-quality services. The strategies primarily address maintaining or improving application process times and generally do not discuss consistent, fair, and high-quality services. As previously noted, INS has quality standards that it is using as a measure, but the performance plan does not articulate the specific quality standards for achieving the outcome. Justice did not discuss the implications of using strategic human capital management as a strategy to help achieve this outcome even though one performance target was not achieved until resources were realigned. Thus, the deployment of available staff appears to be critical to achieving the timeliness performance targets. In addition, the performance plan did not provide as much detail as it could have to describe INS’ strategy to provide electronic filing of applications and the implications for accomplishing timely, consistent, fair, and high-quality services. Although Justice identified that it is deploying CLAIMS 4 software to field offices in fiscal year 2001 and upgrading CLAIMS 3 automated support, the performance report does not explain how the information technology improvements will contribute to achieving better INS services. In our February 1999 report, we note that the listing of current programs and initiatives that were often included in agencies’ plans were useful for providing an understanding of what agencies do. However, presentations that more directly explain how programs and initiatives achieve goals would be most helpful to congressional and other decisionmakers in assessing the degree to which strategies are appropriate and reasonable. Overall progress made by INS towards achieving this outcome is difficult to fully gauge because INS has a new performance measure for which there was no fiscal year 2000 performance target, and the other two performance measures did not enable us to assess progress toward achieving this planned outcome. Because it was a new measure, Justice did not set a performance target for high-priority border corridors demonstrating optimum deterrence, a critical performance measure to determine whether it is securing U.S. borders. Justice did not discuss the rationale for the new measure or how the new measure will better enable INS to assess its progress toward securing our borders. Justice said that during fiscal year 2000, INS continued to refine the border control operational effectiveness measure, in particular by using “corridors” rather than zones, with each sector identifying the corridors within their area of operation. Even though this was a new measure, Justice provided historical data from fiscal years 1994 to 1999, provided actual performance for fiscal year 2000, and projected performance targets for fiscal years 2001 to 2004 for this performance measure as an indication of its progress. The historical data showed that INS has maintained optimum deterrence in 6 of 26 corridors along the Southwest border during fiscal years 1998, 1999, and 2000. In addition, while Justice met the targets for the other two performance measures for this outcome, these measures were not directly linked to the outcome because they omitted some aspects of the performance. For example, to deter illegal immigration at the source, INS has a performance measure to intercept undocumented offshore travelers en route to the United States. Justice reported that these intercepts were accomplished as a result of INS officers working closely with their host country government agencies, diplomatic missions, and others to provide advice, training, and assistance. Justice’s performance report does not sufficiently discuss the working relationship with host countries and others or the quality of INS officers’ training and assistance in relation to deterring illegal immigration at the source. In a May 2000 report, we said that the agency does not believe that overseas efforts have produced long-term impacts because training that INS personnel provided to foreign air carrier and law enforcement personnel diminished within a few months. In addition, INS believes that the non-INS personnel they have trained do not receive continual encouragement and support to perform their jobs professionally and, therefore, revert to their old practices. In its performance report Justice stated that it expects to meet the 2001 performance targets for the three performance measures. Specifically, Justice’s performance report states that on the basis of fiscal year 2000 actual performance for demonstrating optimum deterrence in six corridors, INS expects to meet the 2001 performance target for this measure of deterrence in eight corridors. Justice exceeded, by a significant number, its performance targets for intercepting undocumented offshore travelers en route to the United States (the performance target was 8,283 interceptions and the actual was 19,007) and the offshore prosecutions assisted by INS (the performance target was 107 prosecutions and the actual was 514). Justice reported that improved and thorough reporting of these activities by the INS overseas district offices resulted in a more accurate account of these activities than had been available in the past, and INS significantly exceeded its targets. Justice’s performance plan indicates INS expects to also exceed the fiscal year 2001 performance targets of 9,324 interceptions and 119 prosecutions. Although Justice briefly explained its data collection and storage, and data validation for each performance measure, there is some question about the credibility of the performance data. Specifically, Justice reported that all three performance measures related to securing the U.S. borders from illegal immigration had data limitations. With respect to measuring border corridors demonstrating optimum deterrence, the report states that collecting data to measure this goal is currently an intensive manual process and that INS is implementing a process to standardize recording and reporting of data to ensure consistency and validity. Justice also reported that data provided for corridors demonstrating optimum deterrence prior to fiscal year 1999 were estimated because data was not available for corridors during that period and that projected corridor effectiveness for fiscal years 2001 through 2004 is dependent on sufficient allocation of resources. Justice’s strategy to secure U.S. borders from illegal immigration does not adequately discuss integration of resources to achieve the outcome. Justice’s basic strategy is to apply increased levels of Border Patrol staff, technology, and other resources in the busiest areas until the risk of apprehension is high enough to be an effective deterrent, thus creating acceptable areawide control. Justice’s performance plan does not discuss the mix of staffing, equipment, and technology needed to achieve the desired level of deterrence in each area nor does it clearly discuss the basis upon which a determination is made that a particular corridor has achieved optimum deterrence. In addition, in December 1999, we reported that INS had had difficulties attracting and retaining qualified applicants for Border Patrol positions. Justice’s performance report indicates that INS did not meet its performance target to have 9,377 Border Patrol agents on board at the end of fiscal year 2000, falling short by 196 agents. According to Justice, additional Border Patrol resources (personnel and technology) are needed in fiscal year 2002 to maintain and extend control along the border. INS expects to meet its hiring goals for agents in fiscal year 2001, reaching an on-board strength of 9,807 and projected an on- board strength of 10,377 agents for fiscal year 2002. According to Justice, INS has overcome difficulties in hiring Border Patrol agents. The Justice report also states that INS set records in fiscal year 2000 for the number of qualified applicants and the number passing the required tests. However, Justice did not discuss actions planned to bringing agents on board nor did it explain how having more applicants and candidates passing tests will ultimately result in achieving the targeted level of agents to be on-board in fiscal year 2001. While hiring more agents is a first step, INS did not discuss training and deployment of hired agents--initiatives that also impact on INS’ ability to have agents at the border. Furthermore, the performance plan did not explain Justice’s plans for obtaining equipment and technology needed to implement the border control strategy. As previously mentioned, strategies can be more useful if they describe how they will enable the agency to achieve its goals. Justice stated in its 2002 performance plan that it continuously evaluates the effectiveness of its border control strategies, particularly for the Southwest border, and quarterly evaluates progress through the Commissioner’s Performance Management Reviews. In addition, Justice reported that several special studies have been initiated and are ongoing to evaluate border enforcement effectiveness. In a December 1997 report on the Southwest Border Strategy, we recommended a comprehensive and systematic evaluation plan of INS’ border strategy be developed to obtain information about the effectiveness of the strategy in reducing and deterring illegal entry. Justice anticipates conducting additional studies related to the effectiveness of INS’ enforcement activities at the border that includes one that responds to our recommendation. In a May 1999 report, we concluded that information on INS studies was too limited for us to assess whether these studies will provide the information needed to comprehensively and systematically evaluate the effectiveness of the strategy. For the selected key outcomes, this section describes strengths or remaining weaknesses in Justice’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. This section also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan addresses concerns and recommendations by us and Justice’s OIG. We identified several strengths in Justice’s performance reports. First, both fiscal years 1999 and 2000 performance reports generally included (1) a comparison of actual performance with the projected level of performance (when a goal had a performance projection) as set out in the performance goals and (2) an explanation for why the goal was not met, where a performance goal was not achieved. Second, a key improvement of the fiscal year 2000 report was that, as required under GPRA, the report showed that Justice generally reassessed fiscal year 2001 performance targets on the basis of its performance for fiscal year 2000. Third, Justice’s performance report included historical data to provide perspective on its progress. And finally, we also noted that this year Justice issued a combined fiscal year 2000 performance report and fiscal year 2002 performance plan. The information is now presented in a sequential manner, discussing the results of the past year, then the anticipated performance for the current year, and finally the impact of next year’s performance. Presenting the information in this manner, we believe, provides decisionmakers with a better understanding of the agency’s progression toward achieving its goals. The fiscal year 2000 performance report, like the 1999 report, also contains several weaknesses in that it does not consistently address changes in the performance report as to why certain measures were discontinued, new ones added, or revisions made to existing measures. For example, INS changed its performance goal to measure deterrence in relation to corridors rather than zones; however, there is no discussion as to the rationale for changing the areas of operation to be measured or how the new measure will better enable INS to assess its progress toward securing our borders. We believe an explanation in the performance report would be useful to better understand the relationship of revised or new goals and measures toward achieving the performance goal. Furthermore, although Justice generally explained why it did not meet certain targets and revised those targets downward, its strategies do not articulate what Justice will do differently to achieve its unmet goals in the future. In addition, eight management challenges identified in our 2000 GPRA report continue to be management challenges. Progress in resolving two of the eight management challenges—INS restructuring and internal control weakness at DEA—was not discussed in either the 1999 or 2000 performance report. Our comparison of Justice’s performance plans for fiscal years 2001 and 2002 found that many of the weaknesses previously identified by us in the 2001 plans were present in the 2002 plan. Although the strategic human capital management goals and measures were identified in its 2001 and 2002 performance plans, Justice’s 2002 performance plan did not address human capital strategies in relation to achieving programmatic outcomes for two goals—dismantling major drug trafficking organizations and providing timely processing of naturalization applications. In addition, Justice identified personnel skills that supported each strategic goal, but did not discuss whether it had the staff with these skills or whether it needed to acquire or develop staff to meet agency needs. The performance plans also consistently identified program evaluations related to each of its strategic goals. However, the plans do not discuss whether these evaluations could be used in assessing the achievement of goals or as alternative measures for performance. For example, we noted that Justice reported on a program evaluation to verify and validate CLAIMS, which supports INS’ benefit processing that may provide information to improve operations, but will not provide outcome measures. However, we noted that another program evaluation concerning a multiyear study of the employment verification pilots may provide some information toward measuring progress. We believe that providing information on how the program evaluations would help measure Justice’s achievement of its outcomes could be useful to decision-makers. Like its fiscal year 2001 performance plan, Justice’s fiscal year 2002 performance plan consistently identified crosscutting activities, but its discussion of crosscutting activities generally did not discuss how the activities could be coordinated to improve overall performance within Justice. For example, to disrupt and dismantle major drug trafficking criminal enterprises, the performance plan states that interagency cooperation is key to successful drug enforcement and provides information on a number of programs through which investigators from various agencies can coordinate. The plan cites DEA, FBI, the Criminal Division, and other federal law enforcement agencies as participants in these programs. However, the plan does not explain how the strategies of Justice’s components are mutually reinforcing, nor does it explain common or complementary performance indicators. Justice stated that it has developed new performance measures for goals where in the past it had not set targets. Most of Justice’s performance measures in its 2002 performance plan had targets against which to measure progress. However, we do not know the extent to which the new performance measures will clearly demonstrate results achieved. As mentioned earlier, in our September 2000 report, we provided information and examples to assist agencies in identifying how they might use evaluations to improve their performance reporting. We noted that program evaluations are objective, systematic studies that answer questions about program performance and results. An evaluation study can explore the benefits of a program as well as ways to improve program performance by examining a broader range of information than is feasible to monitor on an ongoing basis through performance measures. For example, a program evaluation was conducted of an INS border control initiative in El Paso, Texas, called Operation Hold the Line. Operation Hold the Line was a new INS enforcement approach introduced in 1993. Rather than apprehending aliens after they had illegally crossed the border in El Paso, INS sought to prevent illegal entry from occurring in the first place by increasing the number of Border Patrol agents in El Paso and position them in high visible locations along the border. The evaluation collected data to assess the effects of Operation Hold the Line on a number of outcomes, including illegal and legal crossings, business activity, crime, education, births, and the use of social services in El Paso. By collecting quantitative and qualitative data on a range of outcome indicators, the researchers were able to draw conclusions about the representativeness, scope, and magnitude of the Operation’s effects. The fiscal year 2002 performance plan clearly identified the OIG management challenges and Justice designated areas of material weaknesses. The plan does not consistently identify our recommendations or concerns in relation to achieving goals and performance measures. For example, the Justice plan provided information on actions taken to address our recommendation to DEA regarding its performance measures but the performance plan did not address actions taken in response to our recommendation to INS regarding its estimation for application processing times. We identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, Justice’s performance plan had goals and measures related to human capital, and the agency’s performance report explained its progress in resolving human capital challenges. With respect to information security, Justice’s performance plan had goals and measures related to information security, and the agency’s performance report explained its progress in resolving its information security challenges. In addition, we identified 12 major management challenges facing Justice. Justice’s performance report discussed the agency’s progress in resolving many of its challenges, but it did not discuss the agency’s progress in resolving the following challenges: (1) internal control weaknesses at DEA, (2) options for restructuring INS, (3) weaknesses in Justice’s asset forfeiture program, and (4) program management weaknesses in the Weed and Seed program. As shown in table 1, of the agency’s 12 major management challenges, its performance plan (1) had goals and measures that were directly related to five challenges; (2) had a goal but no measures that were directly related to one challenge; (3) had goals and measures that were indirectly applicable to one of the challenges; (4) had no goals and measures related to two of the challenges, but discussed strategies to address them; or (5) had no goals, measures, or strategies to address three of the challenges. Appendix I provides detailed information on how Justice addressed these challenges and high-risk areas as identified by us and its OIG. As agreed, our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of Justice’s operations and programs, GAO identification of best practices concerning performance planning and reporting, and our observations on Justice’s other GPRA- related efforts. We also discussed our review with officials in the Department of Justice and its OIG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for the agency and do not reflect the outcomes for all of Justice’s programs or activities. The major management challenges confronting Justice, including the governmentwide high-risk areas of strategic human capital management and information security, were identified in our January 2001 performance and accountability series and high-risk update and were identified by Justice’s OIG in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from our other work in assessing the validity, reliability, and timeliness of Justice’s performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. We discussed our draft report with Justice officials on June 13 and 14, 2001, and received written comments on June 19, 2001. The full text of Justice’s written comments is included in appendix II. In its letter, Justice discussed four major areas—our report’s overall focus, outcome goals that were evaluated, limited consideration of new goals and measures in its performance plan, and the presentation of progress on management challenges. Overall focus. Justice believes that our report focuses heavily on what its performance report and plan do not discuss, on targets not established, or on targets not met. In addition, Justice believes that our report does not focus on improvements the agency has made. For example, in addressing INS’ goal for ensuring that immigration benefit services are timely, fair, and consistent, Justice said that our report focused on the agency missing the naturalization case processing time by 2 months. Justice believes that reaching an 8-month processing time is an incredible achievement, given that the processing time was 27 months just 2 years earlier. We addressed many of the improvements that Justice made under the section comparing the performance report and plan with the previous year’s report and plan. The sections discussing achieving outcomes are an assessment of progress toward achieving results on the basis of performance measures and targets, historical data, and our work related to program areas. We acknowledge that Justice’s performance report included historical data for fiscal years 1998 and 1999 for many of its measures. But other than the example Justice cited in its comments, the historical data for the other measures did not clearly demonstrate improvements. Furthermore, after meeting with Justice to discuss the draft report, we revised the text to include the historical data regarding reported improvement to reduce the processing time of naturalization cases (the example Justice cited). Outcome goals. Justice acknowledged that the outcomes we used in our analysis were prescribed by the requestor, but believes that the outcome of reduced availability and/or use of illegal drugs is not part of its mission. Instead, Justice stated that its strategic goal relative to enforcing the nation’s antidrug laws is to reduce the threat and trafficking of illegal drugs by identifying, disrupting, and dismantling drug trafficking organizations. Thus, Justice does not believe that any of its annual goals or measures will relate directly to the achievement of the outcome to reduce the availability and/or use of illegal drugs, giving the false impression that its report and plan are deficient. Justice also believes that, while reducing drug- and gang-related violence is part of its mission, only four of its measures under this outcome, not nine, should have been used in our analysis. Thus, Justice believes that the other five measures in assessing this outcome should be deleted. In our opinion, reducing the threat and trafficking of illegal drugs by identifying, disrupting, and dismantling drug trafficking organizations is directly related to reducing the availability and/or use of drugs. If drug trafficking organizations are disrupted and dismantled, clearly this will affect the availability of drugs on the street. Concerning Justice’s contention that five of the measures under the planned outcome to reduce drug- and gang-related violence should be deleted, we disagree. The five measures in question are (1) number of criminal background checks, (2) number of persons with criminal backgrounds prevented from purchasing firearms, (3) number of cases in Indian Country, (4) number of new Interpol cases, and (5) number of new treaties with other countries. In its performance report, Justice included these five measures under its strategic goal to reduce the threat, incidence, and prevalence of violent crime, especially as it stems from gun crime, organized crime, and drug and gang-related violence. While Justice’s strategic goal is not an exact match to the planned outcome, we believe that the performance measures included in our analysis are appropriate. Specifically, all of these measures, in our opinion, have the potential, in part, to be related directly or indirectly to drug- or gang-related violence. For example, members of gangs may be prevented from purchasing firearms because of criminal background checks. Additionally, under the measure for the number of cases in Indian Country, growing juvenile gangs is one of the major issues discussed in Justice’s performance report. Likewise, Justice’s performance report indicated that international law enforcement cooperation is critical to addressing the dramatic growth of transnational crime such as narcotics trafficking and terrorism, which may, in part, relate to drug- and gang-related violence on an international level. New goals and measures. Justice believes that its performance measures have matured over time and indicated that it has discontinued old and added new measures as appropriate. Since some measures are new in fiscal year 2002, performance targets did not exist for the fiscal year 2000 plan. Nevertheless, Justice reported on its accomplishments by providing historical data for fiscal years 1999 and 2000 whenever possible. Justice believes that this is particularly significant for two outcomes: (1) timely, consistent, fair, and high-quality services provided by INS and (2) U.S. borders secure from illegal immigration. Concerning the first outcome, Justice noted that it has a new performance measure for the level of compliance with quality standards for processing naturalization cases, and Justice reports that it has achieved 99 percent compliance with those standards since fiscal year 1999. Concerning the second outcome, Justice believes that it is unfair for us to report that its performance was not considered sufficient to assess progress merely because there was no performance target against which to measure. Furthermore, Justice believes that it is particularly discouraging for the managers and analysts that worked to develop a measure which Justice believes is an excellent example of reporting outcomes. While we used performance measures and targets in our analysis, our evaluation was also based on other factors, such as previous reports and evaluations by us and others, our knowledge of Justice’s operations and programs, and our identification of best practices concerning performance planning and reporting. Furthermore, we added text to reflect the development of new measures in our comparison of the performance report and plan with the previous year’s report and plan. Concerning the quality standards issue, we did not indicate that INS had not met the 99- percent standard. We merely indicated that the performance report does not explain what is covered by these standards. While Justice believes that the existence of quality standards implicitly explains the relationship to the outcome, we believe that the report could articulate what aspects of quality service have been achieved. Moreover, we included information from our previous work relative to CLAIMS that indicated that data limitations could affect Justice’s assessment of the quality of services. Management challenges. Justice believes that the format used in appendix I of our report did not lend itself to an accurate description of its performance report and plan. In the column describing how Justice assessed its progress in resolving the management challenges, we sometimes indicated that progress relative to a management challenge was not discussed. Justice believes that, although technically correct, this is misleading because information about some of the management challenges may be included in the third column of the table, which discusses applicable goals and measures in Justice’s performance plan. Justice suggested that, where appropriate, we should indicate in the report column that information about a particular challenge is included under the “plan” column. Further, Justice noted that, in some instances, more complete discussions of its progress in addressing some issues can be found in other, more applicable, documents. We included text in the first paragraph of appendix I to explain that Justice did not have performance goals and measures for fiscal year 2000 to assess progress and that, for some of the management challenges, Justice discussed the challenge in its fiscal year 2002 performance plan. We did not verify whether additional information about Justice’s management challenges may be found in other documents, but if information in other documents is relevant to assessing Justice’s progress, it would have been useful to decisionmakers if Justice were to identify these documents in the performance report. In addition to the four areas discussed above, Justice raised one final issue. Justice noted that it continues to face conflicting pressures to keep its performance report and plan streamlined and yet to include more detailed information. Justice characterized our position as one desiring considerably more detail in its performance report and plan. Our point is not necessarily that Justice needs to include more detailed information, but rather that it needs to better articulate and explain how performance and strategies relate to achieving desired goals. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to appropriate congressional committees; the Attorney General; and the Director, Office of Management and Budget. Copies of this report will also be available to others on request. If you or your staff have any questions, please call me at (202) 512-8777. Key contributors to this report were Linda Watson, Tim Outlaw, Mary Hall, Julia Duquette, David Irvin, and Charles Vrabel. The following table identifies the major management challenges confronting the Department of Justice (Justice), which includes the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the 19 management challenges identified by our office and/or Justice’s Office of the Inspector General (OIG). The second column discusses what progress, as discussed in its fiscal year 2000 performance report, Justice made in resolving its challenges. The third column discusses the extent to which Justice’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the OIG identified. We found that Justice’s performance report discussed the agency’s progress in resolving many of its challenges, but it did not discuss the agency’s progress in resolving the following challenges: (1) internal control weaknesses at the Drug Enforcement Administration (DEA), (2) options for restructuring the Immigration and Naturalization Service (INS), (3) weaknesses in Justice’s asset forfeiture program, (4) program management weaknesses in the Weed and Seed program, (5) proper management of grant funds, and (6) enforcement efforts along the northern border. However, Justice officials pointed out that progress for these management challenges are not discussed in the fiscal year 2000 performance report because there were no goals, measures, or strategies in its fiscal year 2000 performance plan. Furthermore, Justice noted that some of these management challenges are included in its fiscal year 2002 performance plan. Of the agency’s 19 major management challenges identified by us and Justice’s OIG, Justice’s performance plan (1) had goals and measures that were directly related to ten challenges; (2) had a goal but no measures that were directly related to one challenge; (3) had goals and measures that were indirectly applicable to two of the challenges; (4) had no goals and measures related to two of the challenges, but discussed strategies to address them; or (5) had no goals, measures, or strategies to address four of the challenges. | This report reviews the Department of Justice's fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 and assesses Justice's progress in achieving selected key outcomes that were identified as important mission areas. Justice's overall progress toward achieving the key outcomes was difficult to ascertain because generally the performance report lacked fiscal year 2000 performance targets to measure success and lacked clear linkage between performance measures and outcomes. Justice did not set fiscal year 2000 performance targets for some measures because the measures were new, and for some measures Justice believes that setting performance targets could cause the public to perceive law enforcement as engaging in "bounty hunting" or pursuing arbitrary targets merely for the sake of meeting particular goals. Justice's strategies varied in the extent to which they included sufficient information to inform decisionmakers about initiatives to achieve these outcomes. GAO notes opportunities for Justice to improve the usefulness of its reports and plans. |
Building highways requires a diverse collection of skill sets and expertise. The highway construction industry is composed of a variety of different trades such as equipment operators, mechanics, truck drivers, ironworkers, carpenters, and cement masons. These trades are not specific to highway construction but also apply to other areas such as general building construction. Historically, many of these trades have been dominated by white males. Over the last 25 years, participation of women in the construction industry has been relatively stable, averaging around 8 to 10 percent. Among minority groups, while the percentage of African Americans participating in the construction workforce has been relatively constant (5 to 7 percent of the workforce), the proportion of Latinos in the industry has increased significantly and is estimated to comprise about a quarter of the construction workforce. In 1968, Congress authorized a job training program, which required that states receiving federal aid for highways implement apprenticeship and training programs that ensure equal employment opportunities without regard to race, color, creed, national origin, or sex. FHWA has targeted this job training program to women, minorities, and economically disadvantaged individuals to provide these groups with highway construction-related skills to reach journey-level status. As a nondiscriminatory program, it cannot exclude any individual from participation. The Secretary of Transportation must certify that states have such a program in place. While the program does not have a distinct funding source, job training expenses on federal-aid highway projects are eligible for federal dollars, just like other project costs. According to FHWA officials, each state has discretion in how much or little to spend on this program, as well as how a contractor will be reimbursed, if at all, for training activities on its highway projects. State transportation offices are responsible for providing their state program’s framework. Individual states establish overall training goals for the program such as articulating the number of training slots on selected federal-aid highway construction contracts they expect to award during the coming year. These state agencies also determine which federal-aid highway construction contracts will require that training is provided to a minimum number of trainees and thus which contracts include a training special provision. State transportation agencies—using on-site personnel such as contractor compliance specialists, engineers, and project inspectors—monitor and oversee contractors’ adherence to job training requirements. Multiple FHWA offices are involved in the on-the-job training program. FHWA’s Office of Civil Rights, located in the agency’s headquarters office, provides leadership in setting policy for the program, and in this capacity has assigned oversight responsibilities to the FHWA division offices in each state and has established regulations for state transportation agencies to administer the program. This decentralized management structure—in which certain oversight responsibilities are assigned to division offices—is consistent with FHWA’s approach for the federal-aid highway program in general. Among the primary responsibilities of the division offices are to review the annual goals submitted by the states and oversee whether states are meeting their annual job training goals by reviewing accomplishment reports and annual contractor training reports. FHWA division offices also play a role in assessing the efforts of both the individual contractors participating in this program and the states to meet their respective job training goals and requirements. FHWA’s Resource Center also provides assistance to state transportation agencies and FHWA offices in implementing FHWA policy and programs by providing training on program requirements and other activities (see table 1). While a state approves a contractor’s training approach, the contractor is responsible for meeting a training requirement. If a contractor fails to meet the training requirement stipulated in the contract, the state transportation agency can withhold payments or limit the contractor’s ability to bid on future contract opportunities. The amount of the sanctions or penalties will depend on the state transportation agency’s contract administration procedures. For example, in Missouri, the state transportation agency may levy fines against contractors that do not fulfill their training requirements. Congress authorized the supportive services program in 1970 to supplement the on-the-job training program and support state transportation agency training programs by providing services to highway construction contractors and assistance to highway construction apprentices and trainees. According to FHWA, the main objectives of the program are to increase the overall effectiveness of each state job training program in connection with federal-aid highway projects and seek other ways to increase the training opportunities for women, minorities, and economically disadvantaged individuals. Depending on the needs and preferences in a specific state, services funded under this program may include basic training in the construction industry, stipends to support childcare or defray transportation costs for highway construction workers, transportation career awareness programs, and internships. FHWA is authorized to grant up to $10 million per year in this program. FHWA funds some supportive services through a discretionary grant program. From 2008 through 2010, FHWA awarded 153 grants totaling about $37 million to 37 states, the District of Columbia, Guam, and Puerto Rico for supportive services through the discretionary grant program. According to FHWA guidance, supportive services activities must be connected to a federal-aid highway construction project in order to be eligible for funding. State transportation agencies must submit a statement of work to FHWA that details how the grantee proposes to use the requested funding. The proposals are required to establish measurable goals for results, although FHWA permits wide variation in defining these goals. According to FHWA, proposed activities must target their efforts towards women, minorities, or economically disadvantaged individuals to receive funding. According to FHWA guidance, applications are reviewed by panels consisting of FHWA officials and scored using criteria to evaluate the content of the statement of work, including whether the statement of work has defined end dates, how the needs of the supportive services program would be addressed through the proposed activities, and a monitoring plan. FHWA requires each grantee to submit regular progress reports to the respective FHWA division offices as well as a final accomplishment report within 60 days of the program’s completion, which provides information on previously established performance goals. According to FHWA officials, an interim accomplishment report is also requested from on-going activities when additional funding is requested during the annual grant solicitation process. FHWA also uses the supportive services funding for transportation- related education and internship opportunities. FHWA distributes some funding to summer transportation institutes (located at universities and colleges), which provide a curriculum designed to introduce secondary school students to careers in all modes of transportation and encourage them to pursue transportation-related courses of study at the university level. There is also a summer internship program, wherein FHWA selects and places students from various colleges and universities in internships at one of the U.S. Department of Transportation’s modal agencies, such as FHWA, or at a state transportation agency. These programs are targeted at women, minorities, and economically disadvantaged individuals to provide hands-on experience and on-the-job training while working on current transportation-related topics and issues. The overall extent that FHWA’s on-the-job program has helped women, minorities, and the economically disadvantaged reach journey-level status in the highway construction trades is unclear, primarily because a limited amount of usable information is available on program results. However, based on the limited information that is available, state programs have created some new opportunities tailored to individual state circumstances. The skill enhancement opportunities provided by state programs vary across states by requiring different lengths of training, relying on a diversity of entities and training structures to deliver the training, and giving contractors various flexibilities in how and what skills they provide to individuals. Additionally, state programs have varying degrees of focus on reducing underrepresentation. While we cannot definitively report on how well women, minorities, and economically disadvantaged individuals are moving to journey-level status in highway construction, we can describe some of the approaches states have chosen to implement the program and make some observations about how the program has contributed to enhancing the career prospects of individuals from the targeted groups. One way state programs differ in providing opportunities for enhancing skills is by providing different length training periods to participants. Contracts that road builders enter into with state transportation agencies require varying degrees of training that must be provided to trainees, yielding differing degrees of trade proficiency for participants, from a brief to extensive exposure to the trades. For example, in an effort to give as many individuals as possible some construction experience, Florida has adopted a program in which a contractor must provide each trainee with approximately 300 hours of training. State officials explained that this program is intended to give trainees a brief exposure to a trade, not mastery of a craft. Florida reported that 288 people completed training through the program in 2009. Conversely, some states require contractors to have trainees substantively complete or graduate from training programs that may take multiple years—and thousands of training hours—to complete and provide trainees with a high level of work experience and a marketable credential, but that reach fewer people. For example, Texas, which employs this approach, graduated 57 trainees in 2009. Other states, such as Missouri and Washington, fall in between these examples by requiring contractors to provide individual trainees with 400 to 1,000 hours on any given project, believing this is the minimum needed for meaningful skill acquisition. As a result of these different state approaches to the contract training requirement, trainees in different programs acquire different levels of job experience and trade proficiency to take with them when seeking subsequent employment. A second way state programs differ in providing opportunities for enhancing skills is in using different entities to deliver training. Depending on what is available in the state, some trainees participate in the on-the- job training program as part of preexisting training programs—such as apprenticeship programs—or training that was designed and managed by the contractor or an industry group (see fig. 1). For largely unionized construction workforces, training is typically provided through apprenticeship programs. Apprenticeship programs vary in length depending on the trade, but are commonly about 4 years long and follow specified training steps, including meeting job site training time requirements and classroom instruction. As long as an individual is an apprentice, he or she could be hired to meet a contract training requirement. Contractors that are not unionized may use industry-sponsored apprenticeship programs, other training programs established by industry, or, in the absence of such programs, design their own training plans. For example, in Texas, trainees generally participate in a program established by the state chapter of the Associated General Contractors and the Texas Department of Transportation. Contractor-designed plans may be approved by the state transportation agency or FHWA division office officials, such as civil rights officials. These training plans are tailored to the individual project and the specific contract requirement; unlike an apprenticeship, these plans could include training in more than one trade. A third way state programs differ is in program structure; specifically, how much flexibility states give contractors in determining how to fulfill training requirements. For example, some states have implemented contractor- based programs that provide contractors with the flexibility to have trainees work on multiple projects. Typically, job training requirements are specific to individual federal-aid projects and, to successfully meet the terms of the contract, the contractor must meet this training requirement by the time the project is completed. In states with contractor-based programs, the state transportation agencies assign some contractors with a target number of workers that they are expected to train and the contractors have flexibility to decide on which federal-aid projects trainees will work to meet the requirement. Under this approach, trainees may work on more than one project, especially if one project does not have enough work for an individual to complete the required training. For example, Texas has adopted this contractor-based approach. In 2009, the Texas Department of Transportation assigned training goals to 19 of the largest contractors in the state based on the amount of work awarded to each contractor in the preceding year. Through our review of state reports and discussions with FHWA officials, we found that four additional states—Indiana, Iowa, North Carolina, and North Dakota—have also adopted this approach. Other state practices give contractors added flexibility. For example, Florida has established a system in which contractors can train individuals on state-funded projects that do not receive any federal funds and earn training credits that the contractor can later use to meet training requirements on federal-aid projects. Transportation officials in Florida indicated that trainees working on state projects must meet the same training and demographic standards as on federal-aid projects. South Carolina also allows contractors to temporarily transfer trainees between projects and accumulate up to 25 percent of their required training hours from other projects. Contractors do not receive payment for any of the training hours received on other projects but these hours can count towards completion of the training requirement. State officials explained that contractors frequently take advantage of this option. The effect of these differences in training length, delivery, and program structure on the ultimate career enhancement of trainees is unclear. For example, some union, state, and apprenticeship program officials noted that apprenticeship programs provide workers with more structured training and connection to a specific trade than training delivered independently by contractors. One apprenticeship program official explained that program staff can help ensure that a trainee gets job opportunities. Similarly, according to U.S. Department of Labor officials, without the structure of an apprenticeship program, trainees may not be well positioned for long-term careers. Additionally, apprenticeship programs, by definition, provide a clear demarcation of when an individual moves from apprentice to journey-level. However, stakeholders also reported that a contractor who is solely responsible for a training plan could provide a wide variety of training cutting across multiple trades and directly related to the skills needed by the employer, better positioning a trainee for future opportunities with that contractor. In general, union and nonunion officials agreed that effective training is more likely to lead to employment if the training is directly linked to a specific job. Views also differ about what type of training program structure— contractor-based or project-specific—is most effective. Proponents of contractor-based approaches, including officials with FHWA’s Office of Civil Rights and Resource Center, stated that this structure creates a more solid relationship between the contractor and the trainee and helps ensure the trainee gets a sufficient number of hours and the most useful training, both of which improve ultimate employment outcomes. Conversely, some state transportation officials indicated that the project- specific approach has advantages, such as giving trainees more freedom to find employment with other contractors and giving contractors flexibility. Ultimately, stakeholders agreed that the effectiveness of these training activities in leading to jobs for participants depends heavily on the condition of the broader economy. As states face budget shortfalls, transportation funding is constrained, thus diminishing opportunities for training. Moreover, during economic slowdowns, contractors may be reluctant to bring in new employees as trainees. Given that unemployment in the construction industry was roughly 20 percent in May 2010, potential trainees have faced strong competition in the labor market for scarce construction employment opportunities, according to officials from industry and labor groups. (See app. III for information on the on- the-job training opportunities created by the Recovery Act.) Many states compile annual reports on their achievements. These reports generally show that state programs have led to a wide range of opportunities. However, these state accomplishment reports by themselves do not provide a clear and reasonably comprehensive picture of program achievement. Due to FHWA’s oversight approach and the limitations of available information, the data collected and available from FHWA do not provide a clear picture of the program’s results, limiting our assessment to state-specific illustrations and anecdotes. As with other federally-funded job training programs, such as those administered by the U.S. Department of Labor, tracking the career outcomes of individuals that receive training may be difficult because of the amount of resources and effort required to measure long-term outcomes. The implications of this difficulty are discussed later in this report. However, using available data, we nevertheless estimate that several thousand people are trainees in any given year nationally. Further, to provide more detailed illustrations of the training provided through the program, in those states we reviewed more closely, we found that most workers enrolled in the program were minorities and that there was a range of female participation (see table 2). For example, in Pennsylvania in 2009, all participants were either women (64 participants) or males from a minority group (90 participants). Additionally, program stakeholders told us that the job training program— by addressing ongoing barriers to employment for traditionally underrepresented groups—can create opportunities that would not have otherwise existed. For example, state officials in two states noted that without the program fewer minorities would work in highway construction, explaining that the construction industry continues to be dominated by informal personal networks and a handful of firms, making it difficult for traditionally underrepresented individuals to find career opportunities. Many program stakeholders see the program as a useful counter to these barriers. For example, one female journey-level equipment operator we spoke with in Washington state attributes her success in the trade to an opportunity the federal program provided in the 1980s. However, others noted that the program could unintentionally disadvantage some workers. For example, officials familiar with two states’ training programs noted that contractor requests for women and minorities leave other potential workers with fewer job opportunities. Numerous officials noted that the success of the program depends largely on whether the contractor; the state project oversight personnel, such as project engineers and inspectors; and state transportation leadership are committed to it. According to some of these officials, if a contractor wants to create new training opportunities and sees value in diversifying the firm’s workforce, then the program can have a positive impact. Similarly, according to FHWA officials, the visible commitment and support of top transportation leaders, a strong state civil rights office, and an understanding of the program’s goals by construction engineers and field staff help the program succeed. Conversely, contractors that are not committed to the program may be able to find ways to fulfill a contractual training requirement without actually hiring trainees. For example, a contractor might be able to meet the requirement through the demonstration of a good faith effort—in which the contractor describes its unsuccessful attempts to find a suitable trainee—rather than through actual hiring. Though good faith efforts may be legitimate and thoroughly reviewed by oversight officials, in some cases, state officials responsible for approving such good faith efforts may accept them without scrutiny because they may not take the training requirement seriously or want to avoid potential legal issues with the contractor, according to a senior state official and a labor official. Additionally, some contractors may meet training requirements by upgrading the skills of employees that are already a part of their company’s workforce. In these situations, the training requirement does little to create opportunities for underrepresented groups because contractor hiring practices are not changed. Contractors may have different agreements with unions that dictate their ability to specifically request—and for unions to provide—apprentices that are women, minorities, or disadvantaged individuals in order to meet a training requirement. Likewise, a union may be limited in its ability to meet such requests if women and minorities are not available within their membership. To address these barriers, some contractors and unions have arrangements that help contractors to recruit new members to meet demographic goals for trainees. For example, one union and contractors in Pennsylvania allow for year-round enrollment of women and minorities into one apprenticeship program instead of during shorter annual enrollment periods. State programs have varying levels of focus on women, minorities, and disadvantaged individuals in accepting trainees on projects with job training requirements. We generally found that the state transportation agencies we reviewed intended for trainees to be women or minorities; however, state programs varied in how rigorously they pushed contractors to hire trainees from these targeted groups. For example, states like Pennsylvania and Washington placed a strong emphasis on accepting trainees that were either women or minorities and rarely approved trainees not in these groups. Other states, however, enroll more nontargeted individuals. For example, in 2009, white men were 83 percent of trainees in Ohio. State programs target training opportunities toward either the highway construction labor force in general or try to target underrepresentation of women and minorities within specific trades. Some state programs focused on increasing opportunities for women and minorities more generally. For example, officials in southwestern states noted that some construction trades in the region are now predominantly Latino and many contract training requirements are fulfilled by Latino workers. When a contractor in those states hires a Latino trainee to work within a trade that is predominantly Latino, it meets the broad intent of the program by creating an opportunity for a minority group that has been historically underrepresented, but may not address current underrepresentation of other groups. In contrast, other states may encourage contractors to target training opportunities toward underrepresentation in specific trades, although officials acknowledged that this approach can be difficult. For example, an FHWA official explained that minorities and women were not underrepresented as laborers in King County, Washington, so the state tried to limit when a minority or woman could be hired as a laborer trainee and focus training positions in other trades in that geographic area. According to state officials in Florida and Washington, it can be difficult to address underrepresentation of demographic groups in specific trades because identifying such individuals can be a challenge for contractors. Additionally, the training requirement cannot exclude individuals, such as white men, from participation. Some states have implemented other approaches to give contractors flexibility in hiring trainees, although it is unclear if these flexibilities have led to increased opportunities for women and minorities. For example, in Ohio, contractors are not required to meet specific contract training requirements or an overall annual goal (as in contractor-based programs). Instead, state transportation officials explained that contractors are required to provide training on all federal-aid projects unless they can demonstrate that doing so is not feasible. In this approach, the contractor—not the state—makes the initial determination of whether a project is conducive to training. Although officials believe this approach has increased opportunities for longer term employment for trainees, only 17 percent of Ohio’s 2009 trainees were women or minorities, including trainees involved in Recovery Act projects. However, Florida also gives contractors flexibility in hiring trainees. In 2009, Florida reported that 8 percent of participants were women and 88 percent were minorities (both men and women). It is unclear if differences in how the states have structured their job training programs, state demographics, or other factors explain this difference. FHWA has done little to assess its on-the-job training program nationally and has not determined whether states’ efforts have led to increased opportunities for workers traditionally underrepresented in the highway construction workforce. Moreover, FHWA does not attempt to determine how effective division offices are in their oversight of states efforts. FHWA officials cited insufficient resources and higher priorities within the agency as reasons for the lack of national oversight. While FHWA has established regulations and broad guidelines for the program, the guidelines are vague and it is unclear what states should accomplish. The regulations and guidelines provide some assistance to state transportation agencies in implementing their job training programs. For example, FHWA regulations provide state transportation agencies with a list of general factors—such as local demographics and project size—to consider in selecting projects and determining the number of workers to be trained to fulfill contract requirements. Similarly, as required by statute, FHWA collects general types of information from states that enable the agency to judge compliance with the requirements of the on- the-job training program. States provide information to FHWA about the composition of the highway construction workforce and the results of their training program, indicating progress towards state goals. However, FHWA’s regulations for the program were written in the 1970s and, according to FHWA officials and an industry official familiar with the program, have not been updated to reflect changes in program implementation. For example, the regulations provide that FHWA headquarters shall establish suggested annual minimum training goals for each state, but, in practice today, state goals are proposed by state transportation agencies and approved by FHWA division offices, or not set at all. FHWA Civil Rights officials told us that they have taken some early steps towards considering possible revisions of the regulations, including a change that would require state transportation agencies— rather than FHWA headquarters—to propose annual training goals. Finally, the FHWA Resource Center, which provides a wide range of civil rights training and support to state transportation agencies and FHWA division offices, has developed materials that provide state transportation agencies with some program definitions and requirements. For example, the FHWA Resource Center has created general overview and frequently asked questions documents aimed at helping state transportation officials familiarize themselves with the program. While FHWA’s current regulations and guidelines establish general requirements for states, they do not establish clear criteria for what states must do, what is optional, and the degree to which states can adapt their programs to their own circumstances. Instead, FHWA has left the interpretation of these regulations and guidelines, and subsequent program implementation, largely to state transportation agencies and FHWA division offices. For example, FHWA’s regulations and guidelines list what factors should be considered in selecting projects and determining the number of trainees, but they do not explain how a state ought to consider factors like local demographics or project size when setting a contract requirement or how a state’s goal should be determined. The lack of clear criteria can make program implementation more difficult for states. For example, Washington state transportation agency officials told us that the lack of criteria within the existing guidelines has made it difficult to structure their program and direct their efforts. Because FHWA has not established clear criteria, state transportation agencies rely on their own judgment in implementing their programs and key attributes of different state programs vary considerably, as previously discussed. A number of federal and state officials familiar with the program noted that some variation in how the program is implemented (1) allows for states to adapt the program to their own circumstances and preferences and (2) provides an opportunity for states and contractors to innovate. For example, as previously mentioned, some states have implemented contractor-based programs that provide contractors with flexibility to move trainees across multiple projects, while other states directly select which projects will provide on-the-job training. Although providing states with flexibility may have some benefits, such as allowing for state innovations, a lack of clear criteria for state programs prevents FHWA from having a basis to judge the effectiveness of the varying state programs, demonstrate program results, and identify and share best practices. We have reported that federal program standards that successfully address important and varied aspects of program performance are key aspects of a results oriented performance management. Thus, agencies should create a set of federal program goals and standards that address important dimensions of program performance that allow for the variation in individual state programs. Without federal program standards to unify a federal agency’s efforts, division offices and states are left to interpret the regulations, structure their programs, and measure program achievements in whatever manner they deem reasonable. Consequently, there is no basis to judge whether varied state efforts are meeting federal standards for performance management. For example, without set criteria for how states may or may not structure their programs, it may be difficult to determine what program structures are appropriate or what innovations are successful and should be expanded. A lack of clear criteria about what the programs should accomplish could hinder the program’s effectiveness in moving women, minorities, and economically disadvantaged individuals into journey-level positions. Although FHWA division offices receive results information from state transportation agencies annually, the type of information that states submit does not help determine the overall effectiveness of state programs. As previously mentioned, states are required to provide FHWA division offices with annual progress reports, also known as accomplishment reports, that describe states’ and contractors’ efforts to hire underrepresented individuals into the highway construction work force. These accomplishment reports should contain information about the previous year’s accomplishments, such as the number, demography, and trades of trainees that contractors hired as well as the proposed goal for the following year. These reports may also contain information about the other actions the state has taken as part of its program. For example, South Carolina’s 2008 accomplishment report included information on the state’s update to its on-the-job training procedures manual. In addition to annual accomplishment reports, states also provide FHWA with highway construction workforce composition data, which summarize the number of individuals contractors have hired in specific demographic groups in specific job categories. This data provides a snapshot of the highway workforce for a period in July—typically a month with a high volume of highway construction activity—by trade and various demographic groups. However, FHWA lacks an understanding of the effectiveness of individual state programs and their results nationally for several reasons. First, it is difficult to determine the overall effectiveness of state programs because the accomplishment information that FHWA receives does not include all states and is of limited usefulness in determining how well a state is addressing underrepresentation. Based on our review, states that provided annual accomplishment reports on their training program’s achievements almost all included some form of quantified results information. For example, of the 30 reports that describe 2009 program results, 29 included some quantified information on the state’s accomplishment. These reports frequently included data on trainee enrollment, completion, and demographics. Of the 30 state reports, 18 included annual statewide goals; 17 of these 18 reports also included achievement data regarding whether the state met that goal or not. While a little more than half (17 of the 30) of the state reports we reviewed included the state’s accomplishments and the annual statewide goal they were striving towards, FHWA could not assess whether 13 of those state transportation agencies successfully accomplished their goal. Very few of the annual reports we reviewed included information on the extent to which underrepresented groups participated in the program; the reports that did (2 of the 30) included cursory information. As FHWA has not provided states with clear criteria on how to complete these reports, states included the information they chose to or that was requested by their FHWA division offices. Second, states submit accomplishment information with a wide range of different output terms and different demographic and trade classification categories (see fig. 2). For example, states may have listed their accomplishments in different output terms such as hours, enrollees, or graduates. Furthermore, even when states used similar terms—such as training “spots” assigned to highway construction projects—it was not clear that states were defining the term in the same way. This lack of consistency prevents comparisons between states or aggregation of accomplishment data across states. Besides different output terms, states also reported information using different demographic and trade classification categories. The 19 reports (out of 30) that provided demographic data for trainees in 2009 used different demographic categories. For example, Montana reported trainee demographics using the general category of minority whereas some other states reported more specific categories such as Latino, African American, Native American, Asian, or Pacific Islander. Additionally, some states included data on the trades of trainees, but these trades were not defined in the reports and may not necessarily be comparable. Twenty of 30 state reports contained trade data in 2009; however, the reports used different trade categories. For example, Kansas reported trainees in multiple different equipment operator positions—scraper, crane, and tractor operator, for example—whereas other states, such as Idaho, listed “operator” as one category. Consequently, though no fault of individual states, it is difficult to consolidate or compare the trade data in these reports. Third, states also submit FHWA highway construction workforce composition data, which provide a snapshot of the highway workforce for a period in July by trade and various demographic groups. However, the data that FHWA receives from states do not include useful information on which groups are underrepresented in which trades. According to a state official familiar with the program, the highway construction workforce composition data that states report do not separate the number of trainees and apprentices hired as a result of the training requirement versus those hired independently of the training requirement. In other words, the highway workforce composition data that states submit merge the number of trainees and apprentices who work on projects with training requirements as well as projects that do not have training requirements. State officials told us that some trainees and apprentices reported by states and contractors cannot be attributed to training requirements, but might have been on the job independently of any training requirements. As a result, the workforce composition data that states and contractors submit are not effective in capturing information on how well states and contractors are addressing underrepresentation within highway construction work trades. FHWA civil rights officials acknowledged that these data are insufficient and created a working group made up of FHWA division and state transportation agency officials to examine how this information could be improved. In April 2010, the working group implemented several changes to improve the highway construction workforce composition data collected from states, including revising the ethnic and racial categories and making the reporting forms easier to read. As a result of the limitations described previously, FHWA is not meeting governmentwide guidance, which states that management should track major agency achievements and compare these achievements to plans, goals, and objectives established under the Government Performance and Results Act of 1993. Also, managers need to compare actual performance to planned or expected results through the organization and analyze significant differences. These control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Although FHWA division offices fulfill a number of important oversight responsibilities, FHWA does not have a clear overall understanding of how division offices are carrying out their oversight of the on-the-job training program. As previously mentioned, FHWA headquarters relies heavily on division offices to provide oversight of state programs and to ensure that states establish apprenticeship and training programs that are targeted to move women, minorities, and disadvantaged individuals into journey-level positions. We found many instances in which civil rights staff in FHWA division offices provided oversight of state and contractor efforts to meet training requirements on federal-aid projects. Various FHWA division officials we spoke to, for example, reviewed contractor training and enrollment plans, approved new training classifications, provided direction to states in establishing appropriate annual goals, monitored and assessed state achievements by reviewing state reports, assisted states in assessing contractor compliance with training requirements, and recommended use of administrative tools and penalties against contractors not in compliance. However, it is unclear to what extent division offices are monitoring states primarily because FHWA has neither provided clear guidance on how divisions should carry out their oversight responsibilities nor has FHWA held division offices accountable in meeting performance criteria such as ensuring that state transportation agencies establish active training programs. In our review of various state programs, FHWA division offices executed their oversight responsibilities with different levels of rigor. For example, the FHWA division in Missouri told us that they were actively involved in reviewing contractor’s good faith effort proposals. Conversely, some FHWA division offices had been lax in their oversight of state transportation agencies. For example, we found that FHWA division offices had allowed two states to go through extended periods without active training programs. These states have re-established their programs, in part, due to the insistence of the FHWA division offices. Previously, FHWA had allowed them to lapse without any objection. According to an FHWA official familiar with the program, New Mexico went through a period starting in the 1990s without a program and only reinstated training requirements in federal-aid highway contracts at the insistence of the FHWA division in 2009. The program may have been discontinued because a change in state leadership may not have considered the program a priority, according to an official. Similarly, Texas department of transportation officials told us the training program in Texas was formally established in 2006 and implemented in 2007 when a new civil rights program specialist came on board and said that Texas needed to develop it. They also stated that prior to that Texas had an optional program because the Texas FHWA division civil rights specialist did not require the state transportation agency to develop a training program. FHWA civil rights officials acknowledged that there may be instances of states lacking active training programs due to limited resources within the Office of Civil Rights to manage state programs and the low priority states may assign to these programs relative to other civil rights programs. In addition, some division offices did not adequately oversee states’ annual training goal setting, a central component of existing program regulations and guidance, but one that some program stakeholders see as not valuable. Some division offices played key roles in helping states determine appropriate state goals while others were less rigorous in ensuring that the state transportation agency established appropriate goals. For example, an FHWA official familiar with Alabama’s state program told us that the division office plays an active role in determining whether the training goal is reasonable by examining past reports and historical data and looking to see if the state transportation agency achieved its training goal the previous year. However, other states like Arizona, California, New Mexico, and Ohio, were exempted by their FHWA division offices from having to establish an annual statewide goal. The lack of consistent adherence to this requirement can be explained in part by the lack of clear criteria on how division offices should oversee state programs and differing views among program stakeholders about the usefulness of having state goals. While some state officials told us that setting state goals helps state transportation agencies track their progress, others—including officials from the Office of Civil Rights— stated that individual contract goals were sufficient and statewide goal setting did not add value. Currently, headquarters cannot and does not assess how well division offices oversee states’ adherence in establishing a state goal because headquarters has not established clear criteria that all states must establish training goals. If FHWA headquarters were to strengthen criteria by requiring states to establish annual goals, then it would provide headquarters a basis—specifically by determining how adequately divisions oversee states goal setting—upon which to assess whether division offices were consistently holding states to federal criteria. Although FHWA division offices execute a number of important oversight responsibilities to ensure that states and contractors meet training requirements on federal-aid projects, division office performance should be monitored by headquarters. We have reported that it is a useful practice to assess the oversight activities of division offices in order to monitor states’ progress in meeting overall program objectives. In the absence of clear criteria on how division offices should oversee state programs and how to hold state transportation agencies accountable, FHWA will be unable to fully assess whether division offices are effective in ensuring that states meet program requirements. The Office of Civil Rights focuses on policy while paying minimal attention to national program oversight in part because the office lacks the resources to provide adequate oversight to state transportation agencies, according to FHWA officials. The FHWA Office of Civil Rights only has one full-time equivalent employee that oversees both the on-the-job training and supportive services programs. Also, FHWA officials told us that the agency has provided little national oversight to state transportation agencies because it has placed a higher priority on other civil rights programs that are at higher risk—based on FHWA’s corporate risk assessment—than the on-the-job training program. FHWA identified higher risk programs as including the Disadvantaged Business Enterprise, Title VI of the Civil Rights Act of 1964, and the Americans with Disabilities Act programs. Because headquarters is responsible for overseeing these other civil right programs, FHWA has not been able to provide sufficient national oversight to the on-the-job training program, according to FHWA officials. Nevertheless, FHWA has recently undertaken several measures that may strengthen its oversight and assess program results. For example, FHWA surveyed all 52 division offices in 2011 and conducted baseline assessments of state civil rights offices in 2008 to gather basic information on the states. According to FHWA civil rights officials, the survey—which focused on the supportive services program—could identify training and workforce development issues that may need to be addressed by the division office. Additionally, FHWA officials have recently established what they describe as an informal partnership with the Department of Labor to explore how local career centers might assist tracking the results of the on-the-job training program and the supportive services program, among other things. Although limited resources and competing priorities are valid concerns, especially for a smaller program, FHWA’s oversight approach needs to provide the agency with a basic assessment of how well the program has functioned on a national basis. In the absence of national oversight from headquarters, it is unclear what impact the program has beyond the individual state-level. FHWA grants about $10 million each year for supportive services that directly and indirectly support job training activities. However, even after considering the small size of the supportive services program, we found that FHWA’s stewardship is limited. The agency collects some information on services provided, but does not always determine results achieved and does not routinely consider grantees’ performance in making funding decisions. FHWA officials said they have few resources devoted to the program and results are sometimes difficult to aggregate. Currently, FHWA provides about $5 million to $6 million each year for services that directly support job training programs (through the discretionary grant program) and about $4 million each year for programs that indirectly support job training programs (through the discretionary grant program, summer institutes, and internships). Regarding the discretionary grant program, the agency typically provides funds to about 20 states each year, averaging about $240,000 for each state. FHWA does not attempt to determine, and we could not establish, how many people are participating in the program since FHWA does not collect this information. From reviewing applications and considering the degree to which FHWA provided requested grant amounts, we estimate that roughly 2,000 people may have received some direct supportive services in any one year. FHWA officials noted that while they do not know how many individuals participate in the supportive services program, they estimated that several thousand individuals may receive services in a given year, depending upon the number of projects funded, as well as other factors. FHWA officials stated because these activities can vary considerably from state to state and they lack the resources needed to determine such a count, they have been unable to determine the total number of participants. We could not determine with any confidence how many people received supportive services through the discretionary grant program because FHWA has not collected this information. Also, we could not analyze the demographics of individuals served by this program. However, a rough indication of the services provided can be gleaned from states’ applications for funding (see table 3). About three-quarters of the states proposed to provide job placement and other outreach activities (e.g., referral services or employment counseling) and preapprenticeship type training (e.g., safety training, overviews of highway construction equipment, or training certifications). To a lesser extent, states proposed to provide life skills training, physical construction tools, transportation, remedial math or language training, and child care. For example, Arkansas proposed a variety of services to support a 20-person class for heavy equipment training and proposed providing tools, boots, transportation, and child care support to all participants employed on a federal-aid highway construction project. FHWA’s discretionary grants also fund some activities that support job training indirectly. For example, a number of states have used supportive services funds for construction career days, which expose high school students to various areas of construction, including heavy highway construction, with the intent of increasing interest among women, minorities, or economically disadvantaged individuals in the transportation industry and highlighting potential career opportunities. Applying the same approach used to estimate the number of individuals receiving direct supportive services, we estimate that roughly 8,000 individuals, primarily through the construction career days, are exposed indirectly to highway construction jobs. Similarly, FHWA provides more than $2 million each year to universities through state transportation agencies for summer transportation institutes that expose students to the transportation industry broadly, not just highway construction. Activities include exposure to engineering and construction concepts, presentations by industry groups, and site visits to local transportation facilities, such as train stations and transportation simulators. We estimate that roughly 1,200 people participated in the activities in 2010 across 32 states, the District of Columbia, and Puerto Rico. Finally, FHWA funds about 100 internships each year at agencies within the U.S. Department of Transportation (e.g., Federal Transit Administration and Federal Railroad Administration) and at state transportation agencies, costing about $1.5 million annually. These internships expose students to transportation careers and encourage the pursuit of transportation-related studies in college. In the activities supported by the fiscal year 2010 summer institute and internship programs, we estimate that female and male participation in each program was relatively equal, and that a significant number of the participants served by these two programs were members of minority groups (see fig. 3). While these activities can increase awareness of highway construction job opportunities and lead to future work force entries, the effect of these efforts, if any, may not be apparent for years since students typically return to school upon completion. They may not enter the workforce for a year or more, whether in construction or other transportation fields or in a nontransportation field. FHWA has not used any of the information available to it to determine the overall effectiveness of its supportive services activities. FHWA does not track how many of the state grantees have achieved their goals in directly supporting on-the-job training. Although states are required to provide reports on their accomplishments to FHWA division offices, this information is not typically relayed to the FHWA officials making grant decisions. FHWA has only received about one-third of the final fiscal year 2008 accomplishment reports for the discretionary grant program, and FHWA officials noted that a low response rate is typical. Officials responsible for making the grant funding decisions explained that they do not routinely receive monthly or quarterly progress reports from the division offices but can request them on an as-needed basis. They also noted that occasionally, they request these reports to identify promising practices. However, these officials noted that they have limited tools to induce states to meet their reporting requirements. Furthermore, they explained that some states do not provide reports because of delays in awarding contracts, noting that often contracts are not in place by the time the reporting requirements have begun, and thus the states have no results to report. FHWA officials recognized that they did not have sufficient information on the results and the accomplishments of these programs, and surveyed the division offices in 2011 to obtain information on what grantees have accomplished and what approaches have worked well. As of August 2011, FHWA officials were still collecting and analyzing responses from the states, in part, due to additional time needed by the division offices to complete the survey as well as comply with additional reporting requirements for other FHWA programs. Moreover, FHWA has not established how state-reported data can be used to evaluate whether grantees have met FHWA’s overall program objectives to increase the overall effectiveness of each state’s job training program and enhance the training opportunities for women, minorities, and economically disadvantaged individuals. FHWA officials stated that they have not analyzed the extent to which grantees are achieving their performance goals, citing a variety of reasons, including a lack of resources and other competing programmatic priorities. FHWA officials anticipate that the survey, which they expect to complete in the summer of 2011, will provide much of the information needed to analyze the effectiveness of the program. Regarding indirect supportive services, FHWA officials noted that they have collected some data on the number and demographics of the individual attendees for the summer institute and student internship program, and further heard anecdotally that the indirect services provided (e.g., awareness programs) are effective in persuading students to consider a career in the transportation field. However, for reasons noted previously, FHWA lacks this information for the indirect activities supported by the discretionary grant program, even though the grant program receives a sizable portion of FHWA’s supportive services funding. Moreover, FHWA officials do not track and do not know to what extent indirect supportive services are leading to jobs in the highway construction industry. Officials noted that they do not track the outcomes for a number of reasons, including privacy concerns with collecting data on minors. FHWA’s past efforts to determine the effects that its supportive service funding provided have been limited, but we recognize that doing so is complicated. For programs designed to support diverse state or local activities, such as the supportive services program, finding common performance metrics to describe the overall program’s effectiveness can be challenging. We have reported on options for building accountability provisions into grants that help balance states’ flexibility to select a mix of activities and services that will best allow them to achieve a particular national outcome with accountability for achieving that outcome. These options include emphasizing results-based evaluation (e.g., workforce retention) in addition to examining output activities (e.g., the number of participants receiving a service). For example, under a results-oriented evaluation, FHWA could specify national goals and objectives, set up a process for establishing them, or adopt some combination of the two. FHWA officials requested results information through its survey of supportive services providers in the discretionary grant program. A results-orientation requires ongoing information. FHWA officials indicated that they plan to annually gather some of the basic information that was solicited from states in the current survey. In addition, FHWA states that it requires that grantees establish performance goals and measurable objectives for their proposed activities, and report on progress towards meeting these goals. However, this approach, to the extent it is employed, focuses on outputs rather than end results. Program results are important for making budgetary and programmatic decisions. High-level decision makers, such as Members of Congress and agency heads, need to know which programs are achieving their goals and objectives to make informed decisions about whether to expand, reduce, or maintain funded activities. Furthermore, agencies are responsible for ensuring that grantees use federal funds for eligible activities. In the absence of reported program results, FHWA cannot know whether funds have been used effectively and appropriately. FHWA often funds the same projects for supportive services year after year. For example, 17 of the 26 projects (65 percent) that received grants in fiscal year 2010 also received them in 2008, 2009, or both years. FHWA reviewers of discretionary grant applications are instructed to score the scope of the work, performance goals, objectives and measurements, budget summary, monitoring and evaluation plan, and reporting plan. However, past performance information is not required of applicants in the application nor is past performance one of the criteria scored during funding reviews. Furthermore, the solicitation issued to states does not request information from grantees about how they have used prior FHWA grants, or the resulting effectiveness of their activities. FHWA officials told us that they informally consider performance information when screening discretionary grant applications. For example, they stated that they may use data from the accomplishment reports to look for potential problems. In addition, officials noted that states whose accomplishment reports show positive results provide FHWA assurance that the state may be able to successfully implement additional programs, which can influence the state’s chance of receiving funding in a subsequent year. However, as noted previously, FHWA decision makers have received a limited number of progress and final reports, which are the primary source of performance information for discretionary grants. Furthermore, FHWA decided to require only one final oversight report for four funding cycles occurring in fiscal years 2009 and 2010, which included two rounds of Recovery Act awards. FHWA officials stated that they made this decision in order to streamline the reporting requirements for grantees. Accordingly, FHWA has only received a few accomplishment reports for this period. As a result, FHWA will not be able to determine the effects of the individual award decisions until after all rounds of funding are complete, which, in some cases, will be 2 years after the decisions were made, following subsequent funding decisions by FHWA. Similarly, for the summer transportation institute program, FHWA reviews the annual reports submitted by states and informally assesses performance, and it considers past performance during its funding review to some degree. Like the discretionary grant program, many of these applicants are funded year after year. For example, 34 of the 53 applicants (64 percent) funded in fiscal year 2010 were funded in each of the previous two fiscal years. According to FHWA officials, the division offices look at earlier annual reports to see if the same host site is soliciting funding for the subsequent year, and try to determine whether the host achieved its program objectives. However, like the grant program, past performance information is not required of applicants in the application and performance is not one of the criteria scored during funding reviews. Furthermore, the solicitation issued to states does not request information from grantees about how they have used prior FHWA grants and the resulting effectiveness of their activities. For the summer internship program, FHWA evaluates a prospective intern’s performance through the student’s academic and professional work history, which, among other things, entails a review of the applicant’s resumé, references, and academic transcript. FHWA also surveys students at the end of the program to gather information on how well the program worked, and to suggest recommendations for how to address these issues in the future. Given that many of the activities funded through the program are funded repetitively, good practices suggest that the use of performance information can inform and improve recipient selection approaches, even for a smaller program. While the $10 million provided annually through this program is much smaller than many other federal grant programs, integrating results information can help FHWA identify approaches that work or leverage good practices to improve the program, and decrease funding to poor or marginal performers (or encourage them to improve their performance). FHWA is considering whether to change the grant funding approach from discretionary to formula-based funding. However, using performance data could still help ensure accountability for results. Under the formula approach that FHWA is considering, each state would receive some supportive services funds, in contrast to the 20 or so states that receive funding each year under the current approach. Using performance data, FHWA could help states that have not participated in the program to more easily identify previously successful approaches to effectively implementing their own supportive services programs. The performance data could also be used to determine whether funds should be withheld from or provided conditionally to any currently low-performing states. FHWA hopes to implement the new funding approach in fiscal year 2012. FHWA’s on-the-job training program and its counterpart, the supportive services program, represent decades-long federal initiatives to increase participation of women, minorities, and economically disadvantaged individuals in the highway construction industry. FHWA allows each state to tailor its job training activities to fit its unique demographic, geographic, and social characteristics, which can spur innovation and help states meet their needs. However, FHWA has not established clear criteria for what states must do, what is optional, the degree of flexibility states have in implementing their programs, and what they are intended to accomplish. Within state transportation agencies, FHWA, and state partners involved in the program, we found officials working toward the programs’ success. However, FHWA does not know what these programs have accomplished or how effectively these activities have advanced the broader goal of bringing underrepresented individuals into the highway construction workforce, because FHWA has performed only limited assessments of these programs over their nearly 40-year history. We recognize that doing so may be difficult. FHWA’s current activities—such as its survey regarding the supportive services program—are positive steps towards making such an assessment. While it is appropriate for FHWA headquarters to rely extensively on its division offices to oversee state on-the-job training programs, such a decentralized management approach does not relieve FHWA headquarters from the responsibility of providing leadership and a national perspective for its programs. Even though the on-the-job training and supportive services programs are relatively small compared to FHWA’s other programs, we would still expect FHWA to conduct oversight to ensure program goals are met and at a scale appropriate for the size of the programs. A necessary first step is for the agency to establish clear criteria—existing program criteria are not clear—for states on what they are to accomplish and for its division offices on how they are to oversee state activities. These criteria could continue to allow for flexibility in state programs, as FHWA deems appropriate. In doing so, FHWA needs to provide guidance on state reporting that will lay the groundwork for national assessments of results. Likewise, evaluation of supportive services results could inform funding decisions. Such actions will result in FHWA being able to better ensure that program goals are being met and would allow them to improve program accountability. To establish accountability for meeting the programs’ goal of increasing the participation of traditionally underrepresented groups in the highway construction workforce, we recommend that the Secretary of Transportation direct the FHWA Administrator to take the following three actions: Strengthen criteria—through regulations, guidelines, or other mechanisms—so that states have a clear understanding of how the on-the-job training program should be implemented and the results state programs are intended to accomplish. Create and implement an oversight mechanism that (1) holds states accountable for meeting federal training criteria and (2) clearly stipulates how FHWA will assess state program effectiveness, including what type of program achievement data states are to submit and how such data will be used. This oversight mechanism should include assessing the effectiveness of its division offices in overseeing state activities. For the supportive services program, develop an approach to (1) evaluate the extent to which grantees have met their proposed annual goals and (2) integrate the results of this evaluation into FHWA’s funding decisions for supportive services programs. We provided a draft of this report to the Department of Transportation for review and comment prior to finalizing the report. The Department of Transportation generally agreed with the recommendations and provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to congressional committees with responsibilities for surface transportation issues, the Director of the Office of Management and Budget, the Secretary of Transportation, and the Administrator of the Federal Highway Administration. In addition, 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) 512-2834 or wised@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In this report, we assessed the Federal Highway Administration’s (FHWA) on-the-job training program and the associated supportive services program. To do so, we focused on the extent to which (1) states’ implementation of the FHWA on-the-job training program provides training and career enhancement opportunities for traditionally underrepresented groups to work on federal-aid highway projects, (2) FHWA has overseen the program and demonstrated results, and (3) the supportive services program established by FHWA has assisted state job training and apprenticeship programs. In response to your interest, we also gathered information on financial incentives and penalties states use to encourage contractors to provide job training. Additionally, for background, to get an understanding of historical participation in construction for women and minority groups between 1985 and 2010, we analyzed data provided by the Department of Labor’s Bureau of Labor Statistics on industry employment by race, ethnicity, and gender. While the data used are not strictly comparable over time due to changes in industry classifications systems, we used the data to describe a general trend in employment in the construction industry. We believe the data are sufficiently reliable for our purposes, which were to provide historical context on the industry. To determine how FHWA’s on-the-job training program has provided training and career enhancement opportunities for traditionally underrepresented groups on federal-aid highway projects, we reviewed legislation, including the Federal Aid Highway Act of 1968, which authorized the program, and the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users; the program’s implementing regulations; FHWA guidance such as its contract compliance manual; and our reports on performance management. We interviewed officials from FHWA’s Office of Civil Rights and its Resource Center to understand the agency’s overall program philosophy. In addition, to gain a basic understanding of how the program operates and its environment, we interviewed officials from FHWA division offices and state transportation agencies in 11 states. We selected these states based on a variety of factors, including unionization, the state’s size, the extent to which a state had been awarded funding for supportive services and used workforce development funding, and geographic location. We further examined more closely how these programs were implemented in four of these states: Missouri, Pennsylvania, Texas, and Washington. We selected these states because they differed in demographics; unionization; how job training is structured within the state, including any unique practices; and the extent to which the state participates in the supportive services program. We also interviewed representatives from local chapters of industry groups, such as the Associated General Contractors, as well as members of local unions, including laborers, craft- workers, and heavy equipment operators. The information gathered through our review of state programs is intended to illustrate these programs; it is not generalizable to all states or to other states with similar characteristics. To develop an order of magnitude estimate of the number of individuals participating in the program in a given year we used information in annual accomplishment reports that states submitted to FHWA. In making these calculations, we estimated the total number of participants from the sample of reports provided by FHWA. We also used this data, along with our interviews with FHWA and state transportation officials, to provide examples and illustrations of the type of data collected by the states for these programs, including activities implemented, the financial incentives and penalties used by states, and the extent to which the American Recovery and Reinvestment Act of 2009 (Recovery Act) provided job opportunities. While we cannot independently verify all of the data collected by the states and submitted to FHWA, because the data is used solely to provide context on the overall program, we believe the data is sufficiently reliable for our purposes. To assess how FHWA oversees job training programs to determine program achievement, we reviewed the program standards and outcome measures required in FHWA’s regulations and program guidance and compared them to good management practices, such as the assessment of oversight activities we have identified in other programs. We also compared the information on training activities and program results contained in the state accomplishment reports to requirements detailed in FHWA regulations, guidance, and other instructions communicated to states. Because of the differences in how states collected and reported data, we were unable to compare the results across states. Accordingly, in order to understand trends, similarities, and differences across implemented programs we relied on interviews with FHWA and state transportation officials to provide examples of the type of oversight activities implemented by each state. The information we obtained from these officials is not generalizable across all state programs. To determine the extent to which supportive services have assisted state job-training programs, we reviewed how FHWA has implemented and overseen the three components of the program: (1) the discretionary grant program, (2) the national summer transportation institute program, and (3) the summer transportation internship program for disadvantaged groups. We analyzed FHWA budget information to determine the amount of funding provided to the three programs. In order to assess the data’s reliability, we interviewed department officials and reviewed departmental audit reports about the system which processes the data. We determined that this data was sufficiently reliable for our purposes. For the discretionary grant program, we analyzed legislation, such as the Federal Aid Highway Act of 1970, which authorized the program, regulations, and other FHWA guidance, such as FHWA’s supportive services handbook. We reviewed the agency’s approach to requesting and evaluating grant proposals for the program. Specifically, we analyzed program criteria for funding proposals and incorporating performance information by reviewing the agency’s request for proposals, rating review sheet, and other information communicated to prospective applicants. We compared FHWA’s use of performance information to good management practices that we have identified. We reviewed the 153 grant proposals that received funding from 2008 through 2010 and categorized the activities receiving funding. In addition, we reviewed FHWA’s guidance for reporting the results of programs. However, because FHWA could only provide about one-third of the annual grantee accomplishment reports for fiscal year 2008 and only a handful of reports for the following funding cycles, we were unable to determine the extent to which states complied with this guidance. In addition to FHWA officials, state transportation officials, and industry groups identified previously, we also interviewed supportive services grantees in Missouri, Pennsylvania, and Texas. These results are not generalizable to all states or to other states with similar characteristics. In order to estimate the number of individuals participating in the program in a typical year, we reviewed the goals in the funded proposals for activities proposed from fiscal years 2008 through 2010, excluding Recovery Act projects. We classified each of the activities as either directly supporting job-training or current trainees (such as preapprentice training, stipends for child care and transportation, and providing job-related equipment) or indirectly supporting job training (such as career day events). For each year, we added the numerical goals for each type of job training activity and averaged our results over the 3-year period. Our calculation represents a very rough estimate of the number of participants in this program. Finally, we reviewed FHWA’s proposal to change how it distributes funds through the program. For the summer transportation institute program, we reviewed FHWA guidance and other documents on the program’s history and implementation. We reviewed FHWA’s request for proposals and evaluation criteria and compared the requirements for the use of performance information to the use of such information for programs that we have identified. In addition, we analyzed the results described in annual reports submitted by programs in 32 states, the District of Columbia, and Puerto Rico for fiscal year 2010. Specifically, we used these data to estimate the total number of participants in the program, and provide demographic information, such as ethnicity, gender, and education level, of the participants, as well as examples of the types of activities undertaken through this program. As the data was reported individually by each state, we limited our use of these data to background on the participants and believe these data are sufficiently reliable for this purpose. Finally, we interviewed officials from FHWA and two program sites to understand how FHWA selects, implements and oversees these programs. Similarly, for the student internship program, we reviewed FHWA guidance and other documents, including the program and evaluation criteria, and compared FHWA’s use of performance information to good practices we have identified. We also reviewed FHWA’s analysis of the results of the program, including demographic information about the participants, such as gender, ethnicity, proposed major, and location of the internship. We limited our use of these data to background on the participants and believe these data are sufficiently reliable for this purpose. We also interviewed FHWA officials to understand how the agency oversees and implements the internship program. We conducted this performance audit from August 2010 through September 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. While the on-the-job training program does not have a distinct funding source, job training expenses on federal-aid highway projects are eligible for federal dollars in the same way as the typical 80/20 federal/state split of project costs. Each state has discretion in how contractors will be reimbursed for these training activities, if at all. Some states have tried to create financial incentives for contractors to perform job training, but these incentives are relatively small. For example, some states reimburse contractors for the hours of training performed. Reimbursement rates range from 80 cents per hour, in Arizona for example, to $3.50 per hour in Missouri, in the states we reviewed. Other states include the job training requirement as a bid item in the request for contract proposals, allowing contractors to name their price for meeting the requirement. Officials and contractors that we spoke with generally agreed that reimbursement rates were too low to be much of an incentive to contractors. Some contractors simply do not bother submitting the paperwork required to claim a reimbursement. Likewise, in cases in which job training is a bid item, we heard that contractors will commonly bid a minimal amount for this item, preferring to keep their overall price as low as possible to win the contract award. Financial incentives can also take a penalty form, although this approach appears to be less common. For example, Missouri has recently established a penalty system for nonperformance. In this system, the contractor will be held liable to pay $7 for every hour of training that should have been provided but was not. To date, the state has rarely levied such a penalty. On occasion, states may threaten to withhold contract payments if a contractor is not performing. In our interviews with state officials, we found this practice is rare and states are reluctant to do so. Officials noted that generally the threat to withhold funds is sufficient to correct problems. Through the American Recovery and Reinvestment Act of 2009 (Recovery Act), the federal government provided states with additional funds for highway construction projects and the same general training requirements applied to these projects. However, to some extent, these projects may have been less conducive to training than projects funded through regular annual federal-aid highway apportionments. Because the Recovery Act prioritized projects that could be completed quickly, many projects focused on resurfacing or other less complex and lengthy projects. Short projects tend to require few workers overall and less time per trade to complete, minimizing the opportunity to train workers on the project. In the four states we reviewed more closely, officials generally agreed that the Recovery Act-funded projects led to some job training opportunities, but these opportunities were generally shorter than regularly funded projects. Several states reported to FHWA that Recovery Act-funded projects employed trainees. Three of the 30 states we reviewed significantly increased their annual achievement due to Recovery Act funding. For example, more than half of the trainees in Texas worked on Recovery Act-funded projects in 2009. Specifically, 156 individuals worked as trainees on 142 Recovery Act-funded projects. At the end of 2009, 101 of these trainees remained actively enrolled in the program and 36 had graduated. In addition, some states made special efforts to ensure training occurred on Recovery Act projects. For example, Texas created a separate job training program for Recovery Act projects that assigned training goals to individual projects. Texas already had a contractor-based program in place, but wanted to directly track job training results that were associated with Recovery Act funding. In addition to the contact named above, James Ratzenberger and Teresa Spisak (Assistant Directors), John Stambaugh, Tina Paek, Matthew Voit, Dianne Blank, Elizabeth DeVan, Sara Ann Moessbauer, Amy Rosewarne, and Crystal Wesco made key contributions to this report. | The Federal Highway Administration's (FHWA) on-the-job training program-- a relatively small part of the federal aid highway program--requires states to implement job training programs to provide traditionally underrepresented groups with opportunities in highway construction. To increase the effectiveness of state job training programs, FHWA grants up to $10 million annually for supportive services, such as job placement assistance. This report examines the extent to which (1) FHWA's job training program enhances training and career opportunities for these groups, (2) FHWA oversees the job training programs, and (3) supportive services provide assistance to these programs. To address these topics GAO reviewed federal legislation, good management practices identified in prior GAO reports, FHWA documents, and proposals and reports submitted by states. GAO conducted an in-depth examination of these efforts in four states, and interviewed a cross-section of FHWA staff, state officials, and industry groups. It is unclear the extent to which FHWA's on-the-job training program enables women, minorities, and economically disadvantaged individuals to reach journeylevel status in the highway construction trades, although stakeholders believe it can create some opportunities. FHWA's decentralized management of the program--in which state transportation agencies and FHWA's division offices are generally responsible for program implementation--has led to a wide range of practices. As a result, the types of training opportunities created by the program vary from state to state in terms of, for example, the length of training and the entities involved in providing training. In addition, the extent that state programs focus on creating training opportunities for traditionally underrepresented groups differs. The limited amount of useable information available on program results varies among states. As a result, FHWA does not know how well the program is doing, and GAO could not accurately determine how many trainees participate in the program or the demographics of those trainees; however, GAO estimates that several thousand likely participate in any one year. FHWA's oversight approach does little to assess program results. FHWA lacks clear criteria that articulate what states are supposed to accomplish through their job training programs. While some broad program expectations are stipulated in guidance and regulations, FHWA acknowledges some of these are outdated. Furthermore, FHWA's oversight approach does not determine the overall effectiveness of state programs or measure state progress. For example, although state transportation agencies are required to submit achievement information on an annual basis to FHWA division offices, states submitted this information using a wide range of different output terms and different demographic and trade classification categories. GAO has reported that program criteria are key aspects of results-oriented performance management. Through a separate program, FHWA provides funding for a variety of activities intended to increase the overall effectiveness of the on-the-job training program, but its overall stewardship of the program is limited. FHWA's supportive services program provides grants for locally tailored initiatives, such as skills training, child care, and career awareness events, that directly and indirectly link to job training programs. However, there is insufficient data to determine how effective these efforts have been in enhancing job training opportunities. Although FHWA has articulated the types of data states should collect and report, the agency does not know, and GAO could not determine, the number of participants in the supportive services program or its effect, in part because grantees do not always provide information about their program results. However, GAO estimated that there are about 10,000 people participating in any one year. Furthermore, past performance information is not required of applicants or scored during funding reviews. Given that many grantees are funded repeatedly, good management practices suggest that using past performance information can inform and improve recipient selection approaches. Program results are important for making budgetary and programmatic decisions. Without insight into program activities, FHWA cannot ensure that funding is used effectively. GAO recommends that FHWA (1) strengthen on-the-job training program criteria, (2) create and implement an oversight approach for its job training program, and (3) evaluate the extent to which supportive services programs have met their goals and use this information to inform future funding decisions. The agency generally agreed with these recommendations and provided technical comments, which were incorporated as appropriate. |
As we reported in March 2012, retirement plan sponsorship is low among small employers, which may reflect the challenges employers face in establishing and maintaining a plan. Our analysis of available Labor and IRS data found that about 14 percent of small employers sponsored some type of plan in 2009. As shown in figure 1, the smallest employers—those with 1 to 4 employees—had the lowest sponsorship rate at 5 percent but even employers with 26 to 100 employees had a sponsorship rate of 31 percent. To put this in context, about 50 percent of the private sector workforce at any one time participates in an employer-sponsored pension plan. Also, small employers paying average annual wages of $50,000 to $99,999 had the highest rate of plan sponsorship at 34 percent while small employers paying average wages of under $10,000 had the lowest sponsorship rate at 3 percent. When we met with small employers and other stakeholders, they identified a variety of factors as challenges to sponsoring retirement plans or as reasons for terminating existing plans. One commonly cited concern focused on the multiplicity of plan types and the burden of paperwork and administration. For example, some small employers and retirement experts said that the broad range of plan types and features made it difficult for small employers to compare and choose plans. Another small employer who previously sponsored a 401(k) plan with a company match said the amount of required plan paperwork, including generating annual reports, was a key reason he terminated it. Other areas of concern for small employers centered on a sponsor’s fiduciary responsibilities with respect to managing or controlling plan assets. Specifically, some small employer sponsors found the fiduciary responsibility of selecting investment fund choices for their plans particularly challenging. A small employer with a 401(k) plan described the difficulties of selecting investment options with an appropriate balance of risk for a workforce that includes both younger and older workers. Moreover, a number of stakeholders said some small employers may not have an adequate understanding of their fiduciary duties and are not always aware of all their legal responsibilities. One service provider explained that some small employers mistakenly believe that all fiduciary responsibilities and liabilities are transferred to a service provider when they are hired. Another expert noted that some small employers have an exaggerated sense of the possible liabilities that being a fiduciary carries, and may avoid sponsoring a plan out of fear of being sued by their employees. In addition to these challenges, smaller or newer firms may be unwilling or unable to sponsor plans because they lack sufficient financial resources, time, and personnel. For instance, smaller employers noted that startup and ongoing costs involved with maintaining a plan, costs associated with reporting and testing requirements, administrative fees paid to an outside party, and any employer requirements to match employee contributions were barriers to plan sponsorship. Small employers also expressed the need to reach a certain level of profitability before they would consider sponsoring a plan and that general economic uncertainty makes them reluctant to commit to such long-term expenses. Low employee demand for an employer-sponsored plan may also be a challenge for small employers. For example, a number of small employers stated that employees prioritized health care benefits over retirement benefits. One small employer thought that, given the limited funds available to contribute towards benefits, his employees would prefer those resources be applied toward lowering the employees’ share of health insurance premiums. Small employers emphasized that offering health care benefits was necessary to attract quality employees. Additionally, some small employers, such as those who described having a younger workforce, stated that their employees were less concerned about saving for retirement and, as a result, were not demanding retirement benefits. Other small employers told us that employees, particularly those with low pay, do not have any interest in retirement benefits because they live paycheck to paycheck and are less likely to have funds left over to contribute to a plan. For example, one small employer discontinued his plan when too few of his employees—most of whom he described as low-wage—participated in the plan. Another small employer noted that even senior-level managers in his business did not participate in the plan. However, a retirement expert stated that while some employees might not be interested in participating in a retirement plan, he believed the perceived lack of demand to be exaggerated. He added that he believed some businesses may use lack of employee demand as an excuse when the small employer was not interested in sponsoring a plan. In March 2012, we made a recommendation to Labor to convene an interagency task force with the Department of the Treasury, IRS, SBA, and other appropriate agencies to review, analyze, and address the challenges small employers face in helping ensure retirement security. The agencies generally agreed with this recommendation, however, Labor disagreed with one aspect of our recommendation, which was for the task force to create a single webportal for federal guidance. We believe consolidating plan information onto one webportal could benefit small employers, mainly because federal resources are scattered across different sites. We also made a recommendation to the Department of the Treasury to collect additional information on IRA plans. Small employers are more likely to sponsor 401(k) plans and participants of these plans tend to pay higher fees than larger plans. According to our analysis of Labor and IRS data, out of slightly more than 712,000 small employers that sponsored a single type of plan in 2009, about 46 percent sponsored a 401(k) plan, 40 percent a SIMPLE IRA, and the remaining employers sponsored other types of plans, including DB and non-401(k) Experts have identified low contribution rates as a profit sharing plans.key problem facing workers seeking to secure an adequate retirement income. In 2011, the average account balance of 401(k) plans with 100 or fewer participants was about $59,000. This may reflect the challenges facing participants in small plans of not only contributing faithfully, but also investing prudently and avoiding high fees. Regarding fees, plans with fewer than 100 participants account for the majority of 401(k) plans, and these plans usually pay higher fees. According to industry experts and research, plans with fewer participants generally have lower plan assets, and therefore pay higher fees as a percentage of assets than plans with more assets or older plans that have grown their assets over time. Service providers and an industry expert we met with noted that administrative fees to start a 401(k) plan can be significant for small plans. Additionally, representatives of a retirement industry organization said that it may be difficult for sponsors of small plans to negotiate for lower fees because assets in these plans are modest. In April 2012, we reported that participants in smaller plans typically pay higher fees than participants in larger plans. Specifically, our nationally representative survey of plan sponsors found that participants in plans with fewer than 50 participants paid an average of 0.43 percent of their plan assets annually, while participants in larger plans—those with more than 500 participants—paid 0.22 percent for record keeping and administrative services. On top of these fees, participants likely paid other plan fees. For example, according to survey results, in about 69 percent of small plans, participants paid all of the investment fees (see fig. 2 for additional details), which ranged from less than 0.01 percent to 3.24 percent of assets. 32 disclosure of service providers’ direct and indirect compensation; and before regulations to disclose certain plan and investment-related information, such as fees, to participants and their beneficiaries in participant-directed individual accounts were in effect. 29 C.F.R. §§ 2550.408b-2 and 2550.404a-5 (2012). GAO-12-325. This work was conducted before Labor finalized regulations regarding 33 For further details on the design of our 401(k) plan sponsor survey on fees, see GAO-12-325. As we reported in September 2012, little is known about the employers that participate in MEPs, or even the number of MEPs by type, in part because the federal government no longer collects these data. As of 2009, the most recent data available for our September 2012 report, MEPs represented only a small portion of the pension universe. Specifically, DB MEPs represented 0.7 percent of all DB plans, about 6.0 percent of all DB assets and 5.0 percent of all DB participants. DC MEPs represented about the same percentage of all DC plans, assets and participants. In our September 2012 report, we found smaller employers in MEPs were mainly participating in association-sponsored MEPs. Two associations told us their participating employers averaged between 20 and 60 employees. However, one MEP sponsored by a PEO reported that the typical participating employer in its plan was small as well. In particular, little data exist on the current number of PEO or open MEP plan types, their asset size, the number of participants, or the participating employers. Relative to other MEP types, PEO and open MEPs are the newest, and may be the only types actively marketing their MEPs to participating employers. MEPs have been suggested by PEO and open MEP representatives as a viable way for small employers to reduce their administrative responsibility for their pension plans. Several MEP representatives said MEP administrators can complete the record keeping and the annual testing, and can submit required filings such as a single Form 5500 for the MEP on behalf of all the participating employers. Furthermore, employees can more easily move among employers in the plan. For example, in a DB MEP sponsored by an association, as long as a participant remains an employee of an employer within the association, participants can change employers and continue earning vesting service credit in the same plan. A small employer sponsoring a single employer plan can also contract with a service provider to perform administrative functions, but a couple of interviewees said employers not already offering plans might find it easier and faster to join a MEP than to create their own single employer plan. MEPs have also been suggested by some as a possible means to lower the costs of plan sponsorship, since participating employers can pool assets to obtain lower pricing available to larger plans. One expert we spoke with said that certain association plans have been very effective at offering efficient, cost-effective retirement options for their members. Furthermore, a couple of interviewees said MEPs may also reduce costs for employers since they will not need to spend money to create an initial plan document, as they would in establishing a new single-employer plan. As we found in September 2012, another possible benefit of MEPs, according to some MEP marketing material, is reducing participating employers’ fiduciary liability since the MEP administrator takes on some fiduciary duties. However, it is not clear how much relief from fiduciary liability a MEP can provide to participating employers, and it is not clear that such relief is unique to MEPs. For example, small employers may also be able to receive a similar degree of reduced fiduciary liability by using a service provider to administer the employer’s own plan. Because small employers may not be familiar with how to manage a plan, reduced fiduciary liability may be an attractive feature for them, and, in our March 2012 small employer report, small employers identified possible fiduciary responsibility as a barrier to sponsoring a pension plan. However, while MEP representatives and MEP marketing materials sometimes stated otherwise, participating employers retain some fiduciary responsibility, according to Labor officials. At a minimum, participating employers must still select a MEP to join and monitor a plan’s investments and fees, which Labor considers a fiduciary function. Overall, no consensus existed among MEP representatives and pension experts on the potential for MEPs to substantially expand coverage. Large associations can provide the option of joining a MEP to their members. That option is unavailable to small employers not part of a membership organization looking out for their interests. The extent to which small employers can join a MEP may depend on whether a MEP is actively marketed and sold, since one pension expert observed that small employers do not extensively research pension plans or actively seek them out. Additionally, employers who choose to become part of a MEP for the first time may already have been providing a plan for their employees. While a couple of the MEP representatives we spoke with specifically targeted employers without plans, several targeted businesses with existing plans. From Labor’s perspective, their primary regulatory concern centers on one type of MEP, the open MEP. During our review for our September 2012 report, Labor issued an advisory opinion stating that one particular open MEP did not constitute a pension plan under ERISA because it was not established or maintained by an employer or an employee organization. Labor determined that, in the case of this MEP, participating employers did not constitute a bona fide employer group or association, sufficient to be considered an employer sponsoring the arrangement, because, among other things, they did not exercise sufficient control over the plan. As a consequence of this guidance, the participating employers in that open MEP were instead determined to each be the sponsors of their own, individual plans. Association MEP representatives told us Labor’s guidance had no affect on their plans. As a practical matter, Labor’s ruling is being treated by many as meaning that individual participating employers in an open MEP have to comply with any reporting, auditing, and bonding requirements on an individual rather than aggregate basis. In our September 2012 report, we noted that a number of compliance-related questions were left unanswered for open MEPs. treatment, IRS might still consider an open MEP to be one plan rather than a series of individual plans. In an effort to remove confusion for plan sponsors, we recommended Labor and IRS coordinate their interpretations and develop compliance-related guidance. Labor and IRS generally agreed with our recommendations on coordination. Additionally, we noted that, for purposes of preferential tax Labor’s expectation is that the recently issued opinions on open MEPs will serve as guidance to the pension industry at large. However, despite the ruling on open MEPs from Labor, pension experts and MEP representatives told us that broader policy questions remain. The opinion did not provide Labor’s view on the potential of open MEPs to lower plan costs or expand coverage, but we were told by MEP representatives and pension experts that open MEPs will continue to receive the attention of policymakers for that reason. At this time no one knows for certain how many open MEPs there are, who is in them, or how they may affect future pension coverage. Pension experts cautioned that any legislative change allowing certain open MEPs should ensure that there are appropriate safeguards to protect plan participants. GAO-12-665. Labor officials said the potential for inadequate employer oversight of a MEP is greater than for other pension arrangements because employers pass along so much responsibility to the entity controlling the MEP. Labor officials noted that potential abuses might include layering fees, misusing assets, or falsifying benefit statements. One pension expert agreed that there is potential for MEPs to charge excess fees without the enrolled employer being aware. While Labor officials acknowledged that single employer plans could be subject to similar abuses, they cautioned that the way a MEP is structured and operated could make it particularly susceptible to abuses.can be important. Representatives of MEPs maintained by associations we interviewed said they had an appointed board made up of association members who served as the named fiduciaries of the plan. Most of these associations required board members to also participate in the MEP. However, the extent to which open MEPs have or would have such structures in place is unclear. Given the limited knowledge some plan sponsors have of the fees they pay and their fiduciary responsibilities, it would appear that some such governance structure or related safeguards is warranted to protect employer and participant interests. For this reason, the structure of a particular MEP Labor’s lack of data to identify different MEP sponsor types or any employers participating in MEPs limits the agency’s ability to protect MEP employers and participants. To ensure Labor has information needed to oversee MEPs, in September 2012, we recommended that Labor gather additional information about the employers participating in MEPs, potentially through the Form 5500, which is the primary source of pension plan information for government oversight activities. Labor officials said the number of participating employers or the names of participating employers could be useful oversight information. The agencies generally agreed with our recommendation on gathering additional MEP-related information and said they will consider MEP-related changes to the Form 5500 as part of their regular evaluations. We consider this an important first step, and await any proposed or scheduled changes to data collection. For workers at small employers, building an adequate level of income for retirement is becoming increasingly challenging. Particularly for small employers, the low level of plan sponsorship means that many of their workers may enter retirement with little or no income outside of Social Security. Small employers also face some greater challenges to sponsorship than larger employers and they often have less time, fewer resources and personnel to handle them. The potential advantages of multiple employer plan design are appealing in this context, however, current data and information, as well as other safeguards, will be necessary to ensure that small employer interests are protected and promises to participants are not broken. Chairman Harkin, Ranking Member Alexander, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact Charles A. Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Tamara Cross, Assistant Director; James Bennett, Edward Bodine, Sarah Cornetto, Patrick diBattista, Chuck Ford, Gene Kuehneman, David Lehrer, Ted Leslie, Sheila McCoy, Thomas A. Moscovitch, MaryLynn Sergent, Roger Thomas, Frank Todisco, Kathleen van Gelder, Lacy Vong,and Craig Winslow were key contributors to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | About 42 million workers, or about onethird of all private-sector employees, work for employers with fewer than 100 employees, and recent federal data suggest many of these workers lack access to work-based retirement benefits. Despite efforts by the federal government to develop new plan designs and to increase tax incentives, plan sponsorship remains low among small employers. MEPs, a type of arrangement involving more than one employer, have been suggested as a potential way to increase coverage. This testimony describes (1) the challenges small employers face in helping ensure that their workers secure retirement income, and (2) types of MEPs and their potential to address these challenges. GAO drew from its previous reports related to small employer challenges in establishing and maintaining a retirement plan and recent work on MEPs issued from March 2012 through September 2012. About 14 percent of small employers sponsor some type of plan for their employees to save for retirement and these employers in general can face numerous challenges establishing and maintaining a plan. GAO's March 2012 report found that many of the small employers who were contacted said they felt overwhelmed by the number of plan options, plan administration requirements, and fiduciary responsibilities. For example, some small employers found it challenging to select investment funds for their plans. Small employers also cited other challenges in sponsoring a plan, including a lack of financial resources, time, and personnel. GAO's April 2012 review of select 401(k) plans--the most common type of plan sponsored by small employers--found that some smaller plan sponsors did not know about or fully understand fees they and their participants were charged, such as fees associated with group annuity contracts. In addition to these fees, participants in small plans often pay higher recordkeeping and investment management fees than participants in larger plans. GAO's work demonstrates the need for plan sponsors, particularly small sponsors, to understand fees in order to help participants secure adequate retirement savings. Any fees paid by participants, even a seemingly small amount, can significantly reduce retirement savings over time. Little is known about the types of employers that participate in multiple employer plans (MEP), particularly because, since 2004, no publically available information has been collected on such employers. MEP representatives have suggested MEPs as a viable way for small employers to reduce the administrative and fiduciary responsibilities that come with sponsoring a pension plan, and for reducing costs, in part through asset pooling. However, GAO found that these advantages are not always unique to MEPs. There was also no consensus on the potential for MEPs to increase plan coverage. During GAO's September 2012 study the Department of Labor (Labor) ruled that some MEPs made up of otherwise unrelated employers did not constitute a single pension plan but an arrangement under which each employer sponsored a separate plan for its own employees. Because this raises significant policy and compliance questions and data are limited, it is important that Labor gather information on participating employers to inform policy and oversight activities on retirement security for employees of small businesses. GAO is not making any new recommendations. GAO made several recommendations in prior reports to Labor and the Internal Revenue Service (IRS) to address challenges facing small employers and to improve oversight and coordination for MEPs. The agencies generally agreed with GAO's recommendations. However, Labor disagreed with a recommendation to create a single webportal for federal guidance. GAO believes consolidating information could benefit small employers, mainly because resources are scattered. |
Research indicates that making price and other contextual information available is important for consumers to be able to anticipate the costs of their care and also to make informed health care decisions. In recent years, many public and private price transparency initiatives have been initiated to provide consumers with information about the price of their health care services. Determining the price of a health care service often involves coordination between providers, insurers, and consumers. Providers, such as hospitals or physicians, charge consumers fees for the services they receive, which are known as billed charges. Payers, such as insurance companies, often have contractual agreements with providers under which the payers negotiate lower payment rates for a service on behalf of their members or beneficiaries. These rates are known as negotiated rates. In the case of Medicare specifically, CMS sets the program’s payment rates for providers based on a formula that includes several factors, such as geographic location. For consumers with health insurance, their out-of-pocket costs for a health care service is determined by the amount of cost sharing specified in the benefits of their health insurance plan for services covered by the insurer. For consumers who lack health insurance, they are often billed for the full amount charged by the provider, such as a billed charge from a hospital. The estimated out-of-pocket cost for an uninsured consumer will typically be the billed charge for a health care service minus any charity care or discounts that may be applied by the provider. Providers and payers often price health care services using the various codes used by health care professionals. For example, physicians may bill for their services based on Current Procedural Terminology (CPT) codes developed by the American Medical Association. Individual health care services, such as those referred to by individual CPT codes, can be grouped or bundled together into an episode of care, which refers to a group of health care services associated with a patient’s condition over a defined period of time. An episode of care for a knee replacement, for example, includes multiple services such as those provided during the actual surgery, as well as preoperation and postoperation consultations. The episode of care would also include services provided by various providers who typically bill separately, such as a hospital, surgeon, and anesthesiologist. PPACA requires HHS to develop a national pilot program, which may include bundled payments for episodes of care surrounding certain hospitalizations, in order to improve the coordination, quality, and efficiency of health care services. According to researchers, it is important for consumers to have access to quality of care and other information to provide context to the price information and help consumers in their decision making. For example, according to the Agency for Healthcare Research and Quality (AHRQ), appropriate quality of care information for consumers may include the mortality rates for a specific procedure, the percentage of patients with surgical complications or postoperative infections, or the average length of stay, among other measures. By combining quality and price information, some researchers argue that consumers can then use this information to choose providers with the highest quality and the lowest price—thereby obtaining the greatest value when purchasing care. Furthermore, some research suggests that information on volume (the number of services performed) may be used as an indication of quality for certain procedures. This assumes a positive association between the number of times a provider administers a service and the quality of the service provided. Information about previous patients’ satisfaction with a provider’s service can also help consumers make decisions about their health care. Public price transparency initiatives often began in response to laws or orders requiring an agency or organization to make price information available to consumers, while private sector initiatives started primarily through voluntary efforts. For example, in response to a 2006 federal executive order to promote quality and efficiency in federal health care programs, federal agencies that administer or sponsor a health care program were directed, among other things, to make available to enrollees the prices paid for health care services. In response, agencies including HHS (including its component agencies such as CMS and AHRQ) and OPM began to make health care price information available. Similarly, over 30 states have proposed or enacted some type of price transparency legislation, though what is actually required varies greatly across the states. For example, some states, such as Colorado and South Dakota, require hospitals to disclose, upon request, the expected or average price for the treatment requested. In contrast, some states, such as Maine and Minnesota, require that certain health care price information be made publicly available through an Internet website. While many public price transparency initiatives began as a result of legislation, private sector price transparency initiatives, such as insurance company initiatives, were established voluntarily for various reasons. For example, insurance officials that we spoke with said their price transparency initiatives started for reasons such as increased interest from employers to curb costs, to gain a competitive edge over other insurance companies without price transparency initiatives, and to help their members become better health care consumers. Other private price transparency initiatives, such as Health Care Blue Book and PriceDoc, were started to help consumers find and negotiate fair prices for health care services. Though both public and private price transparency initiatives have become more widespread in the last 5 years, some research suggests that even if consumers have access to price information, such as price information made available by these initiatives, they may not use such information in their decision making. For example, insured consumers may be less sensitive to prices, since the financial costs of selecting one provider over another may be borne by the insurer, not the consumer. Despite these concerns, some research indicates that consumers want access to price information before they receive health care services and have tried to use price information to some degree to inform their decision making. Furthermore, research states that incentives may be helpful to further consumers’ use of transparent price information. Specifically, financial incentives may include insurers providing lower out-of-pocket costs for their members if they select low-price, high-quality providers. Several health care and legal factors can make it difficult for consumers to obtain price information—in particular, estimates of their complete costs—for health care services before the services are provided. The health care factors include the difficulty of predicting in advance all the services that will be provided for an episode of care and billing services from multiple providers separately. In addition, according to researchers and officials we interviewed, legal factors, such as contractual obligations, may prevent insurers and providers from making available their negotiated rates, which can be used to estimate consumers’ complete costs. One factor that may make it difficult for consumers to obtain estimates of their complete costs for a health care service is that it may be difficult for providers to predict which services a patient will need in advance. Specifically, physicians often do not decide what services their patients will need until after examining them. Researchers and officials we spoke with commented that health care services are not standardized across all patients because of each patient’s unique circumstances, which influence the specific services a physician would recommend. For example, when we anonymously contacted 20 physicians’ offices to obtain information on the price of a diabetes screening, several representatives said the patient needs to be seen by a physician before the physician would know what tests the patient would need. In addition, even after identifying what health care service or services a patient may need, additional aspects associated with the delivery of a service may be difficult to predict in advance, such as the length of time a patient stays in a hospital. This factor can make it challenging for providers to estimate consumers’ complete costs in advance. For example, when we anonymously contacted 19 hospitals to obtain information on the price of a full knee replacement surgery, several hospital representatives quoted a range of prices, from about $33,000 to about $101,000. The representatives explained that the price for the procedure could vary based on a variety of factors, such as the time the patient will be in the operating room and the type of anesthetic the patient may receive, and some noted that they would need to know this information if they were to provide a more specific price estimate. Several hospital and physician office representatives we spoke with recommended that insured consumers contact their insurer for complete cost information; however, the inability to predict which health care services will be needed in advance also makes it challenging for insurers to provide complete cost estimates. Officials from an insurer association commented that, if asked by their members for cost estimates, insurance company representatives may require more information—such as the CPT codes for the services a patient will receive—before the insurers can provide a cost estimate. However, in the instances when providers cannot predict in advance the codes for which they will bill, consumers will be unable to provide the respective codes to insurers and obtain complete cost estimates from them. Another factor is that many services included in one episode of care may be provided by multiple providers, such as a hospital and surgeon, who bill for their services separately. This makes obtaining complete cost information challenging because, in these cases, consumers may have to contact multiple providers to obtain estimates of their complete costs. Many providers can only give price estimates in advance for the services that they provide, and are often unaware of the prices for services performed by other providers. For example, when we contacted hospitals anonymously for the price of a full knee replacement, none were able to provide information on the complete cost to consumers for this service. The hospital representatives we contacted who could provide price information were only able to provide us with the hospital’s estimated charges or a Medicare deductible amount for the service and could not provide us with the charges associated with the other providers involved in the service, such as a surgeon or anesthesiologist. Charges from these providers are typically billed separately from the hospital’s charges, even though some of these services are provided in the hospital. Similarly, when we called physicians’ offices to obtain information on the price of a diabetes screening, most representatives could not tell us how much the associated lab fees would cost and some noted that this was because the lab fees are billed separately. Several hospital and physician office representatives we spoke with suggested we contact the other providers, such as a surgeon or lab, separately in order to obtain information on the price of these services. However, officials from a provider association questioned how consumers would even know which providers to contact to get price information if the consumers do not know all of the different providers who are involved in an episode of care in advance. Lastly, consumers may have difficulty obtaining complete cost estimates from providers because providers are often unaware of these costs due to the variety of insured consumers’ health benefit structures. For example, according to officials from a provider association, physicians may have difficulty accessing insured consumers’ health benefit plan information, and thus may not be able to provide estimates of consumers’ out-of- pocket costs under their specific benefit plans. For example, officials stated that for physicians to inform a patient about the price of a health care service in advance they have to know the status of consumers’ cost sharing under their specific health benefit plan, such as how much consumers have spent in out-of-pocket costs or towards their deductible at any given time. Without this information, physicians may have difficulty providing accurate out-of-pocket estimates for insured consumers. In addition, different consumers may have out-of-pocket costs that vary within the same benefit plan, which adds to the variety of potential costs a patient could have, and creates complexity for providers in providing complete cost estimates to consumers. Officials from provider associations commented that insurers should be responsible for providing complete cost information to their insured customers because insurers can provide price information specific to insured consumers’ situations. However, insurers may also have difficulty estimating consumers’ complete costs. Specifically, according to a 2007 report by the Healthcare Financial Management Association, many insurers do not have data systems that are capable of calculating real- time estimates of complete costs for their members prior to receiving a service. As a result, insurers may have difficulty maintaining real-time data on how much their members have paid towards their deductibles, which could affect an estimate of the complete cost. Additionally, according to officials from an insurance company, it is difficult for insurers to estimate complete costs when insured customers receive services from providers that are outside of the insurer’s network. These estimates may be difficult to provide because insurers have not negotiated a rate with providers out of the insurer’s network, and thus may be unaware of these providers’ billed charges before a service is given. Officials from an insurance company explained that this concern is especially a problem for their members who go to an in-network hospital and are seen by a nonparticipating physician within that hospital during their visit. The officials explained that this can occur without the patient’s knowledge because patients often do not choose certain providers, such as radiologists or anesthesiologists, and consumers may be faced with significant out-of-pocket costs. Researchers and officials we interviewed identified several legal factors that may prevent providers and insurers from sharing negotiated rates, which can be used to estimate consumers’ complete costs. First, some officials stated that some contractual obligations between insurers and providers prohibit the disclosure of negotiated rates with anyone outside of the contracting entities, such as an insurer’s members. Specifically, most officials representing insurance companies have reported that some hospitals have included contractual obligations in their agreements with insurers that restrict insurers from disclosing negotiated rates to their members. For example, some insurance company officials we interviewed told us that these contractual obligations prohibited the sharing of specific information on negotiated rates between providers and insurers on their price transparency initiatives’ websites. Officials from one insurance company said that they generally accept these contractual obligations, particularly in the case of hospitals that have significant market leverage, because they do not want to exclude these hospitals from their networks. Second, some of the officials and researchers we spoke with reported that providers and insurers may be concerned with sharing their negotiated rates, considered proprietary information, which may be protected by law from unauthorized disclosure. Some officials and researchers we spoke with suggest that without these rates, it could be more difficult for consumers to obtain complete cost estimates. According to officials from an insurer association, proprietary information such as negotiated rates may be prohibited from being shared under the Uniform Trade Secrets Act, which many states have adopted to protect the competitive advantage of the entities involved. These laws are designed to protect against the wrongful disclosure or wrongful appropriation of trade secrets, which may include negotiated rates. For example, if a hospital was aware that another hospital negotiated a higher rate with the same insurance company, then the lower-priced hospital could seek out higher negotiated rates which may eliminate the first hospital’s competitive advantage. Conversely, if officials from an insurance company were aware that another insurer paid the same hospital a lower rate for a given service, the higher-paying insurer may try to negotiate lower payment rates with that hospital. Lastly, some researchers and officials noted that antitrust law concerns may discourage providers and insurers from making negotiated rates public. For example, some insurance company officials we spoke with expressed concerns that sharing negotiated rates publicly would give multiple competing providers access to each other’s rates, and therefore could lead to collusion in price negotiations between providers and insurers. According to the Federal Trade Commission (FTC) and the Department of Justice (DOJ)—the principal federal agencies enforcing the antitrust laws—antitrust laws aim to protect and promote competition by preventing businesses from acting together in ways that can limit competition. Joint guidance from FTC and DOJ indicates that without appropriate safeguards, exchanges of price information—which insurance company officials told us could include negotiated rates—among competing providers may present the risk that competing providers communicate with each other regarding a mutually acceptable level of prices for health care services or compensation for employees. Although some officials and researchers noted that antitrust laws may discourage making negotiated rates public, the FTC and DOJ guidance also identifies circumstances in which exchanges of health care price information—that could include negotiated rates—are unlikely to raise significant antitrust concerns. These circumstances require the collecting of price information by a third-party entity and ensuring that any information disseminated is aggregated such that it would not allow recipients to identify the prices charged by an individual provider. Under these circumstances, consumers may not be hindered in their ability to have information that will allow them to make informed decisions about their health care. The price information made available to consumers by the eight selected price transparency initiatives varies, in large part due to differences in the price data available to each initiative. Additionally, we found that few of the selected initiatives are able to provide estimates of consumers’ complete costs, primarily due to limitations of the price data that they use and other obstacles. The eight public and private price transparency initiatives that we examined vary in the price information they make available to consumers. (See table 2.) Three public initiatives in California, Florida, and Wisconsin make information available on hospitals’ billed charges, which are typically the amounts hospitals bill payers and patients for services before any negotiated or reduced payment discounts are applied. In general, hospitals’ billed charges do not reflect the amount most payers and patients ultimately pay for the service. Two private initiatives administered by Aetna and Anthem provide their members with price information based on their contracts with providers, and this information reflects the insurer’s negotiated discounts. Similarly, the federal initiative provides price information based on Medicare payment rates. Initiatives in Massachusetts and New Hampshire provide price information, based on payments made to providers, using claims data, and these prices reflect any negotiated discounts or other reductions off the billed charges. Despite differences in the types of price information they provide, the selected initiatives are generally similar in the types of services for which they provided price information, with most providing price information only for a limited set of hospital or surgical services that are common, comparable, or planned in advance, such as a knee replacement or a diagnostic test. Various factors help explain the differences in the types of price information made available by the selected initiatives. In some cases, the initiatives provide certain types of price information because of the price data available to them, generally through state law. For example, the Wisconsin initiative provides price information based on hospitals’ billed charges because the state contracted with the Wisconsin Hospital Association (WHA) to collect and disseminate hospital information, including hospitals’ billed charges, when the state privatized hospital data collection. WHA saw this as an opportunity to develop a price transparency initiative that reported billed charges for consumers. In both California and Florida, initiative officials said that state laws enabled the state to collect and make hospitals’ billed charges public and this gave the states the authority to make this information available to consumers. In Massachusetts, officials said that 2006 state health reform legislation provided the state with the necessary authority to collect claims data for the price transparency initiative. In other cases, the price information the initiatives provide reflects choices made by initiative officials regarding the types of information that they considered would be most helpful to consumers. For example, in developing Hospital Compare, CMS officials chose to provide price information based on Medicare payment rates to hospitals because, according to officials, this information would be more helpful than hospitals’ retrospective billed charges for Medicare patients. The officials explained that hospitals’ billed charges are too divergent from what Medicare and insurance companies actually pay for the same service, and CMS officials reasoned that Medicare rates could give consumers, particularly those without insurance, a point of comparison from which they may be able to negotiate lower prices with providers. In New Hampshire, officials said they successfully sought legislation to get access to claims data from all payers in the state to establish an All Payer Claims Database (APCD) for their initiative. Based on an earlier experience with posting billed charges and feedback from consumers, New Hampshire officials were convinced that billed charges were not useful for insured consumers. Additionally, some factors that may limit access to certain price data also limit how the price information is presented to consumers. For example, some of the selected initiatives, such as Florida and Anthem, present price information as a range, which avoids providing a specific price that providers may consider proprietary. Anthem officials further noted that the primary reason the initiative provides price information as a range is so that the price information can better reflect for consumers the billing variation and differences in treatment decisions that occur when health care services are delivered to different patients. In Massachusetts, the initiative combines the claims, or prices paid, by commercial insurers for that specific hospital service and reports a provider’s median price as well as a range of prices paid for that service. Officials explained that they present aggregated price information across all health plans to avoid disclosing prices that may raise proprietary concerns among providers and insurers. In another approach, the two initiatives by New Hampshire and Aetna bundle multiple services typically performed at the same time into the price presented, such as bundling all associated costs for a hip replacement surgery. By doing so, New Hampshire officials said that they are able to mask the specific rates paid for individual items, and avoid proprietary concerns, while providing an easily understandable estimate for the total health care service. Lastly, officials from the Aetna and Anthem initiatives cited provider resistance as limiting the extent to which they can make price information available to their members for all providers in the insurers’ networks—with provider-imposed contractual obligations requiring the Aetna and Anthem initiatives to omit price information for certain providers in the initiatives’ websites’ search results. In addition to providing the price of a service, most selected initiatives also provide a wide range of nonprice information, such as information on quality of care measures or patient volume. Five of the eight selected initiatives provide quality information for consumers to consider along with price when making decisions about a provider. (See table 3.) In addition to providing quality and volume measures, initiatives also shared information, such as resources for understanding and using price information, including explanations of the source and limitations of the price data, glossaries, and medical encyclopedias. Initiatives also provided a range of supplementary financial information to give context to the price information provided. For example, Massachusetts’ initiative presents symbols ($, $$, $$$) to indicate how the provider’s price compares to the state median for that service in an effort to provide what officials described as more easily understood price information for consumers who are familiar with graphical ratings systems. Additionally, Wisconsin’s initiative provides pie charts representing the percentage different payer types—such as private insurers, Medicare, and Medicaid—paid to a specific hospital in relation to the total billed charges, which indicates at an aggregate level the extent of discounts given by payer category. Some officials expressed reservations about how consumers may use price and quality information together. Insurance company officials we spoke with see linking price to quality information as a means for consumers to identify high-value providers and for the company to create more cost-efficient provider networks. In Hospital Compare, however, quality data and price data are not linked. CMS officials said that while quality data are featured prominently on Hospital Compare, price information is featured less prominently. CMS officials explained that promoting price information to consumers, in the absence of greater consumer education about how to understand price information in relation to quality, could lead consumers to select high-priced providers due to an assumption that price is indicative of quality. Due to similar concerns that consumers may assume that a higher price is a sign of higher quality, Aetna’s initiative provides information to educate consumers that high quality and low price are not mutually exclusive. Lastly, in addition to the variety of price and other information made available by the selected initiatives, the initiatives also vary in terms of who has access to the initiatives’ websites and in terms of their expected audiences. For example, the price information provided by the federal initiative we selected is available to all consumers through a publicly available website. CMS officials said the expected audience of this initiative includes insured and uninsured consumers, researchers, Medicare beneficiaries, and providers. Like the federal initiative, all of the selected state initiatives’ websites are publicly available, although they include price information only for their particular state. In contrast, the price information provided by the two selected insurance company initiatives’ websites are accessible to their members, but not to the general public. Few of the selected initiatives provide estimates of consumers’ complete costs, which is price information that incorporates any negotiated discounts; is inclusive of all costs associated with a particular health care service, such as hospital, physician, and lab fees; and identifies consumers’ out-of-pocket costs. (See table 4.) Specifically, of our eight selected initiatives, only the Aetna and New Hampshire initiatives provide estimates of a consumer’s complete cost. The two initiatives are able to provide this information in part because they have access to and use price data—negotiated rates and claims data, respectively—that allow them to provide consumers with a price for the service by each provider that is inclusive of any negotiated discounts or reduced payments made to the billed charge. Specifically, Aetna bases its price data on its contractual rates with providers, which include negotiated discounts. New Hampshire provides price information based on its records of closed claims of particular providers for particular services under a consumer’s specific health insurance plan. Both initiatives use claims data to identify all of the hospital, physician, and lab fees associated with the services for which they provide price information. For calculating estimated out-of- pocket costs, Aetna links member data to its price transparency website, which automatically updates and calculates the member’s estimated out- of-pocket costs in real-time based on the provider and service reported, and the member’s partially exhausted deductibles. In contrast, to calculate out-of-pocket costs, insured users of New Hampshire’s initiative’s website enter their insurance plan, their deductible amount, and their percentage rate of co-insurance. New Hampshire’s Health Cost website then uses that information to calculate an out-of-pocket cost, along with a total cost for the service by provider. Both initiatives demonstrate that while providing complete cost information presents challenges, it can be done—either as undertaken by Aetna for its members or as carried out by New Hampshire, which makes complete cost information available through publicly accessible means. As table 4 shows, six of the eight initiatives that we reviewed do not provide estimates of consumers’ complete costs. The reasons for this vary by initiative, but are primarily due to the limitations of the price data that each initiative uses. For example, initiatives in California, Florida, and Wisconsin provide price information based on billed charges from hospitals, which do not reflect discounts negotiated by payers and providers, all associated costs (such as physician fees), and out-of-pocket costs. An official representing Wisconsin’s initiative said that WHA commonly receives requests from consumers to include physician fees in the price estimate, but the initiative does not have access to these price data, as they are part of a separate billing process and the hospitals do not have these data to submit. California officials said that collecting claims data from insurers would require additional legal authority, raise proprietary concerns, and pose resource challenges. Florida officials acknowledged that providing a billed charge is not as meaningful for consumers as other types of price data, such as claims data. However, while Florida officials have the authority to collect claims data, they said that at this time they are limited from pursuing such information due to the expected financial costs of collecting and storing the data and the challenges of overcoming the proprietary concerns of providers and insurers. Florida officials characterized their initiative’s inability to report out-of-pocket costs as a major limitation. The federal initiative provides price information that reflects what Medicare pays to hospitals for a given service but does not reflect what consumers, including Medicare beneficiaries, would pay out-of-pocket. CMS officials said that providing out-of-pocket costs was too complicated to calculate in advance due to consumers’ medical variation and technological limitations. In contrast, other initiatives have access to data that may enable the initiatives to provide more complete cost estimates to consumers, but certain factors limit the extent to which this type of information is made available. For example, the Massachusetts initiative has access to claims data that could be used to provide more complete cost estimates to consumers, such as negotiated discounts for commercial insurers. However, it presents price information that aggregates the prices paid by commercial insurers for particular services, in part due to insurers’ and providers’ concerns about the initiative disclosing price information by insurer. As a result, consumers are unable to see an estimate for a particular provider that is specific to their insurance company or to calculate their out-of pocket costs based on their specific plan. The officials noted that providers’ and insurers’ resistance to publicly reporting payments made by insurers may also be a challenge for states seeking access to more meaningful price information for their initiatives, such as claims data. Lastly, Anthem’s initiative does provide a price inclusive of all associated fees and negotiated discounts, but currently does not use the specific details of consumers’ insurance plan benefits, such as their deductible, copayment, or coinsurance, to estimate consumers’ out-of- pocket costs. Transparent health care price information—especially estimates of consumers’ complete costs—can be difficult for consumers to obtain prior to receiving care. For example, when we contacted hospitals and physicians to obtain price information for two common services, we generally received only incomplete estimates, which are insufficient for helping consumers to anticipate all of the costs associated with these services or to make more informed decisions about their health care. Our review identified various health care and legal factors that can make it difficult for consumers to obtain meaningful health care price information, such as estimates of consumers’ complete costs, in advance of receiving services. This lack of health care price transparency presents a serious challenge for consumers who are increasingly being asked to pay a greater share of their health care costs. Despite the complexities of doing so, two of the eight price transparency initiatives we examined were able to make complete cost estimates available to consumers. Making meaningful health care price information available to consumers is important, and the fact that two initiatives have been able to do it suggests that this is an attainable goal. To promote health care price transparency, HHS is currently supporting various efforts to make price information available to consumers—including the CMS initiative in our review—and the agency is expected to do more in this area in the future. We note in our review, for example, that HHS provides price information on insurance plans through its healthcare.gov website. Similarly, CMS’s web-based Medicare Part D Plan Finder also provides information on prescription drug prices and CMS’s Health Care Consumer Initiatives provide information on the price Medicare pays for common health care services at the county and state levels. In the near future, HHS’s price transparency efforts are expected to expand. For example, PPACA requires HHS to provide oversight and guidance for the Exchanges that are expected to provide certain price information for consumers through participating insurers. PPACA also directs HHS to develop a pilot program which may include bundled payments, providing another possible opportunity for price transparency. In total, HHS has several opportunities to promote greater health care price transparency for consumers. As HHS implements its current and forthcoming efforts to make transparent price information available to consumers, we recommend that HHS take the following two actions: Determine the feasibility of making estimates of complete costs of health care services available to consumers through any of these efforts. Determine, as appropriate, the next steps for making estimates of complete costs of health care services available to consumers. HHS reviewed a draft of this report and 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 of this report 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 staff have any questions about this report, please contact me at (202) 512-7114 or kohnl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. To obtain illustrative examples of factors that influence the availability of health care price information for consumers, we anonymously contacted hospitals and primary care physicians with zip codes located in the Denver, Colorado, health care market. We requested the price of a full knee replacement from hospitals and the price of a diabetes screening from primary care physicians. We requested these prices for patients without insurance and for patients with Medicare (without supplemental health insurance). Specifically, we called 19 hospitals and 20 primary care physicians between February 28 and March 10, 2011, and contacted each provider up to three times in an attempt to get a response. We determined that we obtained a response from representatives if they answered the phone or they transferred us to a price quote voice mail message that requested specific information from us about the requested service so representatives could call back with cost estimates. In cases where we were asked to provide more information, such as in the case of receiving a price quote voice mail, we did not provide such information in order to help maintain our anonymity. We considered hospitals and physicians nonresponsive if no one answered the phone, or if we received a voice mail message that did not indicate what we needed to provide in order to receive price information, in all three attempts. We received a response from representatives at 17 of the 19 hospitals we contacted. Of the 17 hospital representatives that responded, 10 did not provide any type of price information. None of the hospital representatives could provide a complete cost estimate for a full knee replacement, meaning the price given was not reflective of any negotiated discounts, was not inclusive of all associated costs, and did not identify consumers’ out-of-pocket costs. Almost all of the hospital representatives that responded (14 of 17) required more information from us to provide a complete cost estimate, such as current procedural terminology (CPT) codes, the length of time in the operating room, the model of knee used, or what kind of anesthetic would be provided, which we did not provide. Of the 7 hospital representatives that were able to provide some price information, 5 provided billed charges in either a range, such as between $32,974.73 and $100,676.50 or an average charge, such as $82,390, which is typically reflective of what an uninsured consumer would pay. (See table 5 for more information.) We received a response from 18 of the 20 representatives we contacted. Of the physician representatives that responded, most could provide some type of price information (14 of 18), but only 4 out of 18 representatives who responded could provide a complete cost estimate for a diabetes screening. Most representatives who responded (13 of 18) required more information from us to provide a complete cost estimate, such as a diagnosis from a physician and the amount the laboratory would charge, which we did not provide. Additionally, almost half (8 of 18) of representatives who responded said the patient needs to be seen by a physician before determining a complete cost estimate. All 14 physician representatives who were able to provide some type of price information provided price information based on billed charges. (See table 6 for more information.) In addition to the individual named above, Will Simerl, Assistant Director; Rebecca Hendrickson; Giselle Hicks; Krister Friday; Martha Kelly; Julian Klazkin; Monica Perez-Nelson; Rebecca Rust; and Amy Shefrin made key contributions to this report. | In recent years, consumers have become responsible for a growing proportion of the costs of their health care. Health care price information that is transparent--available before consumers receive care--may help consumers anticipate these costs. Research identifies meaningful types of health care price information, such as estimates of what the complete cost will be to the consumer for a service. GAO defines an estimate of a consumer's complete health care cost as price information on a service that identifies a consumer's out-of-pocket cost, including any negotiated discounts, and all costs associated with a service or services. GAO examined (1) how various factors affect the availability of health care price information for consumers and (2) the information selected public and private health care price transparency initiatives make available to consumers. To do this work, GAO reviewed price transparency literature; interviewed experts; and examined a total of eight selected federal, state, and private insurance company health care price transparency initiatives. In addition, GAO anonymously contacted providers and requested the price of selected services to gain a consumer's perspective. Several health care and legal factors may make it difficult for consumers to obtain price information for the health care services they receive, particularly estimates of what their complete costs will be. The health care factors include the difficulty of predicting health care services in advance, billing from multiple providers, and the variety of insurance benefit structures. For example, when GAO contacted physicians' offices to obtain information on the price of a diabetes screening, several representatives said the patient needs to be seen by a physician before the physician could determine which screening tests the patient would need. According to provider association officials, consumers may have difficulty obtaining complete cost estimates from providers because providers have to know the status of insured consumers' cost sharing under health benefit plans, such as how much consumers have spent towards their deductible at any given time. In addition to the health care factors, researchers and officials identified several legal factors that may prevent the disclosure of negotiated rates between insurers and providers, which may be used to estimate consumers' complete costs. For example, several insurance company officials GAO interviewed said that contractual obligations with providers may prohibit the sharing of negotiated rates with the insurer's members on their price transparency initiatives' websites. Similarly, some officials and researchers told GAO that providers and insurers may be concerned with sharing negotiated rates due to the proprietary nature of the information and because of antitrust law concerns. The eight public and private price transparency initiatives GAO examined, selected in part because they provide price information on a specific health care service by provider, vary in the price information they make available to consumers. These initiatives include one administered by HHS, which is also expected to expand its price transparency efforts in the future. The price information made available by the selected initiatives ranges from hospitals' billed charges, which are the amounts hospitals bill for services before any discounts are applied, to prices based on insurance companies' contractually negotiated rates with providers, to prices based on claims data that report payments made to a provider for that service. The price information varies, in large part, due to limits reported by the initiatives in their access or authority to collect certain price data. In addition to price information, most of the selected initiatives also provide a variety of nonprice information, such as quality data on providers, for consumers to consider along with price when making decisions about a provider. Lastly, GAO found that two of the selected initiatives--one publicly available with information only for a particular state and one available to members of a health insurance plan--are able to provide an estimate of a consumer's complete cost. The two initiatives are able to provide this information in part because of the type of data to which they have access--claims data and negotiated rates, respectively. For the remaining initiatives, they either do not use more meaningful price data or are constrained by other factors, including concerns about disclosing what providers may consider proprietary information. As HHS continues and expands its price transparency efforts, it has opportunities to promote more complete cost estimates for consumers. GAO recommends that the Department of Health and Human Services (HHS) determine the feasibility of making estimates of complete costs of health care services available to consumers, and, as appropriate, identify next steps. HHS reviewed a draft of this report and provided technical comments, which GAO incorporated as appropriate. |
The U.S.-Mexico border extends more than 2,000 miles, from the Gulf of Mexico to the Pacific Ocean. As can be seen in figure 1, portions of four states—Texas, New Mexico, Arizona, and California—encompassing 97 counties and 44 U.S. federally recognized tribal nations make up the border region. The region includes a wide range of community types, from large cities— such as Los Angeles, California, population 3.8 million—to small, rural communities—such as Spofford, Texas, population 75. Of the 44 tribal nations in the region, 30 are in California, 8 in Arizona, 1 in New Mexico, 2 in Texas, and 3 in both California and Arizona. The tribal nations range in population from 1 household in the Jamul Indian Village in California to 3,572 households in the Tohono O’odham tribal nation in Arizona, whose tribal land covers an area approximately the size of Connecticut. Throughout the border region, a lack of safe drinking water and adequate wastewater treatment has been a continuous problem exacerbated by large gains in population associated with rapid industrial growth that has occurred over the past three decades. Part of this population increase has occurred in communities now commonly referred to as colonias. Initially, colonias emerged as developers sold small plots of residential land to individuals without providing water or wastewater infrastructure. Residents often placed a trailer or similar structure on the land or built their homes themselves, many starting with just one room and adding on periodically as they were able to afford it. Numerous news articles during the 1980s and 1990s described colonias, with one referring to colonias as “pockets of poverty” with conditions similar to those generally associated with “third-world” conditions. When colonias first began to emerge, they were often located in remote areas outside of incorporated cities where developers sold land as residential without adhering to the ordinances and regulations of the cities; however, more recently many local governments have begun to classify entire cities or subdivisions within a city as colonias. Since water and wastewater infrastructure were lacking when they bought their lots and built their homes, many residents in colonias relied on on- site alternatives. For example, to obtain water, some used contaminated wells, while others hauled and stored water in barrels or tanks. For wastewater disposal, residents used methods such as septic tanks or cesspools. Septic systems can treat waste safely, but they can also contaminate drinking water with sewage and organic matter if they are not installed and maintained properly. Effective septic systems require that the type and amount of soil be sufficient to absorb wastewater, and that the systems not be located too close to groundwater or surface water. In contrast, cesspools can pose a risk of contamination because they do not treat wastewater and are merely holes in the ground for the disposal of sewage. Problems associated with failing septic systems are not restricted to colonias. Rural households throughout the region can experience difficulties maintaining proper on-site wastewater treatment. Figure 2 compares proper septic system function with improper cesspool disposal. In response to public health concerns in the border region caused by a lack of clean drinking water and adequate sewage treatment, Congress established various programs with dedicated funding. For example, in the early 1990s, Congress established dedicated funding for water and wastewater projects to benefit residents of colonias. These funds have been used for a number of projects to provide colonia residents safe drinking water and adequate sewage disposal, yet some colonias continue to lack these basic services. Appendix II provides additional information on the establishment of federal funding to assist colonias. Colonias are still found throughout the border region, though their characteristics vary widely. Present-day colonias are communities of all types and sizes, both incorporated and unincorporated. For example, a colonia can be a tribal reservation, a fast-growing retirement community, or a high-poverty subdivision. Moreover, not all colonias have the same level of need. For example, a town in Arizona that already had water and wastewater service was designated a colonia in 2008 because the local water utility did not have the funds to address routine repairs, and believed that the designation would increase its ability to receive federal funds. In contrast, residents of the El Conquistador colonia in Hudspeth County, Texas, have lived without access to water and wastewater service for over 20 years. To help communities and households throughout the border region obtain safe drinking water and adequate wastewater treatment, seven federal agencies provide grants, loans, and technical assistance under separate programs and congressional authorizations. These include the following: EPA, which has funding for drinking water and wastewater systems that is complementary to its regulatory and enforcement authorities under the Safe Drinking Water Act and the Clean Water Act. EPA provides grants for water and wastewater infrastructure in the border region through several different programs including the U.S.-Mexico Border Water Infrastructure Program. EPA’s binational program provides grants to water and wastewater facilities within 62 miles of the border. EPA allots most of these funds to the Border Environment Cooperation Commission (BECC) and the North American Development Bank (NADB). These organizations then administer these funds to implement project development activities and construction. In addition to the funds administered by BECC and NADB, EPA provides grants to tribal nations within the border region. Colonias Wastewater Treatment Assistance Program (CWTAP). EPA awarded grants to the state of Texas from fiscal years 1993 through 1999 for the purpose of funding the construction and improvement of water and wastewater systems in colonias. The state of Texas obligated this funding, along with a state match, to public entities during fiscal years 2000 through 2008. Drinking Water and Clean Water State Revolving Fund Programs. EPA annually provides grants to states to help finance local drinking water and wastewater projects nationwide through the Drinking Water and Clean Water State Revolving Fund Programs. The states use this funding, along with a required 20 percent match, to capitalize their state revolving funds. The funds provide low-cost loans or other financial assistance for a wide range of water infrastructure projects. In addition, EPA provides funds from the Drinking Water and Clean Water Revolving Fund Programs to tribal nations throughout the United States for water and wastewater projects. USDA, which provides grants, loans, and technical assistance for rural water and wastewater projects through its Water and Environmental Program. The department can provide assistance for various activities, such as construction of water treatment and sewage collection facilities, connection of single-family homes to water distribution or wastewater collection lines, and training for the operation of water and wastewater utilities. While the program is available to eligible entities nationwide, USDA has been required by annual appropriations acts to set aside a portion of this funding—up to $25 million annually—for water and wastewater systems that benefit colonia residents (referred to as the Section 306C Colonia funds). HUD, which disburses grants to states and local governments through the Community Development Block Grant (CDBG) Program to fund housing, infrastructure, and other community development activities. The annual appropriation for CDBG is split according to HUD formulas so that 70 percent is allocated among eligible metropolitan cities and counties (referred to as entitlement communities) and 30 percent among the states to serve cities with populations of fewer than 50,000 and counties with populations of fewer than 200,000 (referred to as nonentitlement communities). Each border state is required to use up to 10 percent of total funds for projects to meet the water, sewage, and housing needs of colonia residents (referred to as the Colonia Set-aside). According to a HUD official, HUD determines each state’s Colonia Set-aside amount annually based on input from state officials and other colonia stakeholders, such as nonprofit organizations. For fiscal years 2000 through 2008, HUD established a 10 percent annual set-aside amount for Texas, New Mexico, and Arizona and a 5 percent annual set-aside for California. Additionally, HUD provides CDBG funds to tribal nations that can be used for any eligible CDBG activity, including water or wastewater projects. IHS, which constructs water and wastewater projects through its Sanitation Facilities Construction (SFC) Program. This assistance is available to tribal nations within the United States, and through the program, IHS constructs various projects, including distribution and collection lines, treatment facilities, and home connections. EDA, which provides grants to economically distressed areas through its Public Works and Economic Development Program. The funds are used for construction of public facilities, including water and wastewater facilities. The Corps, which has provided assistance for water and wastewater projects in the border region as directed by Congress. Congress has authorized and appropriated funds for the Corps to provide assistance for a number of projects, including projects to benefit colonias in need of water or wastewater infrastructure. Reclamation, which has been directed to provide assistance for drinking water or wastewater treatment projects in response to individual project authorizations but does not have an established program for such assistance. However, in 2006, Congress passed the Rural Water Supply Act, directing Reclamation to develop a rural water supply program. Entities that can seek assistance from most of these federal agencies include local units of government, tribal nations, water or wastewater utilities or similar entities, nonprofit organizations, or individual homeowners. Each federal program has its own application process but generally involves the following steps: Pre-application meeting. Federal agencies generally require the entity seeking assistance to meet with agency officials prior to submitting an application. During this meeting, officials and the potential applicant discuss program eligibility, the type of assistance needed, and application requirements. Submission of application. After the pre-application discussion, the entity seeking assistance prepares an application that can include information such as financial, engineering, and environmental studies that describe the project plan and its costs. Some agencies require additional documentation, such as evidence of public support for the project and documentation that the entity cannot obtain commercial credit at a reasonable rate. Review and evaluation of application. Once an agency receives an application, officials review it for eligibility. After the agency determines that an application meets program eligibility requirements, it may be further evaluated, depending on whether the assistance being requested is from a competitive or a noncompetitive program. For competitive programs, agencies generally score each application according to established criteria and then rank the applications so that the projects with the highest scores will receive priority for available funds. For noncompetitive programs, agencies will generally obligate funding as applications are deemed eligible until all available funds are depleted. We found that seven federal agencies obligated at least $1.4 billion for drinking water and wastewater projects in the U.S.-Mexico border region from fiscal years 2000 through 2008. USDA and EPA obligated 78 percent, or about $1.1 billion, of the total $1.4 billion. The remaining 22 percent, or $309 million, came from HUD, the Corps, IHS, EDA, and Reclamation. Table 1 provides additional data regarding federal funds obligated to the border region for water and wastewater projects by agency and program. Details about the funding provided by each of the seven federal agencies to the border region from fiscal year 2000 through 2008 include the following: EPA obligated at least $568 million in grants, or 41 percent of the total federal funding provided to the region. Of that, about $471 million was obligated through programs targeted to the border region, while just over $98 million was obligated through nationwide programs. Of the $471 million targeted to the border region, EPA obligated $298 million in grant funds through the U.S.-Mexico Border Water Infrastructure Program, and $173 million in grant funds through the Colonias Wastewater Treatment Assistance Program. Of the $98 million from nationwide programs, $61 million was congressionally directed in EPA’s State and Tribal Assistance Grant (STAG) account appropriations, according to data provided by EPA. The remaining nationwide program funds were obligated to tribal nations through the Drinking Water and Clean Water Revolving Fund Programs (about $36 million). Appendix V provides additional data on the obligations from EPA in the border region. In addition, state-administered revolving loan funds partially capitalized by EPA provided approximately $3.4 billion in loan financing to water and wastewater projects in the border region through the Clean Water and Drinking Water State Revolving Fund Programs from fiscal years 2000 through 2008. For example, the California Department of Health obligated about $1.7 million for repairs to the drinking water distribution system in Imperial County, California. Appendix VI provides additional data on the obligations from the Drinking Water and Clean Water State Revolving Fund programs in the border region. USDA obligated about $509 million, or about 37 percent of the total federal funding. Of the $509 million, it obligated $208 million in grant funds through its Section 306C Colonia funds. The remaining $302 million—$209 million in loan funds and $93 million in grant funds—was obligated through its nationwide Water and Environmental Program. Of the $509 million total, USDA obligated about $502 million (98 percent) to public utilities or similar entities for construction or improvements to water and wastewater infrastructure. For example, USDA obligated $2.9 million in grants and almost $1 million in loans to the city of Truth or Consequences, New Mexico, for improvements to the wastewater treatment plant and extension of collection lines. It obligated over $7 million to individuals in the border region for household projects, such as installing indoor plumbing. Appendix IV provides additional data on the obligations from USDA funds in the border region. HUD obligated about $218 million, or 16 percent of the total federal funding provided to the region. Almost all of the funds, $217 million, were obligated as grant funds through the Community Development B Grant Programs. The remainder, $925,000, was obligated from HUD’s Economic Development Initiative Special Project account, according to lock officials. Of the $217 million in CDBG grants, $51 million of this was identified by states in HUD’s database as obligated for water or wastewater projects in a colonia. For example, New Mexico obligated about $265,000 to extend water distribution lines to 20 residents of a colonia in Sierra County. Additional funds from the Colonia Set-aside Program may have been used in colonias for water and wastewater projects, but we were unable to determine the total amount because HUD does not comprehensively distinguish in its data system which of the CDBG obligated funds are under the Colonia Set-aside. Of the $217 million in CDBG grants, HUD obligated $2.6 million through its Indian CDBG program to two tribal nations—the Salt River Pima-Maricopa Indian Community and the San Pasqual Band of Mission Indians. Appendix VII provides additional data on the obligations from HUD in the border region. IHS obligated about $45 million for the construction of sanitation facilities on tribal nations in the border region. For example, IHS obligated about $8 million to provide basic sanitation services to residents of the Tohono O’odham tribal nation by participating in a modular bathroom program. Through this effort, residents living in traditional adobe structures that lack indoor plumbing are able to attach a modular bathroom to the home and then connect to a wastewater distribution line. Appendix VIII provides additional data on federal obligations made to each tribal nation in the border region. EDA obligated about $39 million in grant funds for public infrastructure projects that included water or wastewater activities. These funds were obligated for 29 projects. For example, EDA obligated $3.2 million in grant funds for a water system project in San Bernardino, California. This project included land acquisition for new water wells, well drilling, new pipeline, a booster pump, obtaining water rights, an engineering and environmental assessment, and removal of an elevated water tank. The Corps obligated just over $4 million in assistance to projects within the border region. The assistance was used for 6 congressionally directed projects in New Mexico, and 3 projects to assist colonias in Texas conducted under the Water Resources Development Act of 1992, which authorized the Corps to assist communities with water and wastewater needs. Reclamation obligated almost $4 million in grant funds for 5 water supply projects, for which Congress specifically authorized and appropriated funds, according to agency documents. Reclamation currently funds projects only in response to specific congressional directives, but it was authorized in 2006 by the Rural Water Supply Act to establish a rural water supply program. We reported in 2007 that Reclamation planned to develop programmatic criteria to determine eligibility for participation in this program and to assess the status of authorized rural water supply projects and other federal programs that address rural water supply issues, as the act required, by December 2008. As of September 2009, agency officials told us that the establishment of the program is still a priority, but it has been delayed by the change of Administration and by efforts to develop a strategy for implementation of the American Recovery and Reinvestment Act funds. Agency officials stated they hope to have the program established by the end of calendar year 2009. Of the 97 counties in the border region, 94 received some assistance, and 3 received no assistance during fiscal years 2000 through 2008. Figure 3 shows the amounts provided to the 94 counties that received some assistance, which ranged from a low of just under $260,000 provided to Reagan County, Texas, and to a high of almost $130 million provided to Cameron County, Texas. Appendix III provides further data on each county, including its rural- urban classification and the funding obligated by federal agencies. Federal efforts have not effectively addressed the drinking water and wastewater needs in the border region because agencies (1) have not comprehensively assessed the needs of the region, (2) lack coordinate policies and processes, and (3) in some cases have not complied with statutory requirements and agency regulations. O ver the years, some federal agencies have conducted assessments to identify water and wastewater conditions in the border region, but non these assessments either individually or collectively provides a comprehensive picture of the needs of the region. We identified following assessments that either have been conducted by federal agencies or are ongoing: EPA commissioned a study to set a baseline, as of December 2003, for its U.S.-Mexico Border Water Infrastructure Program by estimating the number of households without basic water and wastewater service in area served by the program. While the data collection effort was used by the agency to establish performance measures and strategic goals, the agency did not establish a process to update the data to reflect current conditions. Without such a process, the accuracy and usefulness of the data are limited. In addition, the study did not distinguish between home with appropriate septic systems and homes without them. In addition, EPA has reviewed applications received from both the U.S. and Mexico sides of the border through its U.S.-Mexico Border Water Infrastructure Program in 2004, 2006, and 2008 to determine the total amount of funding requested from the border region. The requests for assistance ranged from $590 million to over $1 billion in project construction costs. During the most recent solicitation, over 130 projects on the U.S. side of the border requested assistance representing $800 million in total project cost, according to EPA officials. While EPA told this effort provides the agency with a snapshot that reflects the existing needs in the region, it acknowledges this snapshot is not a comprehensiv assessment of need in the region and captures only the need from those entities that seek assistance from the U.S.-Mexico Border Water Infrastructure Program. Further, EPA conducts the nationwide Clean Watersheds Needs Survey every 4 years to identify the funds needed to address problems with wastewater treatment facilities. Similarly, the agency conducts an assessment every 4 years to identify the funds needed for existing d water facilities to comply with safe drinking water quality standards. However, on the basis of information provided by agency officials, we not believe that either of these efforts provides the agency with a comprehensive assessment of the border region. For example, acc to officials, these assessments have not traditionally been successful in collecting data from small communities. Officials told us that the 2004 Clean Watersheds Needs Survey had a 36 percent response rate from wastewater systems that serve small communities (those with fewer th 10,000 wastewater customers). In addition, officials told us the 2007 drinking water assessment includes data for all existing utilities servi ng over 100,000 customers, but only a sample of small community systems are included in the assessment—600 of the approximately 33,000 such systems nationwide. Because many of the communities in the border region are small, we do not believe that they would be captured by the survey. In 2008, USDA, reported on the amount of funds directed to colonias in each of the four border states and the amount of unfunded applications the agency received for the program in fiscal year 2008. This report was i response to a request from the Senate Agriculture Committee to, among other things, provide a report that “identifies where additional resources are most needed.” According to our review of USDA’s report, the department did not identify where additional resources are needed simply reported its backlog of applications from each state. For exampl e, the report stated that the department had a pre-application and application backlog of approximately $117 million—with pre-applications accounting for $108 million and applications accounting for $9 million. As with EPA’s assessment of applications submitted to the U.S.-Mexico Border Water Infrastructure Program, these figures represent only those entities that have contacted USDA for assistance, and therefore do not provide a complete assessment of those areas where resources are most needed. HUD has provided funds for local governments to identify colonias and the water and wastewater conditions within them. From 1992 through 2008, HUD-funded assessments were completed for 43 of the 67 Texas counties in the border region. For example, a 2008 assessment for Dimmitt County, Texas, found that 113 housing units lacked centralized water service. However, as some assessments were conducted more than a decade ago or longer, they may not reflect current conditions. HUD also provided funds to the U.S. Geological Survey (USGS) to collect data on infrastructure in colonias for 6 counties in Texas. The dataset, released in 2007, includes information such as number of households, source of potable water, and whether wastewater collection is available. Since 1989, IHS has collected data on the water and wastewater infrastructure conditions for each tribal reservation in the United This information is available through its Sanitation Deficiency System and is updated annually. As a result, IHS can select projects that target the greatest need and report on effectiveness to meet the water and wastewater needs of tribal nations, including those within the border region. States. In 2007, BECC began efforts to identify the water and wastewater infrastructure needs within the 62-mile region north of the U.S.-Me xico border. The study is expected to compare the number of existing water and wastewater connections with the total number of homes and is expected to identify gaps in access to centralized services. According BECC officials, data collection and analysis were completed for New Mexico in the first quarter of 2009 and are currently being conducted f Texas, California, and Arizona. BECC expects to complete all data collection and analysis and issue the study by the end of 2010. Rural communities may also lack the financial resources to hire a consultant who can help them design a project and prepare the app materials, including the preliminary engineering and environmental documents. According to several officials that we spoke to, engineer and environmental reports can cost from $30,000 to $100,000. A prior federal study has identified this high initial cost as a major obstacle to providing federal assistance for water and wastewater service in the region. While federal assistance to help offset this high initial cost is available through some programs, such as EPA’s U.S.-Mexico Border Water Infrastructure Program, the overall federal assistance provided such activities is minimal—from fiscal years 2000 through 2008, the program provided funds to 62 projects in the border region represent about $15 million in grant funds. Although few federal agencies have made efforts to build institutional capacity in border communities, we did find some efforts by state programs and nonprofits. For example, the Texas Colonias Initiative Program has colonia ombudsmen who assist communities with basic infrastructure needs. In 1999, the state of Texas established a Colonias Initiative Program to advance efforts to connect colonia residents’ homes to water and wastewater services. The program’s ombudsmen work in counties in the border region with the highest colonia populations— Hidalgo, El Paso, Starr, Webb, Cameron, Nueces, and Maverick Counties. The role of the ombudsmen includes the following: serving as liaisons among colonia residents, federal and state agencies, local governments, and utility companies; facilitating effective communication among colonia stakeholder groups to improve living conditions for colonia residents; mediating among interested groups to resolve situations that prevent the provision of water and wastewater service; serving as conduits for information by conducting community outreach and facilitating community meetings with colonia residents; and monitoring the different phases of projects to ensure progress and project completion. State and local officials told us that the ombudsmen had helped communities overcome obstacles to obtaining service and had provided valuable information on colonia conditions to state and federal agencies. The federal agencies that provide most of the funding for water and wastewater projects in the border region—EPA, USDA, and HUD—have not developed comprehensive coordinated policies and procedures, resulting in administrative burdens for applicants, duplication of efforts, and inefficient use of resources. However, the agencies have long recognized the need for improved coordination, and in 1997 these agencies issued a joint memorandum to encourage cooperation among federal, state, and local funding agencies. The memorandum states that the agencies will foster coordination efforts by establishing a uniform application, standardizing requirements, coordinating funding cycles, and collaborating in project selection to improve program delivery to small and rural communities, including those in the border region. USDA-Rural Utility Service, Department of Housing and Urban Development, and U.S. because the engineer had to complete two separate sets of engineering documentation for EPA and USDA. The applicant could have saved thesefunds had EPA and USDA established uniform engineering requirements. In addition, because most federal programs have no process by which to coordinate and share information on projects they have selected for funding, we found examples where agencies made inefficient use of limited resources. both provided funds to design wastewater projects that would serve t same communities in Hidalgo County, Texas. EPA provided funds to design the project as an expansion of service from an existing utility, whil USDA provided funds to design the project as a new wastewater treatmen facility. The community elected to build the new facility, thus eliminat ing the need for the EPA design work and resulting in a waste of those federal funds. In another example, HUD provided a utility in Hudspeth County, Texas, over $860,000 in grant funds from 2004 to 2006 to extend water distribution and waste collection lines for residents of a colonia. However, as of September 2009, the distribution lines remain unused because the utility does not have enough water to serve the additional households. T he utility intended to use funding from USDA to construct a new well, but the funding obligated by the agency was not enough to cover project costs.The utility has been unable to obtain the additional assistance from federal agencies, and no additional water supply has been acquired in the 3 years after the HUD funds were provided to construct the distribution lines, resulting in a $900,000 investment of federal funds in distribution lines that are not usable. We received conflicting reports about this project from USDA and utility officials. Specifically, a USDA official in the state offic told us that the agency could provide loan funds only to complete the project and that the agency advised the utility against applying for assistance because the utility could not handle any additional loan burden In contrast, USDA headquarters officials told us that the agency orally offered a loan to the utility to complete the project, but the utility d submit an application to officially request the assistance, and a representative of the utility told us that the utility did meet with USDA officials and it was discouraged from submitting an application. For example, we found a case where EPA and USDA . EPA’s U.S.-Mexico Border Water Infrastructure Program recently adopted a process to coordinate with federal agencies that are providing funding for a project the program may fund. In contrast, federal and tribal officials told us that the collaborative relationship between EPA’s tribal programs and IHS is a model that has been beneficial for tribal nations. The agencies have created a pr coordinate project selection and development in which EPA uses data o the needs of tribal nations from IHS to select projects. According data, IHS administers almost all jointly funded projects, and as a result applicants need to deal with only one federal point of contact. Furthermore, we found examples of states in the border region that have made efforts to better coordinate funding for water and wastewater projects among federal, state, and local agencies and thereby make the application process easier, maximize the use of funds, and reduce complications during project development. The following are ex coordination within the states: Texas has developed a coordination group for the state and federal agencies that provide funding to colonias, and for representatives from s of regulatory agencies. This group meets quarterly to discuss the statu ongoing projects in colonias and any impediments to their completion. California organizes “funding fairs,” where several state and federal agencies come together in communities throughout the state to prov information on potential assistance that may be available. Arizona has developed a committee that consists of several state and federal agencies that conduct meetings throughout the state. According to state officials, these meetings provide communities the opportunity t discuss their needs with the officials and to determine which funding agency could best meet their needs. New Mexico, through executive orders, established an initiative to, am other things, increase collaboration among state agencies that fund water infrastructure. As a result of the initiative, the state developed a single application process for entities seeking assistance with water and wastewater infrastructure to complet e and submit to one state office through a Web-based portal that then disseminates the application to numerous other state and federal agencies for review. The state has also developed a single set of engineering requirements that state and some federal agencies agreed to accept. In addition, a workgroup of state and federal officials meets biweekly to review the applications and identify the combination of programs that would best meet the needs of individ ual applicants. Federal participation includes the New Mexico USDA Rura Development office, and state participation includes the New Mexico s agencies administering the HUD CDBG Program and the Clean Water and Drinking Water State Revolving Fund Programs. Our past work on issues that cut across multiple agencies, such as rural water infrastructure, has shown that agencies face numerous challenges For example, we have found that their efforts to improve coordination. agency missions may not be mutually reinforcing or procedures and processes may be incompatible. However, we found that without a coordinated approach, programs can waste scarc overall effectiveness of the federal effort. In order to overcome significant differences in agency missions, cultures, and established ways of doing business, collaborating agencies must have a clear and compelling rationale to work together. The compelling rationale for agencies to collaborate can be imposed externally through legislation or other directives or can come from the agencies’ own perceptions of the be they can obtain from working together. In either case, among the key practices that can help agencies enhance and sustain their collaborative efforts, include the following: e funds and limit the defining and articulating a common outcome; agreeing on roles and responsibilities; establishing compatible policies, procedures, and other means to operate across agency boundaries; identifying and addressing needs by leveraging developing mechanisms to monitor, eva luate, and report on results. We found that USDA, HUD, and the Corps have not always ensured compliance with statutory requirements and regulations concerning the eligibility of applicants or projects or the prioritization of funds from programs targeted at the border region. HUD and the Corps are not ensuring compliance with eligibility requirements set by Congress when they distribute federal assistance. Specifically, we found the following: HUD. Under the Cranston-Gonzalez Act, the states of Arizona, Californi New Mexico, and Texas shall each ma to meet the needs of the residents of colonias in the State relating to water, sewage, and housing,” a specified percentage of CDBG funds they receive. Under the act, the term “colonia” means any identifiable community that, among other things, is determined to be a colonia on basis of objective criteria, including lack of potable water supply; lack of adequate sewage systems; and lack of decent, safe, and sanitary ho using. In short, the act requires grants to be made for projects meeting the needs of colonias residents, which must be related to water, sewage, and housing. ke available, “for activities designed We found that HUD has not developed guidance for determining wh constitutes a colonia, has not made such determinations, and has not reviewed states’ determinations. Lacking guidance and direction from HUD, states have applied the requirement differently. For example, in California and New Mexico most colonias are designated as communit with substandard housing and a lack of either potable water or adequat sewage systems. In Arizona, designations use any one of the three statutory criteria. In Texas, designations are made for areas with substandard housing that lack either adequate water or wastewater treatment, and which are unincorporated, criteria not found in the act. HUD officials said that the CDBG Program relies on states to make decisions that make the most sense for the particular state, and officials e do not agree that varying interpretations by states suggest that the guidance is problematic. However, officials stated that in the future, will issue guidance that reportedly will include information on the documentation needed by states to support that a colonia meets stat requirements. HUD officials also told us that the agency interprets the statute as authorizing colonia funds to be spent on any currently eligible CDB activity. However, the statute expressly limits the Colonia Set-aside to activities relati ng to water, sewage, and housing. As the agency has not limited state use of the funds, grants have been obligated for numerous activities. Arizona obligated only about 32 percent of the Colonia Se funds for water, wastewater, or housing activities, and the remainder w used for other activities not consistent with the limitations in the act, including about $560,000 for a neighborhood job center and almost $180,000 for a garbage collection vehicle. HUD officials did not say whether the guidance the agency intends to issue in the future will discuss eligible activities. Corps. The Water Resources Development Act of 1992, as amended, authorizes the Corps to provide assistance for wastewater treatment facilities, water systems, and related structures for colonias in the United States along the Un ited States-Mexico border. Although the act does not define colonias, the legislative history for the program shows that colonias were considered to be rural settlements in the border region that lack adequate basic water and sewer facilities, specifically stating that most these communities rely on outhouses or substandard septic tanks. We foun that the Corps has not defined “colonia” for the purposes of the act, or developed any guidance for use of these funds. The Corps recognizes that unlike other Section 219 projects, which have specifically identified pro s locations (e.g., congressionally directed), the colonias Section 219 project i essentially a programmatic authority. Nonetheless, Corps officials stated the orps program was too small for the agency to develop guidance. While the C s states that it independently verifies that the assistance it provides under thi provision is going to colonias, Corps officials acknowledged that the agency does not have criteria for identifying eligible colonias, and it is unclear by what basis the Corps has verified the communities are colonias as meant in ject the authorizing statute. As a result, the Corps cannot ensure that its assistance is going to colonias. USDA and HUD do not ensure that funds intended for use in the border region comply with statutory requirements for establishing project priorities in the border region. Further, the Corps has not established any guidance to ensure funds are targeted to those projects with the greatest need. Specifically, we found the following: USDA. The Consolidated Farm and Rural Development Act, as amended, directs USDA to provide financial assistanc e for water supply and waste facilities and services to communities whose residents face significant health risks, because the community’s residents do not have access to such facilities. The act states that USDA must give preference to entities “that propose to provide water supply or waste disposal services to the residents of those rural subdivisions commonly referred to as colonias are characterized by substandard housing, inadequate roads and drainage and a lack of adequate water or waste facilities.” Thus, the provision requires USDA to give preference to water and waste projects in colonias where other infrastructure and housing are also inadequate. We found that USDA has no process in place to ensure that entities “propos to provide water supply or waste disposal service colonias are given preference. Instead, USDA told us it views an entity ment proposing to assist any community the relevant state or local govern has designated as a colonia as qualifying for the preference. USDA does not attempt to independently verify whether these entities meet the threshold eligibility requirement (proposing to serve communities in which most residents lack access to adequate water or waste facilities), or that th e areas to be served meet the statutory definition of “colonia.” The age ncy also has failed to provide any guidance elaborating on the meaning of an “adequate” water or waste disposal system, or of “colonia.” Despite the lack of guidance, USDA told us that it considers as inadequate a system with a ny violation of the Safe Drinking Water Act or Clean Water Act, as appropria te. As a result of these issues, we believe that USDA has no assurance that entities proposing to serve eligible colonias with the required characteristics have received the required statutory preference. For example, we found that USDA gave an entity proposing a water utility improvement project in New Mexico the colonia preference and obligated $700,000 from the colonia funds. The improvements to the water utility included a new well, tank, and related infrastructure. Rather than reserving the colonia preference to projects that serve areas living without these basic necessities, the agency provided the same preference to this project, which was intended to serve new development, according to the USDA project summary. By awarding the same preference to projects that benefit communities with existing infrastructure, the agency is failing to give preference to those entities proposing to “provide water supply or waste disposal services” to colonias that have the statutory characteristics and live without basic necessities. HUD. The Cranston-Gonzalez Act requires Colonia Set-aside grants to be made in accordance with a distribution plan having the greatest need for such assistance. To do so would require a state to at a minimum identify colonias, discuss the relative needs of colonias, and select projects reflecting the colonias with greatest needs. However, we found that HUD has failed to ensure that state distribution plans reflect that priority is given to the colonias with the greatest need. Instead, HUD officials told us that it is up to the states to determine the needs-based gran t priorities and the agency does not believe it has the authority to direct states on how to distribute the funds as long as it is in accordance with a distribution plan. We believe that without direction and oversight from that gives priority to colonias HUD, states may not be meeting the statutory requirements. For example, one state does not distinguish between Colonia Set-aside funds and CDBG funds and does not actually “set aside” the colonias funds to distribute based on priority of needs. Instead, the state splits the available funds among the regional Councils of Governments, which then determine how to distribute the funds to local projects. The distribution proces vary by region—e.g., one region rotates eligibility among the eligible entities in the county, providing each eligible entity an equal distribution of the funds. The state later adds up the total of the projects that it considers qualifying as colonias to justify the set-aside amount. While HUD officials may believe states are identifying the colonias with the greatest needs, w do not agree that this complies with the act, which requires the agency to take the necessary steps to ensure that the states are doing so. In a July 20 report, the HUD Inspector General also recommended that HUD address this issue, and HUD agreed to issue guidance to assist states to “more clearly articulate the priorities” in developing their method of distribution. As of November 2009, the agency had not yet issued this guidance, but officials told us the agency still intends to issue the guidance in the near future. In July 2008, the HUD Inspector General issued a report auditing the Colonias Set-aside program, including HUD actions to ensure compliance and detailed review of uses of funds by states. Our findings are consistent with those reported by the Inspector General. HUD, HUD’s Community Development Block Grant Set-Aside for Colonias Was Not Used for Its Intended Purposes, 2008-FW-0001 (Washington, D.C.: July 29, 2008). assist the community on the entity’s readiness to enter into the req cost-sharing agreement. By using this approach, the Corps is failing to ensure limited funds are provided to those with the greatest need. Appendix II provides additional information on the establishment of federal funding to assist colonias and GAO’s analysis of legal requir related to eligibility and project priorities. Meeting the drinking water and wastewater needs of the border region is a difficult undertaking. Among other things, the remoteness of many communities can make it difficult to identify residents in need of water and wastewater services. In addition, the program differences resulting from separate mandates and project eligibility requirements for the various federal programs add to the complexity of coordinating funding needed to complete projects in the region. The ultimate success of providing these basic services to residents of the border region hinge several factors, of which a well-coordinated implementation approach based on a comprehensive assessment of the region’s existing water wastewater needs is key. Federal agencies have obligated more than $1.4 billion in recent years to fund numerous projects that provided water an d wastewater service to residents in the border region. However, despite th extensive efforts that have gone into these projects and the agencies’ recognition over a decade ago of the benefits from coordinated policies and procedures, the lack of (1) an overall needs assessment for the region, (2) comprehensive coordinated policies and procedures, and (3) compliance with all statutory and program requirements is undermining the effectiveness of the federal efforts. We believe that the impact of these deficiencies has limited the availability of federal assistance, crea administrative burden for applicants, delayed project completion, and failed to ensure that federal funds are used effectively and directed according to the criteria established in federal statutes. In a time of constrained resources, continuing to provide an uncoordinated federal response is not the most effective use of federal resources to meet the drinking water and wastewater needs in the border region. In order to better address the needs of the region, Congress may wish to consider establishing an interagency mechanism or process, such as a task force on water and wastewater infrastructure in the border region that includes the federal agencies that administer programs in the region. Congress may wish to direct any task force, in partnership with state and local officials, to leverage collective resources to identify needs within the border region— including the identification of the water infrastructure status within colonias, and the extent to which the lack of institutional capacity has impeded communities within the border region from seeking assistanc in light of these ne coordinated policies and procedures across relevant agencies, such as a coordinated process for the selection of projects, and standardized applications and environmental review and engineering requirements the extent possible; eds, establish a framework for compatible and evaluate the degree to which there are gaps in the programs and what resources or authority would be needed to address them; and provide periodic status reports regarding the progress made in deve this strategic and coordinated approach. Congress may also wish to consider reemphasizing the priorities for use of nds Colonia Set-aside funds by specifically requiring HUD to make these fu available only for grants related to the three existing statutory and by directing HUD to report annually to Congress on the purposes for which such funds were used and the steps it is taking to ensure that the funds are being used for the required purposes. We are making the following three recommendations for executive action. To ensure that funding established to meet the needs of colonias is used in ways that are consistent with statutory and regulatory requirements, we recommend that he Secretary of Agriculture direct Rural Development to revise its process of determining eligibility to ensure that the agency only provides Section 306C colonia funds for projects that benefit colonias, as defined by federal statute, and to revise its priority process to better target limited funds to those projects meeting the statutory preference criteria. The Secretary of Housing and Urban Development ensure that state agencies provide Colonia Set-aside funds only for projects that benefit colonias, as defined by federal statute, and to promptly establish guidance to ensure states follow a method of distribution that results in the prioritization of Colonia Set-aside funds to those colonias with the great need. Further, the Secretary should monitor the states’ uses of all Colonia Set-aside funds as a distinct component of CDBG monitoring. est If the Corps continues to assist communities with water and wastewa related activities through the colonia program, the Secretary of Defense direct the Chief of Engineers and Commanding General of the U.S. Army Corps of Engineers to develop eligibility criteria and a standard pro cess to review and select activities for funding that targets the assistance to those with the greatest need. The process should comply with all applicable regulations and include verification of eligibility. We provided the U.S. Department of Agriculture (USDA), the Environmental Protection Agency (EPA), the Department of Housing and Urban Development (HUD), and the U.S. Army Corps of Engineers (Corps) with a draft of this report for their review and comment. In addition, we sent relevant portions of the report to the Department of Commerce’s Economic Development Administration, the Department of Health and Human Service’s Indian Health Service, and the Department of the Interior’s Bureau of Reclamation for their review and technical comment. In its written comments, USDA provided several observations on the report’s findings but disagreed with the report’s recommendation. Specifically, USDA agreed that our report accurately reflects the assistance that has been provided in the border region and stated that more work and additional funding are needed to continue the progress being made. USDA also agreed with our report’s finding that there is comprehensive federal assessment of the region’s water and wastewater systems. However, USDA questioned whether a federal level comprehensive assessment is needed to effectively address water syst inadequacies or whether a locally based federal presence that leverages local knowledge of local conditions might not be more effective. W agree that local knowledge of local needs is an important element that help inform decision makers, we continue to believe that without a comprehensive assessment of the region, federal agencies providing assistance to the region lack necessary information on the magnitude of the problem and on how best to prioritize and target limited resources. Additionally, USDA stated that it believes the examples presented in our report where coordination would have improved the project outcome are rare instances and that the examples of state level coordination in our report demonstrate that effective coordination is occurring amongst the programs. While we agree that some level of coordination is occurrin disagree that the examples cited in our report are rare instances. Dur our review, we contacted numerous officials in the border region— including local, state, and tribal officials; engineers and other consultant nonprofit representatives; water and wastewater utility representatives; and residents—and these officials consistently provided us with numerous s; examples of the type of concerns they have experienced due to ineffect coordination among the federal agencies. Moreover, while state efforts to coordinate funding for water and wastewater projects are beneficial; we found that these efforts are not consistent throughout the region and can not replace the need for coordination of policies and procedures among federal agencies. We therefore continue to believe that without a coordinated approach federal programs continue to place additional burden on applicants, waste scarce funds, and limit the overall effectiveness of the federal effort. Finally, in its comments, USDA disagreed with our recommendation that it should revise its process of determining eligibility to ensure that Section 306C colonia funds are only provided to those projects that benefit colonias, as defined by federal statute, and to revise its priority process to better target limited funds to those projects meeting the statutory preference criteria. Specifically, USDA stated that its current process complies with statutory requirements and that preference is given to entities that propose to provide water or waste disposal services to colonias. In explaining its position, USD that the characteristics of a colonia to be given preference per the statute do not constitute a definition. We disagree with USDA’s interpretation of the statute and continue to believe that USDA must determine that an area proposed for assistance has these characteristics before the agency provides preference to an entity for funding decisions. Our recommendation would allow entities that propose to provide water and wastewater disposal services to colonias that match the statutory characteristics to receive preference for limited federal funds and ensure that the agency is providing federal funds to those with the greatest need. USDA’s letter can be found in appendix IX. In its written comments on the draft report, HUD provided several clarifications about its disagreement with our interpretation of the statutory requirements for the CDBG program and also commented on ou recommendations, although it did not state whether it agreed or di with them. For example, with regard to our recommendations that state agencies only provide colonia set-aside funds for projects that benefit colonias, as defined by federal statute, and th ensure that states follow a method of distribution that results in the prioritization of Colonia Set-aside funds to those colonias with the g reatest need, HUD stated that it will issue guidance to the states that will ad dress the proper administration of the Colonia Set-aside funds. HUD stated that this guidance is currently being finalized, but did not provide a timetable for its release or specify how the guidance would address the issues GAO identified. With regard to our recommendation that HUD should take additional actions to monitor the states’ use of Colonia Set-aside funds, HUD stated that it already monitors distinct components of the state at HUD establish guidance to CDBG program and as part of this process also monitors a portion of the Colonia Set-aside funds. HUD stated that it has recently developed a new monitoring exhibit specifically to assist in the review of Colonia Set-aside funds. Because HUD has not finalized its guidance we believe that our recommendation remains valid. The Department of Housing and Urban Development’s letter can be found in appendix X. In its comments on the draft report, DOD stated that it believes that th Corps’ current method of determining which communities receive assistance under its Section 219 program is appropriate; however, DOD partially concurred with our recommendation, and stated that should he Congress direct additional funds to the colonias Section 219 program, t Corps will develop written guidance on eligibility criteria and the process’s agreement with the for selection of activities. While we appreciate DOD need for a formal process and written guidance, we continue to be concerned about the Corps ad hoc selection process for these colonias to water and wastewater projects. This is because such a process fails ensure that limited funds are provided to those colonias with the greates need—which GAO has found to be a key factor in federal program effectiveness. The Department of Defense’s letter can be found in appendix XI. The U.S. Environmental Protection Agency, the Department of Commerce’s Economic Development Administration, the Department of of Health and Human Service’s Indian Health Service, and the Department the Interior’s Bureau of Reclamation provided technical comments, which we incorporated throughout the report as appropriate. e date of this report. At that time, we will then provide copies of this arties. We will also send copies to the Secretaries of Agriculture, Housing 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 th report to the appropriate congressional committees and other interested p and Urban Development, and Defense, and the Administrator of the nvironmental Protection Agency. In addition, this report will be available E at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this repor Key contributors to this report are listed in appendix XII. t. To determine how much federal funding was obligated to rural households and communities in the border region for water and wastewater projects, we identified seven agencies with programs that may have provided assistance to these areas. We then collected and analyzed obligation and project location data from each of the seven agencies—the U.S. Department of Agriculture (USDA), the Environmental Protection Agency (EPA), the Department of Housing and Urban Development (HUD), the U.S. Army Corps of Engineers (the Corps), the Department of Health and Human Service’s Indian Health Service (IHS), the Department of Commerce’s Economic Development Administration (EDA), and the Department of the Interior’s Bureau of Reclamation (Reclamation)—from fiscal years 2000 through 2008. We collected data from each agency for the 97 counties that are within 150 miles of the border region. We geographically located the data using MapInfo. We assessed the reliability of the data we used by reviewing information about the underlying database systems, reviewing the data to identify outliers and inconsistent or missing values, and discussing the data with knowledgeable agency officials. We present more details about the data, their limitations, and how we addressed these limitations below. On the basis of these efforts, we determined that the data were sufficiently reliable for the purposes of this report. The Border Environmental Cooperation Commission and the North American Development Bank provided grant and loan obligation data for all projects that received funds from EPA’s U.S.-Mexico Border Water Infrastructure Program. The reports are based on data tracked by the agency’s financial systems and program management data. As U.S.-Mexico Border Water Infrastructure Program grant funds are obligated to entities in both the United States and Mexico, we filtered the data to include only projects that were located in the United States. Additionally, we included only water and wastewater projects in our review. EPA provided grant obligation data for congressionally designated projects from the Special Appropriation Act Projects (SAAP) database. We filtered these data to include only projects whose primary purpose was designated as drinking water or wastewater. The SAAP database does not include county-level data, so we identified the county for each project based on location data EPA was able to provide. After the county was identified for each project, we filtered the data to include only projects in counties within 150 miles of the border. EPA provided grant obligation data on tribal programs from spreadsheets used to track projects. EPA provided data for those tribal nations it determined to be within 150 miles of the border region. State agencies from Arizona, California, New Mexico, and Texas provided loan obligation data for the Drinking Water State Revolving Fund and Clean Water State Revolving Fund programs. USDA provided grant and loan obligation data for all water and wastewater utility programs from its Community Program Application Processing (CPAP) system. For some projects that were within the areas of our site visits, we obtained additional information, such as copies of the original applications and project summary data. USDA provided grant obligation data for the single-family programs from the Rural Development Data Warehouse. A number of records in the dataset did not include physical addresses. However, all records did include at least county and state data. We did not include one of USDA’s Section 504 single-family programs in our review. The Section 504 program provides funds to individual households for numerous activities, including water and wastewater projects—such as repairs to septic systems or water wells—but the funds can also be used for other household repairs not related to water or wastewater. USDA does not centrally track how the funds were utilized, and we could not determine what portion of the funds was relevant for our review. HUD provided grant obligation data from its Integrated Disbursement and Information System (IDIS). HUD was not able to extract data by county, but rather provided data for all water and wastewater activities in counties eligible to receive Community Development Block Grant funding in Texas, New Mexico, Arizona, and California. We then reviewed the project location data and determined the county in which each project was located, and we imported the data into a geographic information system and extracted only those activities conducted in the 97 counties included in our review. Within the IDIS, HUD tracks project activities through matrix codes. We obtained data for matrix code 03J—water and sewer improvements, and matrix code 14A—rehab, single-family residential units. HUD also provides funds for planning purposes—matrix code 20—some of which may have been used for water and wastewater activities. However, we found the data for matrix code 20 often did not include enough information to determine whether the project included a water or wastewater component. We did not include these projects in our review. Furthermore, although we requested data from fiscal years 2000 through 2008, HUD could not ensure that all funds for fiscal year 2008 were included in our data. At the time HUD extracted the data, the agency had not verified that all states had finished inputting data into the database. However, officials stated that they believe most, if not all, of the data were included. IHS provided grant obligation data from its Project Data System. We obtained data for all water and wastewater projects in Arizona, California, New Mexico, and Texas. We then reviewed and filtered the data by tribal name and included only the funds obligated to tribal nations located within 150 miles of the U.S.-Mexico border. We determined the tribal nations located in the border region using data provided by EPA, IHS, and the Bureau of Indian Affairs. IHS also provided needs data from the Sanitation Deficiency System. EDA provided grant obligation data from its Operations Planning and Control System. Agency officials identified and provided data for those projects with a water or wastewater component. We reviewed the data and excluded several projects from our review as they were not directly related to the provision or improvement of water or wastewater systems, and thus outside the scope of our review. The Corps provided data from its P2 Project Management System. Corps officials identified and provided data for drinking water and wastewater projects that received assistance in the border region. We did not collect data for regulatory permits or projects conducted on military installations in the region. Reclamation identified and provided data for water and wastewater projects. We determined that several projects were not directly related to the provision or improvement of drinking water or sewage treatment systems, and were thus outside the scope of our review. Specifically, we did not include obligations for activities related to storm water runoff, water recycling, or desalination studies. The federal government has not established a formal or consistent definition of what constitutes a rural area. The term “rural” is defined differently by Congress and each federal agency according to agency guidelines and individual project or program authorizations. Depending on the agency, rural areas may be defined as ranging from fewer than 2,500 to fewer than 50,000 persons. Some agencies and programs that fund water and wastewater projects in the border region do not focus on serving rural or urban areas but instead provide funds to eligible applicants from any location. We determined that, for purposes of this report, the best system for differentiating rural from urban areas would be based on ZIP codes rather than on counties. Because the number of ZIP codes in the nation is so much larger than the number of counties, classification systems based on ZIP code measures offer a more precise means of identifying rural areas than county-based systems. However, because of data limitations and the multiple ZIP codes often served by projects, we could not reliably track funding to the ZIP code level; we chose to use the dominant Rural Urban Commuting Area (RUCA) system, developed by the Washington State Office of Community and Rural Health in 2001. The system relies on both population and commuting patterns of census tracts to classify each county as rural or urban based on the counties’ dominant commuting patterns. The dominant RUCA system is based on the 10-tiered subcounty RUCA system developed by ERS in conjunction with the Department of Health and Human Services in the late 1990s. The rural-urban continuum system does not explicitly define “rural.” However, the rural-urban continuum codes can be combined to create rural and urban designations for counties. To assess the effectiveness of federal efforts, we based our review on key evaluation criteria identified in previously published GAO reports. Our review did not assess the benefits of individual projects; rather, we determined the effectiveness of the collective federal effort of the programs. Specifically, to determine the effectiveness of the federal effort, we identified whether the agencies with programs targeted to the border region had (1) comprehensively assessed the needs they seek to address; (2) developed cooperative policies, procedures, and requirements; and (3) adhered to all statutory and regulatory requirements, including those that ensure assistance is targeted to those with the greatest need. In order to determine whether federal agencies have comprehensively identified the drinking water and wastewater needs of the region, we reviewed existing assessments and interviewed federal officials regarding their assessment efforts. To determine agencies’ efforts to enhance and sustain collaboration with other agencies, we reviewed coordination documentation, such as memorandums of agreement; reviewed program requirements; and interviewed federal officials. To determine if agencies’ programs comply with statutory requirements, we reviewed applicable authorizing statutes, appropriations acts, regulations, and agency policies and guidance. We also reviewed program policies and procedures to solicit and accept applications, and interviewed federal officials regarding their practices. In addition, we reviewed key legislative history for key statutes and any relevant case law. Furthermore, we asked agency attorneys and program officials for explanations where we found noncompliant practices. We conducted site visits to colonias, tribal nations, and other communities in Texas, New Mexico, and Arizona. During the site visits, we observed water and wastewater conditions in the border region and federally funded projects. We also interviewed local, state, tribal, and federal officials; engineering consultants; nonprofit representatives; urban planners; water and wastewater utility representatives; and residents regarding their experiences applying for or receiving assistance from federal agencies. In selecting our site visit locations, we considered a number of factors, including (1) geographic location, (2) proximity to identified colonias, (3) proximity to tribal nations, (4) location of federally funded water and wastewater projects, (4) location of federal agency field offices, and (5) recommendations from state and local officials of areas that either lacked basic services or have received the services as a result of receiving federal funds. While the results of the site visits cannot be generalized to all sites or projects, the results do reflect a range of geographic diversity and water and wastewater needs. In addition to the site visits, we conducted telephone interviews with local, state, tribal, and federal officials, and nonprofit representatives in Texas, New Mexico, Arizona, and California not located within the areas where we conducted site visits to obtain additional information on water and wastewater conditions in their communities and their experiences with federal assistance. Furthermore, we attended two interagency coordination meetings in which various federal and state agency representatives discussed the status of ongoing drinking water and wastewater projects in the border region and the challenges they face completing them. This appendix provides additional information on GAO’s analysis of legal requirements related to eligibility and project priorities for targeted USDA, HUD, and Corps programs. This information includes relevant history of the program’s original authorizing legislation, and additional details and citations. The federal government’s role in assisting colonias was primarily established when the 101st and 102nd Congresses established dedicated funding—in programs administered by USDA, HUD, and the Corps—to address the needs of colonias. These agencies were directed to establish programs dedicated to assisting these communities. The legislative histories of the program authorizations emphasize that the key concern over colonias was public health impacts stemming from the lack of clean drinking water and the inadequate disposal of sewage; for example, one particular concern was that the inadequate systems in use, combined with flooding conditions, would result in human waste in the roads. Statements throughout the Congresses consistently depict colonias as areas that lack safe drinking water and sewage disposal facilities, and the colonias were sometimes likened to areas with “third world” conditions. ewer Substandard housing is also mentioned, but the lack of water and s are the predominant characteristics. For example, the sponsor of the administered Colonia Set-aside explained, “These citizens do not have sewer, they do not have sewage systems, they do not have running water, and I think that is a travesty in America, that American citizens do not have the basic necessities of life.” Another representative, when introducing amendments to the USDA program legislation, stated “here are hundreds of individuals that live in the colonias that will suffer from a lack of adequate water and sanitation facilities. This situation is truly dangerous in terms of sanitation and health hazards from the lack of proper water and sewer systems.” Finally, when the provision authorizing the Corps’ colonias assistance was added to the Water Resource and Development Act bill, a representative explained: “Colonias are rural settlements along the United States-Mexico border which lack or have inadequate basic water and sewer facilities. All of the colonias to receive funding under this amendment are located in the United States . . . . Most of the inhabitants of these communities use outhouses or substandard HUD- septic tanks for their waste disposal. A set-aside for these areas is particularly crucial from a health standpoint. Because of substandard water resources, contagious diseases pose a particular threat to people living in colonias.” The Consolidated Farm and Rural Development Act, as amended, directs USDA to provide financial assistance for water supply and waste facilities and services to communities whose residents face significant health risks, because the communities’ residents do not have access to such facilities. The act states that USDA must give preference to entities “that propose to provide water supply or waste disposal services to the residents of those rural subdivisions commonly referred to as colonias that are characterized by substandard housing, inadequate roads and drainage, and a lack of adequate water or waste facilities.” Thus, the provision requires USDA to give preference to water and waste projects in colonias where other infrastructure and housing are also inadequate. We found that USDA has no process in place to ensure that entities “propos to provide water supply or waste disposal services” to these colonias are given preference. USDA officials explained that the agency considers the funding for colonias to be a set-aside, and therefore only considers entities proposing to assist colonias for this funding. However, in implementing the program, USDA told us it views any entity proposing to assist an area that the relevant state or local government has designated as a colonia as qualifying for the preference, and awards funds to them on a first-come, first-served basis. USDA does not attempt to independently verify whether these entities meet the threshold eligibility requirement (that they propose to provide service to areas where most residents lack access to adequate water or waste facilities), or that the areas to be served meet the statutory definition of “colonia.” While agency regulations repeat the statutory requirement for threshold eligibility and define “colonia”, the agency has failed to provide any guidance elaborating on the meaning of an “adequate” water or waste disposal system, or how to identify those colonias with the statutory preference characteristics. Despite the lack of guidance, USDA told us that it considers as inadequate a system with any violation of the Safe Drinking Water Act or Clean Water Act, as appropriate. Furthermore, the agency simply accepts local designations of colonias to satisfy the regulation and the statute. As a result, USDA has no assurance that entities proposing to serve colonias with the required characteristics have received the required preference. By allowing colonia funds to be used for projects that benefit communities with existing infrastructure, the agency is failing to give preference to those colonias that have the statutory characteristics and live without basic necessities. Under section 916 of the Cranston-Gonzalez National Affordable Housing Act, the states of Arizona, California, New Mexico, and Texas shall each make available, “for activities designed to meet the needs of the residents of colonias in the State relating to water, sewage, and housing,” a specified percentage of CDBG funds they receive. Under the act, the term “colonia” means any identifiable community that, among other things, is determined to be a colonia on the basis of objective criteria, including lack of potable water supply, lack of adequate sewage systems, and lack of decent, safe, and sanitary housing. The act requires grants to be made in accordance with a distribution plan that gives priority to colonias having the greatest need for such assistance. In short, the act requires grants to be made for projects meeting the needs of colonias residents, which must be related to water, sewage, and housing, and which give priority to the colonias with greatest need. With respect to the meaning of “colonia,” HUD told us the agency has not developed guidance regarding interpretation of the definition or determination of eligible entities. HUD’s sole written interpretation of the definition, issued in a 2003 notice, asserts that all three criteria must be met; nonetheless, HUD officials also stated that the agency allows states to interpret the definition as requiring only one of the three criteria to be met. Finally, HUD officials told us that as they give grants to the states for distribution to colonias, the states are ultimately responsible f determining eligible entities; to do so, the states rely on formal “designation” of colonias. Without guidance from HUD, states have applied the requirement differently. For example, in California and New Mexico, most colonias are designated as communities with substandard housing and a lack of either potable water or adequate sewage systems. In Arizona designations use any one of the three statutory criteria. In Texas, designations are made for areas with substandard housing that lack either adequate water or wastewater treatment, and which are unincorporated, a criterion not found in the act. While interpreting colonias as those designated by states may have been the correct interpretation of the Cranston-Gonzalez Act until 1992, in that year Congress repealed a provision requiring that a colonia must be designated as such by the state to be eligible for funds. process was changed so that a colonia can be qualified for this program without regard to a state or county action. We believe that HUD’s reliance on the states in carrying out section 916 fails to give effect to this A committee report explains that the designation change in law. HUD officials said that the CDBG Program relies on states to make decisions that make the most sense for the particular state, and officials do not agree that varying interpretations by states suggest that thelack of guidance is problematic. However, officials stated that HUD will be issuing guidance, which they say will include information on the documentation states need to support that a colonia meets statutory requirements. Housing and Community Development Act of 1992, Pub. L. No. 102-550, § 810 (Oct. 28, 1992). HUD officials also told us that it is up to the states to determine the needs- based grant priorities. However, under the act, states must distribute the colonia funds according to distribution plans that give priority to the colonias in the greatest need of assistance. To do so would require a state to at a minimum identify colonias, discuss the relative needs of colonias, and select projects reflecting the colonias with the greatest needs. However, we found that HUD has failed to ensure that state distribution plans reflect priority given to the colonias with greatest need. Instead, HUD officials do not believe the agency has the authority to direct states on how to distribute the funds as long as it is in accordance with a distribution plan. Without direction and oversight from HUD, states may not be meeting the statutory requirements. While HUD officials may believe states are identifying the colonias with the greatest needs, section 916 requires the agency to not just rely on mere belief, but take such steps as required to ensure it is doing so. HUD officials also told us that the agency interprets the statute as authorizing colonia funds to be spent on any currently eligible CDBG activity. However, the statute expressly limits the set-aside to activities relating to water, sewage, and housing. Lacking guidance and direction from HUD, states have applied the requirement differently. Finally, HUD officials said they are required to give states “maximum feasible deference” in interpreting statutory requirements related to the Colonia Set-aside. HUD regulations establish the maximum feasible deference policy; however, the regulations provide for deference only to states’ interpretations of CDBG requirements under the Housing and Community Development Act of 1974 and certain HUD regulations. The Colonia Set-aside requirement, however, was established by section 916 of the Cranston-Gonzalez National Affordable Housing Act, which stands alone and is not an amendment to the Housing and Community Development Act of 1974. Thus, HUD’s maximum feasible deference regulation by its terms does not encompass state interpretations related to the set-aside. Even if it were applicable, the regulation limits deference to state interpretations that “are not plainly inconsistent with the Act and the Secretary’s obligation to enforce compliance with the intent of the Congress as declared in the Act.” As outlined above, HUD has not taken steps to ensure state interpretations related to funding of set-aside projects, such as which activities are eligible, are in accordance with law. The Water Resources Development Act of 1992 authorized the Corps to provide assistance to colonias. The colonias authorization is unique among WRDA section 219 projects, which are otherwise specific earmarked projects; that is, Congress has not directed the funds to particular colonias projects. The authorization limits grants to “colonias in the United States along the United States-Mexico border,” but does not define colonias. While limited, the legislative history shows that colonias were understood to be “rural settlements along the United States-Mexico border which lack or have inadequate basic water and sewer facilities,” and that “ost of the Inhabitants of these communities use outhouses or substandard septic tanks for their waste disposal.” In addition, Congress has elsewhere defined colonias as “based on objective criteria, including lack of potable water supply, lack of adequate sewage systems, and lack of decent, safe, and sanitary housing.” Nonetheless, the Corps has never developed a definition, an interpretation, or guidance for staff to use in determining whether an assistance recipient is a colonia eligible for the program. Although the Corps recognizes that the colonias section 219 project is essentially a programmatic authority, nonetheless, Corps officials stated the program was too small for the agency to develop guidance. The Corps claimed to independently verify in letter reports, which are brief project reports that the Corps prepares before providing assistance to an entity, that the assistance it provides under this provision is going to colonias; however, the Corps acknowledged that it does not have criteria for identifying eligible colonias. Thus, while these letter reports describe the areas, it is unclear by what basis the Corps has verified they are colonias as meant in the authorizing statute. As a result, the Corps cannot ensure that its assistance is going to colonias. The following figure displays the ranges of USDA funding obligated to counties in the border region for water and wastewater projects. The following figure displays the ranges of EPA funding obligated to counties in the border region for water and wastewater projects. Rural-urban continuum codeRural (7) Rural (6) Urban (2) Rural (8) Rural (6) Rural (7) Rural (9) Rural (6) Rural (7) Urban (3) Rural (9) Urban (2) Rural (6) Rural (7) Rural (8) Urban (3) Urban (2) Rural (8) Urban (3) Rural (9) Rural (6) Urban (4) Rural (6) Urban (1) Rural (9) Urban (4) Rural (7) Rural (9) Urban (4) Rural (6) Rural (6) Rural (9) Rural (9) Urban (5) Rural (8) Urban (1) Rural (8) The following figure displays the ranges of HUD funding obligated to counties in the border region for water and wastewater projects. PA, USDA, an ata. The following are GAO’s comments to the Department of Agriculture’s letter dated December 8, 2009. The following are GAO’s comments to the Department of Housing and Urban Development’s letter dated December 10, 2009. water, sewage, and housing. We did not make any change to our rep in response to HUD’s further explanation. . Our report recognizes that HUD has stated its intent to issue guidance to assist states to more clearly articulate the priorities in developing their method of distribution. However, during the course of the engagement, we asked HUD for a draft version of the guidance or other documentation so that we could review the contents of the guidance and assess whether it would adequately address our concerns. Because HUD did not provide us with any documentation, we have made no modifications to the report in response to this comment. 4. We disagree with HUD’s characterization of our discussion regarding the interpretation of the colonia definition. As stated in our report, HUD has failed to provide guidance on the interpretation of colonia. During our review, the only documented definition we found that H issued in relation to the Colonia Set-aside is in a HUD Office of Community Planning and Development Notice, which as HUD indicates in its response, is not followed by the agen considered to be an official interpretation of the statute. We continue to believe that to ensure compliance with statutory guidance; HUD should undertake a review of the statute and issue clear guidance to states concerning its interpretation of the definition. We did not revise the report in response to this comment. cy, and is not 5. During our review, we conducted interviews with numerous state a local officials throughout the border region—including officials representing the state agencies that administer HUD’s CDBG funds. However, our review focused on the federal efforts to meet needs in the U.S.-Mexico border region and not the state efforts. We made no changes in response to this comment. 6. We have modified the report and clarified that the total funding HUD obligated (about $218 million) is a combination of CDBG funds (about $214 million), Indian CDBG funds (about $3 million), and funds provided through the Economic Development Initiative Special Account (about $1 million). 7. Our report already recognizes the changes HUD intends to make to its data system. However, we have added an additional statement to our discussion that the change will allow HUD to verify that all projects funded with Colonia Set-aside funds are located within a colonia. 8. We disagree with HUD’s characterization that our report suggests that HUD still requires the states to formally designate colonias, or that HUD should be the party to designate colonias. Our report clearly states that we believe that HUD should be conducting activities as necessary to ensure that the states’ use of funds is compliant with the law. As stated in the report, soon after the enactment of the law that established the Colonia Set-aside requirement, Congress amended law to remove a requirement that a colonia be designated by the s or county, and as a result we recognize that no formal designation is required. Yet, in implementing the program, states are informally designating colonias, HUD is deferring to the state determinations as though they were formal designations, and HUD has not provided guidance concerning state implementation of the Colonia Set-aside as to how eligible colonias are to be identified. We have made no revisions to the report in response to this comment. 9. The report does not include any information that would indicate that the project in Hudspeth County, Texas has been closed. The rep clearly states that HUD provided a utility over $860,000 in grant from 2004 to 2006 to extend water distribution lines and waste collection lines for residents of a colonia; and that as of September 2009, the distribution lines remain unused because the utility does n have enough water to serve the additional households and the utility has not been able to obtain the funding needed to construct a new well. We made no changes to the report in response to this comment. The following is GAO’s comment to the U.S. Army Corps of Engineer’s letter dated December 10, 2009. Our report recognized that the Corps had prepared letter reports, which are brief project reports that the Corps prepares before providing assistance to an entity, prior to undertaking each project. However, our report clearly states that the Corps does not have criteria for identifying eligible colonias. Therefore, while these letter reports are prepared, it is unclear by what basis the Corps has verified they are colonias as meant in the authorizing statute. We made no changes to the report in response to this comment. In addition t o the individual named above, Sherry L. McDonald, Assistant Director; Elizabeth Beardsley; Virginia Chanley; Bernice Dawson; Teague Lyons; Benjamin Shouse; and Jay Spaan made significant contribu this report. | A serious problem for U.S. communities along the U.S.-Mexico border is the lack of access to safe drinking water and sanitation systems. Inadequate systems can pose risks to human health and the environment, including the risk of waterborne diseases. Numerous federal programs provide grants, loans, or other assistance to rural U.S. communities, including those in the border region, for drinking water and wastewater projects. The Government Accountability Office (GAO) was asked to determine (1) the amount of federal funding provided to rural U.S. communities in the border region for drinking water and wastewater systems and (2) the effectiveness of federal efforts to meet the water and wastewater needs in the region. GAO analyzed agency financial data; reviewed statutes, regulations, policies, and procedures; and interviewed federal, state, local, and private sector officials. Seven federal agencies--the Environmental Protection Agency (EPA), the Department of Agriculture (USDA), the Department of Housing and Urban Development (HUD), the U.S. Army Corps of Engineers (the Corps), Economic Development Administration (EDA), the Indian Health Service (IHS), and the Bureau of Reclamation (Reclamation)--obligated at least $1.4 billion for drinking water and wastewater projects to assist communities in the U.S.-Mexico border region from fiscal years 2000 through 2008. USDA and EPA obligated 78 percent, or about $1.1 billion, of the total $1.4 billion--with USDA obligating 37 percent, or $509 million, and EPA obligating 41 percent, or $568 million. Agencies provided assistance for a variety of drinking water and wastewater activities, such as constructing or improving treatment facilities and installing distribution lines. For example, of the $509 million total, USDA obligated about $502 million to public utilities or similar entities for construction of or improvements to water and wastewater infrastructure. It obligated over $7 million to individuals in the border region for household projects, such as repairs to indoor plumbing. Federal efforts to meet drinking water and wastewater needs in the border region have been ineffective because most federal agencies (1) have not comprehensively assessed the needs in the region, (2) lack coordinated policies and processes, and (3) in some cases have not complied with statutory requirements and agency regulations. Although federal agencies have assembled some data and conducted limited studies of drinking water and wastewater conditions in the border region, the resulting patchwork of data does not provide a comprehensive assessment of the region's needs. Without such an assessment, federal agencies cannot target resources toward the most urgent needs or provide assistance to communities that do not have the technical and financial resources to initiate a proposal for assistance. In contrast, IHS has collected data on water and wastewater conditions for each tribal reservation. As a result, the agency can select projects that target the greatest need. In addition, although some federal agencies recognize the importance of a collaborative and coordinated process to increase program effectiveness, agencies' policies and processes are generally incompatible or not collaborative with those of other agencies. For example, most federal programs require separate documentation to meet the same requirement and the agencies do not consistently coordinate in selecting projects. As a result, applicants face significant administrative burdens and project completion can be delayed. Moreover, GAO found that some agencies do not always meet the requirements stipulated in federal statutes and agency regulations concerning how they are to determine the eligibility of applicants or projects and how they are to prioritize funds. For example, USDA and HUD do not ensure that recipients' use of targeted funds intended for use in the border region complies with statutory requirements for establishing project priorities in the border region. Finally, the Corps has not established any guidance to ensure funds are targeted to those projects with the greatest need. |
Under DERP, DOD is required to carry out a program of environmental restoration activities at sites located on former and active defense installations that were contaminated while under DOD’s jurisdiction. The goals of the program include the identification, investigation, research and development, and cleanup of contamination from hazardous substances, pollutants, and contaminants; the correction of other environmental damage (such as detection and disposal of unexploded ordnance) which creates an imminent and substantial endangerment to public health or welfare or the environment; and demolition and removal of unsafe buildings and structures. To that end, DOD has established performance measures and goals and identified over 31,600 sites that are eligible for cleanup, including about 4,700 FUDS, 21,500 sites on active installations, and 5,400 sites on installations that have been closed or are designated to be closed or realigned under the Base Realignment and Closure (BRAC) process. The DERP was established by section 211 of the Superfund Amendments and Reauthorization Act of 1986 which amended the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980. In implementing the DERP, DOD is required to carry out its activities addressing hazardous substances, pollutants, or contaminants in a manner consistent with section 120 of CERCLA. Funding for DERP cleanup activities comes from the Environmental Restoration and BRAC accounts. The Environmental Restoration accounts fund cleanup activities at FUDS and active sites and the BRAC accounts fund cleanup activities at certain closing or realigning installations. To carry out the DERP at FUDS, DOD has established three major program categories: the Installation Restoration Program, the Military Munitions Response Program, and the Building Demolition/Debris Removal Program. Specifically: Installation Restoration Program (IRP). DOD established the IRP in 1985 to address the release of hazardous substances, pollutants, or contaminants resulting from past practices that pose environmental health and safety risks on both active sites and FUDS. For FUDS, the IRP includes (1) hazardous, toxic, and radioactive waste (HTRW) sites and (2) containerized hazardous, toxic, and radioactive waste (CON/HTRW) sites, such as sites with transformers and aboveground or underground storage tanks. In FY 2008, 2,621 FUDS were included in the IRP. DOD has developed performance measures to assess progress toward the agency’s IRP goals. These goals are based on the achievement of certain CERCLA cleanup phases and include progress toward achieving DOD milestones of “remedy in place” and/or “response complete” at installations, and progress in reducing overall risks. Specific IRP targets are included in DOD’s annual report to the Congress. Military Munitions Response Program (MMRP). DOD established the MMRP in September 2001 as a separate program to focus on addressing potential explosive and environmental hazards associated with munitions sites on both active installations and FUDS, due to the unique issues associated with munitions sites. The MMRP includes sites with munitions and explosives of concern, munitions constituents, and chemical warfare materiel. In FY 2008, 1,661 FUDS were included in the MMRP. The objectives of the program include compiling a comprehensive inventory of military munitions sites, establishing a prioritization protocol for cleanup work at these sites, and establishing program goals and performance measures to evaluate progress. In December 2001, shortly after DOD established the program, the Congress passed the National Defense Authorization Act for FY 2002, which, among other things, required DOD to develop, by May 31, 2003, an initial inventory of defense sites, other than military ranges still in operation, that are known or suspected to contain military munitions and to provide annual updates thereafter, among other requirements. DOD provides these updates as part of its Defense Environmental Programs Annual Report to Congress. Building Demolition/Debris Removal Program (BD/DR). To address the demolition and removal of unsafe buildings or structures, DOD established the BD/DR Program. In FY 2008, the Corps had 423 FUDS in the BD/DR program. Because of the small number of FUDS in the BD/DR Program, DOD measures and reports cleanup progress at BD/DR sites with the IRP program. Figure 1 shows these three program categories and the types of cleanup projects within each category at FUDS. A FUDS property may have multiple types of cleanup projects, which we refer to as “sites.” For example, a single FUDS property could have a munitions site; a building demolition/debris removal site; and a hazardous, toxic, and radioactive waste site. DOD is responsible for cleaning up its releases of hazardous substances under DERP, in accordance with CERCLA. The remedy chosen for such a release must meet certain standards for contaminants set under state or federal laws or regulations. If there is no standard for a given contaminant, DOD must still achieve a degree of cleanup, which at a minimum, assures protection of human health and the environment. Thus, the absence of a federal or state standard for the cleanup of a particular hazardous substance does not negate DOD’s responsibility to clean up releases of that substance. Currently, all seven of the Corps’ geographic military divisions and 14 of its 45 districts within these divisions have responsibilities for identifying, investigating, and cleaning up hazards at FUDS. The Corps’ Environmental and Munitions Center of Expertise provides specialized technical assistance to help the Corps’ divisions and districts execute their responsibilities. The Corps’ FUDS program policy follows DERP management guidance, provides specific policy and guidance for managing and executing the FUDS program, and applies to all Corps elements engaged in FUDS program activities. Depending on the types of hazards involved and their severity, either a state environmental regulatory agency or EPA is the lead regulator at a FUDS. The lead regulator is responsible for providing regulatory oversight of the Corp’s actions to clean up FUDS. In general, EPA is the lead regulator for all sites, including FUDS properties, on EPA’s list of some of the most contaminated sites in the country—the National Priorities List. Most FUDS are not on the National Priorities List, and states are typically the lead regulators for these FUDS properties. To be eligible for FUDS cleanup under the DERP and FUDS program policy, a property must have been under the jurisdiction of DOD and owned by, leased to, or otherwise possessed by the United States at the time of actions leading to contamination by hazardous substances or other hazards prior to October 17, 1986. In deciding which actions, if any, need to be taken at FUDS, the Corps uses the process outlined in the National Oil and Hazardous Substance Pollution Contingency Plan (NCP) for identifying, investigating, and cleaning up releases of hazardous substances under CERCLA. The Corps describes its usual process in the following, generally sequential, phases: Preliminary assessment—The Corps uses available information, including a search of historical records, to determine whether the property was ever under the jurisdiction of DOD and owned or controlled by the United States, and if hazards caused by DOD’s use may be present. If the Corps determines that the property was under the jurisdiction of DOD and owned or controlled by the United States, but does not find evidence of any hazards caused by DOD, it designates the property as “no DOD action indicated.” If, however, the Corps determines that hazards caused by DOD prior to October 17, 1986, may be present, the Corps begins further study. Site inspection—The Corps inspects the site to confirm the presence and possible sources of hazards; to confirm that a release has occurred; or eliminate from further consideration those sites that pose no significant threat to public health or the environment. The site inspection builds upon the preliminary assessment and involves sampling to determine the nature of contamination, potential pathways of exposure, and recommendations for further action. Remedial investigation—The Corps conducts more rigorous sampling and analysis to determine the nature and extent of the release, evaluates the baseline risk to human health and the environment posed by the release, and determines if further response action is required to respond to an unacceptable risk. Feasibility study—The Corps analyses the feasibility of alternative remedies to respond to the release using the CERCLA remedy selection criteria and establishes the cleanup criteria for the remedial action. Proposed plan—The Corps proposes to the public and the lead regulator its recommendation for a remedial action to respond to the release and explains how it will satisfy the remedy selection criteria of CERCLA and the NCP. Remedy selection—The Corps issues a record of decision or decision document signed by an authorized agency official to formally select the remedial action to be taken to respond to the release and explains the elements of the remedy and the basis for its selection using the remedy selection criteria of CERCLA and the NCP. Remedial design—The Corps designs the remedy selected by the feasibility study. Remedial action construction—The Corps constructs the selected remedy. At the end of construction, the DOD’s milestone “remedy-in-place” is met when testing of the remedy shows that it will function as designed. Remedial action operation—The Corps operates the selected remedy until the cleanup objective is achieved. At the end of operation, the DOD’s milestone, “response complete” is met. Long-term management—The Corps may conduct ongoing environmental management for a number of years to ensure that the remedy continues to provide the protection it was designed to achieve for human health, safety, and the environment. Examples of long-term management activities are monitoring of a groundwater treatment system, maintenance of a landfill cap, and enforcement of land use controls. In addition, the NCP requires that the Corps, as the agency responsible for FUDS cleanup, conduct “5- year reviews” of sites not less than every 5 years after the start of remedial action, when the chosen remedy does not allow for unlimited use and unrestricted exposure. The Corps continues long-term management activities until they are no longer required. DOD has also established a three-tiered process for identifying and evaluating changes in the information about emerging contaminants or how these contaminants are regulated that may affect DOD’s actions or decisions in several areas, including cleanup of contaminated sites. DOD’s Chemical and Material Risk Management Directorate manages this process, called “scan-watch-action,” and has developed watch and action lists of emerging contaminants (see table 1). The watch list identifies chemicals for which there is a potential for a regulatory change that may affect DOD and the action list includes chemicals for which there is significant potential for regulatory change that may affect DOD. According to DOD and Corps officials, the Corps addresses emerging contaminants at FUDS the same way it does other contaminants—by using the established CERCLA process. However, using this process has not often led the Corps to re-examine sites after response actions are completed to determine whether emerging contaminants are present or need to be addressed. Further, our analysis of information on the 5-year reviews completed in 4 divisions identified problems with the Corps’ 5- year review procedures. We found that (1) reviews were not completed on time; (2) DOD and the Corps do not have accurate, complete information on how many 5-year reviews are required, completed, or planned; (3) divisions are inconsistent in their approaches to conducting 5-year reviews for sites where they are recommended, but not required; and (4) review reports did not always receive the technical review by Corps experts required by Corps policy. The Corps identifies and addresses emerging contaminants at FUDS, as it does other contaminants—using the CERCLA process for identifying, investigating, and cleaning up releases of hazardous substances that is outlined in the NCP. Corps officials told us that in their initial evaluations of FUDS under CERCLA, the agency tested for most known emerging contaminants at those sites where there was a reason to suspect these contaminants were present and caused by DOD. They also told us that the Corps would sample a site for a contaminant, if appropriate, regardless of whether there is a federal or state standard for it. Appendix III provides information on the occurrence of emerging contaminants in groundwater, surface water, soil, and sediment at HTRW FUDS, based on the samples taken as of September 30, 2008. To make informed decisions on which contaminants to sample for at a site, the Corps’ districts review records of DOD’s past use of the site. In 2002, we reported that the Corps lacked comprehensive guidance on the typical hazards that may be present at DOD properties as a result of certain types of DOD activities. However, the Corps subsequently developed guidance, and between 2003 and 2008, issued a series of reports identifying potential chemicals that past military activities may have released. District officials told us that they use this guidance, called “Common Operations Reports,” in conjunction with historical information about a site to determine which contaminants may have been released there. After sampling for contaminants at a site, the Corps uses the sampling results and other site-specific information to assign relative risk levels to sites. These relative risk levels are not based on a comprehensive risk assessment, but are a tool used to prioritize the site for cleanup based on information collected early in the cleanup process. After further defining the nature and extent of contamination at a site, the Corps then uses scientific information on contaminants, sampling results, and other site-specific data—such as information on exposure pathways, potential receptors, and site use—to conduct more comprehensive site- specific risk assessments that are to be used in making cleanup decisions for the site. This requires the Corps to identify and select appropriate contaminant toxicity values to use in assessing risks to human health and the environment. The identification of toxicity values is a crucial step that presents special challenges for emerging contaminants, for which information on human health effects may be insufficient, limited, or evolving. DOD’s and EPA’s preferred source for the fundamental toxicity information needed to develop human health risk assessments is EPA’s Integrated Risk Information System (IRIS), a database that contains EPA’s scientific position on the potential human health effects of exposure to more than 540 chemicals. However, IRIS does not contain final assessments for some emerging contaminants. For example: naphthalene, a component of jet fuel that has contaminated many military trichloroethylene (TCE), a solvent widely used in industrial and manufacturing settings; cyclotrimethylenetrinitramine, which is also known as Royal Demolition Explosive, a highly powerful explosive used by the U.S. military in thousands of munitions; dioxin, a chemical that is often the byproduct of combustion and other tetrachloroethylene, which is also known as perchloroethylene, a manufactured chemical widely used for dry cleaning fabrics, metal degreasing, and production of some consumer products and other chemicals. DOD worked with EPA and the Environmental Council of States (ECOS) to develop a white paper in 2007 on the process to use for identifying and selecting toxicity values when there are no values available from IRIS. ECOS endorsed the white paper by a formal resolution of the member states. DOD formalized the process outlined in this paper with a June 2009 policy on emerging contaminants. Using the site-specific risk assessments, the Corps develops site-specific, risk-based cleanup levels for contaminants at FUDS. Under CERCLA, the Corps must choose a cleanup alternative that, at a minimum, assures protection of human health and the environment. In developing a protective remedy, the Corps considers generally acceptable risk ranges and must choose a remedy which will comply with the applicable or relevant and appropriate requirements (ARAR) that have been identified for the site. The Corps and most FUDS state regulators identify ARARs based on site-specific factors such as the contaminants present, site location and physical features, and response actions being considered. Federal or state standards are not automatically applied to a site—they must first be identified as ARARs for the site. ARARs, which are used as a starting point to assess the protectiveness of a remedy, consist of the following two sets of requirements: Applicable requirements are cleanup standards; standards of control; and other substantive requirements, criteria, or limitations promulgated under federal environmental or state environmental or facility siting laws that specifically address a hazardous substance, pollutant, contaminant, remedial action, location, or other circumstance found at a CERCLA site. Only those state standards that are identified by a state in a timely manner and that are more stringent than federal requirements may be applicable. Relevant and appropriate requirements are requirements that do not meet this definition of “applicable,” but address situations sufficiently similar to those encountered at a CERCLA site that their use is well suited to the particular site. State standards must be identified in a timely manner and be more stringent than federal requirements to be considered relevant and appropriate. If there are no ARARs for contaminants at a site, cleanup levels for the contaminants are established based on the Corps’ site-specific risk assessments. In addition, as part of the ARAR identification process, the Corps also identifies other information that may be considered under CERCLA in establishing cleanup levels. This information is not legally binding and can include nonpromulgated guidelines, advisories, or guidance issued by states or the federal government—for example, drinking water health advisories issued by EPA. After the Corps selects a remedy under CERCLA, if the remedy results in any hazardous substances, pollutants, or contaminants remaining at the site, the Corps must review the remedy no less often than each 5 years after the remedial action was initiated to assure that the remedy is protecting human health and the environment. EPA, the primary regulatory agency for CERCLA, interprets the 5-year review requirement to apply when the remedy for a site will not clean up the site to a level that allows for unlimited use and unrestricted exposure. In addition, EPA guidance notes that 5-year reviews are appropriate, even if not required, for sites where the cleanup will eventually allow unlimited use and unrestricted exposure, but will require more than 5 years to complete. EPA and Corps guidance recommend that 5-year review reports include, among other things, a history of the site, a description of the response actions, a summary of the review process, and certain analysis. This analysis should identify whether (1) the response action—for example, a groundwater treatment system to reduce contaminant concentrations, or land use controls to prevent access to a site—is functioning as intended; (2) assumptions—such as exposure assumptions, toxicity of contaminants, and cleanup levels—used at the time of selecting the response action are still valid; and (3) any new information—such as on changes in the use and accessibility of the site—that indicates the response action may no longer be protective of human health, safety, and the environment. In addition, although CERCLA does not require the collection of new samples to determine the presence of additional contaminants during the 5-year review, the review provides a mechanism to consider available evidence of new contamination that is brought to the attention of the districts. In this regard, EPA guidance instructs those conducting 5-year reviews to consider whether new contaminants have been identified when evaluating the continuing validity of the assumptions used at the time of remedy selection. Finally, EPA and Corps guidance recommend that the 5-year review reports include recommendations for follow-up actions, if necessary, to address identified deficiencies. The Corps may need to modify the cleanup actions at a site if the 5-year review identifies significant changes in contaminant or site information that call into question the protectiveness of the remedy, as determined by a comparison of site-specific risks with the generally acceptable risk ranges. In addition to using the CERCLA process, the Corps also uses EPA, DOD, and Army policies or guidance specific to certain contaminants or issues, including perchlorate and TCE, emerging contaminants that are of particular concern to DOD because they have significant potential to affect people or DOD’s mission. Appendix IV provides more information on these contaminants at FUDS. Our analysis of information on the Corps’ 5-year reviews for FUDS in 4 divisions identified the following problems with the Corps’ review process: (1) the reviews were not completed on time; (2) DOD and the Corps lack accurate, complete information on these reviews; (3) Corps divisions are inconsistent in their approaches to conducting 5-year reviews for sites where they are recommended, but not required; and (4) the reports resulting from these reviews did not always receive the technical review by Corps experts as required by Corps policy. These 5-year reviews can be conducted in the remedial action construction, remedial action operation, and long-term management phases. These reviews provide a mechanism for identifying and responding to changes that may occur, such as new scientific knowledge, regulation of emerging contaminants, or the discovery of additional munitions at a site. Corps officials told us that, to date, few FUDS have required 5-year reviews, due to a variety of factors. For example: The Corps strives to clean up FUDS to a level that allows unlimited use and unrestricted exposure, which does not require a 5-year review— preventing exposure to contaminants left in place can be more difficult at FUDS properties than active DOD installations because DOD no longer owns or controls FUDS properties and does not have the same ability to restrict land use. The Corps has completed cleanup at a higher percentage of building demolition/debris removal sites and containerized waste sites than hazardous, toxic, and radioactive sites. This is because, while cleanup is under way at hazardous, toxic, and radioactive sites, these sites are typically much more complex than building demolition/debris removal sites and containerized waste sites, and significantly more time and investment is required to complete cleanup. Building demolition/debris removal sites do not generally require 5-year reviews because these types of sites involve unsafe buildings, or structures and generally not the hazardous substances, pollutants, or contaminants to which CERCLA applies. Containerized waste sites can require 5-year reviews, but Corps officials in 2 divisions told us that most of these sites were cleaned up to a level that did not require 5-year reviews. In addition, one division told us that most of the containerized waste site cleanups completed by the Corps to date were for petroleum storage tanks. Petroleum is not a hazardous substance, pollutant, or contaminant under CERCLA, so 5-year reviews are not required for actions to address petroleum contamination at FUDS. In some divisions and for certain types of sites, the Corps has not yet reached the point at which 5-year reviews become required. For example, one division official told us that they have only recently begun completing cleanup of HTRW sites, and another division official said that most of the sites that might need a 5-year review have not yet been cleaned up. Further, many munitions sites have not yet reached the trigger date for 5- year reviews—the initiation of remedial actions—because they are still in the investigation phase. Corps’ guidance states that all FUDS where an ordnance and explosives response action is implemented require 5-year reviews. Corps officials told us that the districts will be conducting more 5-year reviews in the future. For example, officials in the 4 districts we contacted told us that they will be responsible for completing a total of 30 5-year reviews from FY 2009 through 2014. As of May 2009, these districts had completed a total of 15 5-year reviews—5 for IRP sites and 10 for MMRP sites. However, our examination of information on these 15 reviews indicated that these districts have not consistently implemented the 5-year review process in accordance with CERCLA or Corps and EPA guidance. We found that: 5-year reviews were not always completed on time. For example, all of the five 5-year reviews conducted for IRP sites and at least five of the reviews for MMRP sites were completed late, with the reports being late by 3 months to 9 years. In addition, for three of the five IRP sites for which 5-year reviews had been completed, we determined that the Corps incorrectly identified the trigger dates for initial 5-year reviews as the completion, rather than initiation, of the remedial action. We also found that one additional review for an IRP site is already overdue by more than 3 years, and at least 3 additional reviews for MMRP sites are overdue by 1 to 5 years. Corps officials cited a variety of reasons for these delays, including turnover of program and project managers; lack of internal staffing resources for conducting the reviews; and multiple report iterations resulting from lengthy internal and external reviews involving Corps staff, EPA headquarters and regional offices, and state regulators. Officials also cited program budget and resource constraints, with one district highlighting a higher programmatic emphasis on meeting DOD’s goal of completing site inspections for MMRP sites by September 30, 2010. In addition, the delay for the 5-year review for an IRP site at the Former Weldon Spring Ordnance Works in Missouri resulted from the discovery of additional contamination during the Corps’ activities to close the site. DOD and the Corps do not have accurate, complete information on how many 5-year reviews are required, completed, or planned for the FUDS program. DOD and the Corps rely on data from FUDSMIS for program- wide information on the status of 5-year reviews at FUDS. To manage and implement the FUDS program, DOD, the Army, and the Corps use FUDSMIS to support planning, programming, budgeting, annual workplan development, execution, and reporting requirements for the FUDS program. This system includes data fields to indicate whether a 5-year review is required at a site, record the actual date the 5-year review was completed, and record the scheduled date of subsequent 5-year reviews, among other things. Moreover, DOD uses these data from FUDSMIS to provide information on the status of 5-year reviews at each FUDS property in its Defense Environmental Programs Annual Report to Congress. Corps policy requires the districts to enter this information in the available data fields in FUDSMIS, and the divisions also have responsibility for ensuring that the data are accurate and complete. In addition, the accuracy and completeness of FUDSMIS data on 5-year review planning is part of one of the FUDS Program Management Indicators established by the Corps to evaluate divisions’ and districts’ performance and to measure and demonstrate progress toward cleaning up contamination at FUDS. However, we found that the three divisions we spoke with did not consistently track 5-year reviews in FUDSMIS. Of these three divisions, officials at one division were not aware of the data fields in FUDSMIS related to 5-year reviews. Officials at the remaining two divisions told us that neither they nor their districts enter the required information on 5- year reviews because there is no way for them to later retrieve that information in a way that would be useful to them in managing their work, such as a report listing sites that require such reviews. In addition, they noted that improvements to the system are needed—particularly to (1) alert them to upcoming reviews they need to conduct, (2) better track the dates that trigger the reviews, and (3) enable the generation of reports on 5-year reviews. Divisions are inconsistent in their approaches to conducting 5-year reviews for sites where they are recommended but not required. Officials in only one division told us that their districts would conduct 5-year reviews for sites where the cleanup will eventually allow unlimited use and unrestricted exposure, but where the cleanup will require more than 5 years to complete—sites for which 5-year reviews are recommended by EPA but not required. Conducting reviews under these circumstances may be important for sites where cleanup may require many years, during which information on emerging contaminants may evolve. For example, the Corps estimates that cleanup of TCE in groundwater at the former Nebraska Ordnance Plant will take more than 100 years. According to division officials, the district managing cleanup of this FUDS is in the process of finalizing the site’s first IRP 5-year review, which will indicate that the remedy remains protective of human health and the environment. The 5-year review will recommend an evaluation of a newly identified exposure pathway—intrusion of TCE vapors from the subsurface into buildings—at a limited portion of the site that is currently residential. In addition, the review discusses changes in toxicity data for carcinogenic and noncarcinogenic effects of TCE. The 5-year review also evaluates the potential long-term impacts of a newly identified exposure pathway at the site—intrusion of TCE vapors from the subsurface into buildings—on the protectiveness of the remedy. Conducting 5-year reviews at this site in the future, although not required under CERCLA and the NCP, will allow the Corps the opportunity to periodically identify whether information on TCE has changed to a degree that may affect the protectiveness of the remedy. 5-year review reports did not always receive the required technical review by Corps’ experts. Since 1999 and 2004, Corps policy has required districts to provide their 5-year review reports for MMRP sites and IRP sites, respectively, to the Corps’ Center of Expertise for comment. According to Corps officials, the Center of Expertise’s staff has up-to-date technical expertise that enables them to help the districts identify and respond to potentially important changes that may occur with respect to emerging contaminants—for example, changes in contaminant standards, toxicity information, and exposure pathways, such as vapor intrusion. When conducting their technical review of the districts’ 5-year review reports, specialists at the Center of Expertise are to assess whether the reports are well-documented, follow relevant guidance, such as EPA’s 2001 guidance on conducting 5-year reviews, and include the necessary statement on the protectiveness of the response actions. They also are to evaluate how the reports address whether the assumptions used at the time of selecting the response action are still valid—such as exposure assumptions, toxicity of contaminants, and cleanup levels. Nine of the ten 5-year reviews completed for MMRP sites were completed after the Corps’ 1999 policy requiring submission of review reports was issued; however, we found that the districts in one division did not submit three of their five reports to the Center of Expertise for technical review and comment. In addition, four of the five 5-year reviews completed for IRP sites were completed after the Corps’ 2004 policy was issued, but we found that one of these four reports was not submitted for technical review and comment. The Corps has reevaluated some sites outside the 5-year review process, but these reevaluations have been infrequent, and officials told us that they have generally not been for the purpose of addressing emerging contaminants. Outside the 5-year review process, Corps districts generally only reevaluate sites at the request of state regulators or other stakeholders. For eligible FUDS properties that were previously determined to have no FUDS eligible projects or no further action required, Corps policy allows districts to re-examine up to five FUDS properties per state per year upon request by states, tribes, EPA, or other stakeholders. In responding to such requests, the Corps may review the records or other original information for the property, as well as any additional information provided by EPA, the state, or tribe concerning potential DOD contamination. However, Corps officials told us that they have not received many requests for re-examination, and the requests received by the divisions and districts we visited were generally not for the purpose of addressing emerging contaminants. For example, officials in one district told us that their re-examination of sites has mostly been in response to concerns about petroleum contamination and munitions issues. In addition, in some instances, the Corps reports that it has re-examined certain FUDS on its own initiative. For example, in 2004, the Corps re- examined certain munitions sites to assess the potential for contamination from munitions constituents, particularly lead—an emerging contaminant on DOD’s watch list—and other heavy metals. Corps officials note that this effort was in response to an Army policy change requiring that munitions constituents be addressed as part of MMRP cleanup projects. The Corps re-examined 196 FUDS munitions sites—many of which were former small arms ranges with no issues relating to munitions or explosives of concern—that had previously been determined to have negligible risk and no need for DOD action. We also found that one of the districts we contacted is in the process of re-examining 513 sites, beginning with records research in 2002. While the Corps has not often re-examined FUDS outside the 5-year review process to date, DOD and Corps officials told us that they would reevaluate the need for additional response actions at sites if there were changes in information on a contaminant. If a hazardous substance release is discovered at a FUDS that was never previously addressed at the site but occurred when the site was under DOD’s jurisdiction, DOD is responsible for addressing that release in accordance with the DERP and CERCLA, regardless of whether the Corps has already completed cleanup of other releases at the site. In addition, DOD may need to initiate further response actions at a site where it has already addressed some releases and no 5-year review is required, but new information becomes available for a contaminant, to fulfill its responsibility in accordance with the DERP and CERCLA. For example, new standards may be established for such contaminants, or previously existing standards or toxicity values may be revised. In addition, new exposure pathways may be identified. Until fairly recently, vapor intrusion—the migration of volatile chemicals such as TCE from subsurface media into the indoor air of overlying buildings—was rarely evaluated as part of human health risk assessments and was not well understood. However, given the current inventory of FUDS still requiring cleanup, there may be practical limitations to re-opening sites for further cleanup. In addition, the need for DOD to re-open FUDS to respond to changes in information or standards for contaminants may also depend on agreements reached with EPA or state regulatory agencies. DOD uses the same method to propose funding for cleanup at FUDS, active sites, and BRAC sites; cleanup funding is based on DERP goals and is generally proportional to the number of sites in each of these categories. Officials in the Military Departments, Defense Agencies, and FUDS program who are responsible for executing the environmental restoration activities at the sites for which they are responsible formulate cleanup budget proposals based on instructions provided in DOD’s financial management regulation and DERP environmental restoration performance goals. DOD’s DERP goals include: reducing risk to human health and the environment; preparing BRAC properties to be environmentally suitable for transfer; having final remedies in place and completing response actions; and fulfilling other established milestones to demonstrate progress toward meeting program performance goals. DERP goals are target dates representing when the current inventory of active and BRAC sites and FUDS are expected to complete the preliminary assessment phase, site inspection phase, or achieve the remedy in place or response complete (RIP/RC) milestone. In addition, Congress has required the Secretary of Defense to establish specific performance goals for MMRP sites. A summary of these goals for the IRP and MMRP is shown in table 2. DOD components plan cleanup actions that are required to meet these goals at the installation or site level. DOD requires components to rank their inventory of sites by relative risk to help make informed decisions about which sites to clean up first. Using these risk rankings, as well as other factors, components set more specific restoration targets each fiscal year to demonstrate progress and prepare a budget to achieve those goals and targets. The Department of the Army has established more specific performance goals for FUDS in its Environmental Cleanup Strategic Plan. For example, the Corps’ goals for the FUDS IRP are to achieve RIP/RC at 46 percent of all 357 high-risk sites containing HTRW by the end of FY 2008, 48 percent of all 147 medium-risk HTRW sites by the end of FY 2011, and all low-risk HTRW sites by the end of FY 2020. For the FUDS MMRP, the Corps’ goals are to complete 40 percent of the baseline site inspections by the end of FY 2008, 55 percent of the baseline site inspections by the end of FY 2009, 100 percent of the baseline site inspections by the end of FY 2012, and all site inspections by the end of FY 2014. Another factor that can influence the proposed budgets and obligations among site categories is the need to fund long-term management activities. While DOD uses the number of sites achieving RIP/RC status as a primary performance metric, sites that have reached this goal may still require long-term management and, therefore, additional funding for a number of years. Table 3 shows the completion status for active and BRAC sites and FUDS, as of the end of FY 2008. See appendix V for the completion status of these sites by component for FY 2004 through 2008. The data show that there are currently significantly fewer FUDS that require long-term management—and, consequently, require less funding for this activity—than do active and BRAC sites. Corps officials told us that since FUDS are located on properties that have been transferred outside DOD’s control, they prefer to clean sites to allow unlimited use and unrestricted exposure, when possible. However, Corps officials also said that ongoing site inspections at FUDS MMRP sites indicates that more of these sites may require long-term management in the future. DOD data show that, in applying the broad restoration goals, performance goals, and targets, cleanup funding is generally proportional to the number of sites in the active, BRAC, and FUDS site categories. Table 4 shows the total DERP inventory of sites, obligations, and proportions for FY 2008. Since DERP was established, approximately $18.4 billion dollars has been obligated for environmental cleanup at individual sites on active military bases, $7.7 billion for cleanup at sites located on installations designated for closure under BRAC, and about $3.7 billion to clean up FUDS sites. During FY 2004 through 2008, about $4.8 billion was spent on environmental cleanup of sites on active bases, $1.8 billion for cleanup at BRAC sites, and $1.1 billion for FUDS sites. Appendix VI provides DOD’s funding obligations and estimated costs to complete environmental cleanup by military component and program category for FY 2004 through 2008. The Corps uses risk-based criteria and other factors to prioritize FUDS for cleanup. Since cleanup projects or phases of work cannot all be completed in any given year with the funding the Corps receives for the FUDS program, the Corps must prioritize sites for cleanup. Based on sites’ risks, as well as other factors, districts prepare annual work plans prioritizing their projects and submit these to their division, which combines the districts’ work plans into a single division work plan. Divisions send their annual work plans to the Corps’ headquarters, which sends the FUDS annual work plan to the Department of the Army for approval. While the risk levels of sites are a significant factor in determining cleanup priorities, high risk sites are not always addressed before low risk sites. FUDS program data indicate that, as of the end of FY 2008, 35 percent of high- risk MMRP and HTRW sites (218 of 622 sites) had achieved response complete status, compared to 28 percent of medium risk sites (86 of 303 sites) and 21 percent of low-risk sites (110 of 530 sites). Based on site-specific information, the Corps uses several methods to assign risk-based priority levels to sites to categorize them for cleanup. The method used depends on whether the site contains HTRW, which fall under the IRP; munitions under the MMRP; or building debris under the BD/DR program. Consequently, the Corps may use multiple methods at a single FUDS property that contains multiple types of sites—for example, a munitions site and a hazardous waste site. According to DOD guidance, the components also use the same methods to prioritize HTRW and MMRP sites at active and BRAC installations for cleanup. Appendix VII provides information on the number of high-risk sites at FUDS and active and BRAC installations, for FY 2004 through 2008. At HTRW sites, the Corps uses the Relative Risk Site Evaluation (RRSE) to assign a relative risk level of high, medium, or low, based on an evaluation of three factors for four environmental media: sediment, surface soil, surface water, and groundwater. These factors include the: contaminant hazard factor, which compares the maximum concentrations of contaminants detected to benchmark comparison values; migration pathway factor, which summarizes the likelihood that contamination will migrate; and receptor factor, which summarizes human or ecological receptors that could be exposed to contamination. At MMRP sites, the Corps uses the Munitions Response Site Prioritization Protocol (MRSPP), which DOD began implementing in FY 2007 to assign sites a relative priority level of 1 (highest hazard) to 8 (lowest hazard) using three modules. Explosive hazard evaluation and chemical warfare materiel hazard evaluation modules, which evaluate the presence and accessibility of these hazards and the receptors that may be affected, and A health hazard evaluation module, which evaluates chronic health and environmental hazards associated with munitions constituents—as well as incidental nonmunitions-related contaminants—and builds on the framework established in the RRSE. According to DOD and Corps officials, the Corps is in the process of applying the MRSPP to FUDS, but as of the end of FY 2008, no FUDS had been assigned a final MRSPP score. FUDS program data available on the relative risk levels of MMRP sites are based on the method used prior to implementation of the MRSPP—the Risk Assessment Code, which the Corps used to assign munitions sites a risk-based score of 1 (highest priority) to 5 (no DOD action necessary). This method evaluated potential safety hazards associated with explosives based on the severity and probability of the hazard. According to DOD and Corps officials, Risk Assessment Code scores are no longer used and are being replaced by the relative priority assigned by the MRSPP. The Corps assigns a risk-based priority level to containerized waste sites, based on the condition and location of the storage tanks. For example, a site with known leaks or spills would have a priority of 1, while sites with tanks that are not leaking and located in urban and rural areas would have priority levels of 2 and 3, respectively. The Corps assigns a risk-based priority level to building demolition and debris removal sites, based on the location of the site and ease of access to the site. For example, a site in an urban or densely populated area and with unrestricted access would have a priority of 1, while a site in a rural area or remote island with a guarded entrance would have a priority of 9. In addition, DOD and Corps officials told us that a small number of high- priority FUDS receive separate funding from the Corps’ headquarters—in addition to the funds they receive from the relevant district—to guarantee that cleanup at these sites is funded. These are high-risk, high-visibility sites with cleanup costs high enough to consume a district’s entire budget. According to DOD and Corps officials, the list of such sites may change from year to year. Table 5 identifies the FUDS that received such funding in FY 2008 and the Corps’ estimated costs to complete cleanup at these sites. DOD and Corps officials told us that in addition to considering a site’s risk level, the Corps sets cleanup priorities based on program goals, which have evolved over time. In the past, according to these officials, the Corps initially focused on addressing building demolition and debris removal sites and containerized waste sites—FUDS program data indicate that 81 percent of building demolition and debris removal sites and 82 percent of containerized waste sites have reached response complete status, compared to 54 percent of HTRW sites and 33 percent of MMRP sites without chemical warfare materiel. DOD officials also said that the Corps has made significant progress in completing cleanup at building demolition and debris removal sites and containerized waste sites because they can be completed quickly and at less cost. In contrast, they told us that hazardous, toxic, and radioactive sites and MMRP sites are generally larger and more complex than building demolition/debris removal sites and containerized waste sites, and require more time and investment to clean up. Table 6 shows the percentage of sites that have achieved response complete status by project category, as of the end of FY 2008. According to DOD and Corps officials, containerized waste and building demolition/debris removal sites are now a low priority for the Corps because it is trying to focus on meeting DOD’s goals for the FUDS program and these goals do not measure cleanup of containerized waste and building demolition sites. Specifically: IRP: DOD’s goal is to reduce risk, have a remedy in place, or achieve response complete status at high, medium, and low risk sites by the end of FY 2007, 2011, and 2020, respectively. According to DOD’s FY 2008 Defense Environmental Programs Annual Report to Congress, DOD did not meet its goal for high relative risk FUDS by the end of FY 2007, but is working aggressively to complete required cleanup actions at these sites, while mitigating potential threats to human health and the environment. MMRP: The John Warner National Defense Authorization Act for FY 2007 specified the following two goals for adoption by DOD: complete preliminary assessments by the end of FY 2007 and complete site inspections by the end of FY 2010 and complete remedy in place or response complete by a date set by the Secretary of Defense. However, because the Corps centrally funds MMRP site inspections with a budget established by the Corps’ headquarters and Center of Expertise, other sites do not compete with MMRP site inspections in cleanup prioritization. By the end of FY 2008, DOD had completed preliminary assessments for 99 percent of the FUDS MMRP sites, according to DOD’s FY 2008 Defense Environmental Programs Annual Report to Congress, and will reevaluate current goals at the end of FY 2010. DOD has not yet established a date for achieving remedy in place or response complete status for FUDS MMRP sites. The Corps’ headquarters sets annual performance measures for its divisions and districts—such as achieving remedy in place or response complete status at a certain number of sites each year—that can also play a role in how districts prioritize sites. For example, officials at two districts we visited told us that in order to meet the remedy in place or response complete measure, they try to focus on sites where work is already in progress and cleanup can be completed. Officials at one of these districts told us that it is not appropriate to use risk rankings exclusively in deciding which sites to clean up and that they cannot stop work on sites where actions are already under way because they face pressure to meet the cleanup performance measures. Although containerized waste sites are currently a low priority for the FUDS program, officials at this district also told us they are working on many such sites that are not high-risk, but are low-cost and can be completed in a matter of months. Similarly, officials at another district told us that once a site enters a phase of the CERCLA cleanup process, they try to complete that phase before starting work on another site. However, cleanup costs for sites can also influence the order in which districts address sites. Officials at one district told us that a high-cost site could consume the district’s entire annual budget. While certain high-risk sites with high costs may receive additional funding from the Corps’ headquarters, another district also told us that they may delay a cleanup action until they can allocate enough funds to complete that action. The Corps also recognizes in its FUDS program policy and FUDS program management plan for FY 2009 that the concerns of regulators, the Congress, and the public can influence the Corps’ decisions about which sites to address first and can potentially result in decisions to fund projects that are not high-risk. For example, the Corps’ FUDS program policy states that regulator involvement through Statewide Management Action Plans (SMAP) is essential to the successful implementation of the relative risk concept. The SMAP program at FUDS began in 2001, and the primary purpose of a SMAP is to involve regulators in the development of life-cycle plans for the investigation and cleanup of all FUDS properties within a state. EPA, states, and the Corps may participate in jointly developing the SMAP, which is a living document that had, among its goals, determining a statewide cleanup priority for each property and project. Of the 57 states and territories, over 30 had SMAPs or equivalent agreements, as of December 2008, according to the Association of State and Territorial Solid Waste Management Officials. In the spring of 2008, the association surveyed the states about the effectiveness of SMAPs. Based on responses from 41 states, it reported that the overall effectiveness of SMAPs varied with regard to prioritizing and funding sites for cleanup, among other things. In addition, the Defense and State Memorandum of Agreement (DSMOA), which provides a mechanism for state or territory involvement in environmental restoration activities at DOD installations—including FUDS—and state laws and regulations play a role in how the Corps prioritizes and funds sites for cleanup. The districts record certain factors that may drive prioritization and funding of sites in the “legal drivers” data fields in FUDSMIS. Our analysis of FUDS program data for one of these legal drivers indicated that 72 percent of sites with memorandum of agreement commitments—such as DSMOAs between the Corps and state regulatory agencies—had reached response complete status, compared to 56 percent of sites without such agreements. Similarly, we found that 74 percent of sites subject to state laws and regulations requiring a response within a specified period had reached response complete status, compared to the 56 percent of sites not subject to such requirements. Community or public concerns, as well as owner or congressional interest, also shape the Corps’ decisions on which sites to address first. In particular, officials at all four of the districts we contacted noted that congressional interest can influence decisions on the order in which sites are addressed. Officials at one district told us that this would not lead a medium or low-risk site to be prioritized and funded for cleanup above a high-risk site, but officials at another district and the FUDS program management plan for FY 2009 note that congressional interest could potentially result in a decision to fund a site not considered high risk. However, our analysis of FUDS program data for the congressional or owner interest legal driver showed that 59 percent of sites with this driver had reached response complete status, compared to 57 percent of sites without this legal driver. In addition, officials at one division told us that the Corps’ past focus on addressing containerized waste and building demolition and debris removal projects was because these were the types of hazards that politicians wanted addressed. Moreover, DOD and Corps officials told us that the Corps may still work on these types of sites, which are currently low risk priority, if Congress or other stakeholders, such as state regulators were to demand it. DOD and the Corps report what they consider to be management and support costs for the FUDS program as part of their overall budget proposal to the Congress. DOD and the Corps track program management and support costs, such as salaries for FUDS personnel staffed at the Corps’ headquarters and the operating costs for FUDSMIS. Overall management and support costs and direct management and support costs, as a proportion of the total FUDS budget, have decreased slightly between FY 2004 and 2008, largely due to a restructuring of FUDS responsibilities among the Corps’ field districts and specific DOD direction to the Corps to lower certain costs. The Corps implements several measures to ensure control over how these funds are spent, both by restricting who records expenditures in the financial management information system and assigning these funds a specific tracking code. Federal agencies and programs are not required to use any specific definition of overhead for budgeting or reporting purposes. However, DOD’s Financial Management Regulation for environmental restoration programs—including FUDS—directs that administrative and overhead expenses be identified under the “Program Management and Support” element in budget justification materials. DOD submits a three-part budget justification request to the Congress each year for each DERP program. The first part of the budget submission is the overall Program Management and Support budget, while the second part includes all site- specific cleanup costs, and the third part includes progress toward the DERP goals. DOD divides program management and support funding for the FUDS program into direct and indirect costs. The components of direct and indirect program management and support costs are shown in table 7. The following table shows the amounts obligated for all FUDS activities from FY 2004 through 2008. See appendix VIII for more detailed cost information for the FUDS program. From FY 2004 through 2008, direct program management and support costs for the FUDS program have generally decreased, both in dollar amount and as a percentage of the overall dollars obligated for the FUDS program, largely as a result of a restructuring effort by the Corps. Table 9 shows the total amount that the Corps obligated for both direct and indirect program management and support costs and Table 10 shows both as a percentage of the total program management and support budget and as a percentage of the overall amount obligated for the FUDS budget from FY 2004 through 2008: In FY 2006, the Deputy Assistant Secretary of the Army for Environmental, Safety and Occupational Health directed the FUDS program to reduce the program management and support costs of the program in order to make more funds available for cleanup projects. In addition, the Corps set goals which began taking effect in FY 2007 to reduce direct program management and support funding from FY 2006 levels. Under these goals, by the end of FY 2009, direct management and support costs need to be reduced by 25 percent of the FY 2006 funding level, and this level has to be maintained through FY 2010 and beyond. In order to achieve these goals, the Corps restructured the way the FUDS program was administered by reducing the number of districts with FUDS responsibilities from 22 districts to 14 districts. These 14 districts operate within 7 regional divisions, with 2 Corps districts with FUDS program or project management responsibilities in each Corps division. However, Corps officials told us they cannot determine the overall savings they have achieved to reduce program management and support costs. For example, they said the Corps cannot measure the reduction in full-time employees assigned to FUDS program as a reduction in program management and support costs because a variety of employees, such as those who provide legal and real estate expertise at the district level, must continue to charge their time to the FUDS program. In addition, Corps officials in the divisions and districts we visited told us that they now charge time to the FUDS program for activities that they would have charged to program management and support prior to the FUDS transformation. Several factors help to ensure that overall program management and support funds are spent only on items the Corps has approved. In this regard, only resource managers at the Corps’ headquarters are able to add money to the Corps of Engineers Financial Management System which is how money, including all program management and support funds, is distributed for the FUDS program. The program management and support funding is also assigned a specific code, which can be used to track its expenditures in the financial system. Additionally, each division receives only a relatively small amount of program management and support funding in relation to their overall budget for the FUDS program. Corps’ officials in the divisions and districts we visited told us that these funds are critical to their operations, because they pay for manager’s salaries, travel for training, and respond to administrative requests from headquarters and state regulators. Due to the limited amount of these funds, division and district FUDS managers keep close watch on them, according to Corps officials, and vigorously question any expenditure of these funds, which helps to ensure that program management and support resources are spent only on the approved items. Although the issues we identified regarding the Corps’ 5-year review process have implications for all FUDS where 5-year reviews are required or may be appropriate, they are particularly relevant to sites with emerging contaminants. As more FUDS begin to reach the cleanup phase and knowledge on emerging contaminants continues to evolve, 5-year reviews may play a more important role in identifying and responding to changes in information used in FUDS cleanup decisions, such as toxicity values and standards. The issues we identified raise concerns about the extent to which the districts and divisions (1) will record and review data on 5-year reviews in the Corps’ information management systems, (2) will conduct all required 5-year reviews on time, and (3) will consistently conduct reviews when appropriate. In addition, the lack of technical review of some of these reports by the Corps’ Center of Expertise raises concerns about the Corps’ ability to fully identify and appropriately respond to changes, such as evolving knowledge and standards for emerging contaminants. Without timely, accurate, and complete 5-year reviews for sites and reliable information on the status of such reviews, the Corps cannot be certain that remedies at FUDS remain protective of human health and the environment and cannot adequately inform stakeholders— including the Congress, the public, and regulators—regarding actual site conditions. To help ensure that the remedies at FUDS continue to protect human health, safety, and the environment, we are making three recommendations. We recommend that the Secretary of Defense direct the Corps to conduct 5-year reviews for sites where emerging contaminants are present and the cleanup will eventually allow unlimited site use and unrestricted exposure, but will require more than 5 years to complete, consistent with EPA’s guidance that such reviews are appropriate, even if not required; modify its FUDS program information management system to allow districts to more easily track information on 5-year reviews, and take steps to ensure that the districts utilize this system to plan for 5-year reviews and track progress on completing them; and determine why districts have not always completed timely 5-year reviews and provided all 5-year review reports to the Center of Expertise for comment—consistent with Corps guidelines—and develop procedures and controls to address these causes. We provided a draft of this report to DOD for official review and comment. DOD agreed with two of our recommendations and partially agreed with one. Specifically, DOD agreed with our recommendation that the Corps modify its FUDS program information management system to allow districts to more easily track information on 5-year reviews, and take steps to ensure that the districts utilize this system to plan for 5-year reviews and track progress on completing them. DOD stated that the Army has initiated actions to modify the FUDS information management system to address the recommendation. DOD also agreed with our recommendation that the Corps determine why districts have not always completed timely 5-year reviews and provided all 5-year review reports to the Center of Expertise for comment—consistent with Corps guidelines—and develop procedures and controls to address these causes. DOD said it will ensure that the Corps conducts a review of the FUDS 5-year review process, including management, tracking, and record keeping procedures. DOD partially agreed with our recommendation that the Corps conduct 5-year reviews at FUDS where emerging contaminants are present and the cleanup will eventually allow unlimited site use and unrestricted exposure, but will require more than 5 years to complete, consistent with EPA guidance that such reviews are appropriate, even if not required. DOD said that it will ensure that the Corps conducts 5-years reviews where required by CERCLA, but did not agree to conduct the additional precautionary reviews that are recommended by EPA. We continue to believe that, particularly for sites where emerging contaminants are present, it is important to conduct reviews when the cleanup will eventually allow unlimited use and unrestricted exposure, but will require more than 5 years to complete. Over an extended cleanup period, information on these contaminants may evolve, and these reviews may play an important role in identifying and appropriately responding to such changes as revised toxicity values or standards and new exposure pathways. If the Corps does not conduct reviews under these circumstances, it is missing an important opportunity to evaluate whether remedies remain protective of human health and the environment and to fully inform stakeholders— including the Congress, the public and regulators—regarding actual site conditions. DOD also provided technical and clarifying comments, which we incorporated as appropriate. DOD’s letter is included in appendix IX. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense. In addition, the report will be available at no charge on our Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or stephensonj@gao.gov. 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 X. Between 1958 and 1980, the United States Air Force operated a radar station on approximately 100 acres atop Mt. Umunhum and Mt. Thayer near San Jose, California. In 1986, the Midpeninsula Regional Open Space District (MROSD), a California state government entity, acquired the former Almaden Air Force Station. The property contained various structures, including radar towers, operations buildings, housing facilities, a power plant, above- and below-ground fuel storage tanks, and a sewer treatment plant. MROSD staff occupied several buildings from 1986 to 1998. A 1989 earthquake damaged some buildings, transformers, and fuel tanks. In 1991, the U.S. Army Corps of Engineers (Corps) determined that the site was eligible for cleanup under the Formerly Used Defense Sites (FUDS) program and ranked it as high risk due to the presence of various contaminants in transformers, drums, and storage tanks. Between 1994 and 1996, the Corps removed transformers, above, and below-ground fuel storage tanks and associated piping, and drums filled with chemicals. After these removal actions, the Corps turned its attention to other FUDS in the Corps District for a number of years. In 2006, the Corps returned to remove more waste from buildings, pipes, generators, and sumps. In 2007, the Corps initiated a site inspection to determine if it had overlooked any contamination, particularly polychlorinated biphenyls (PCB) from electrical transformers and petroleum from underground storage tanks and to determine if any further remediation action is needed. Corps officials anticipated completing the investigation in 2009. From 1991 through 2008, the Corps spent $3.5 million investigating, removing materials, and taking remedial actions at the site. In addition to cleaning up any remaining contamination, MROSD also wanted the Corps to demolish and remove all remaining structures—many of which contain deteriorating lead-based paint and asbestos—so that it may open the site to the public for recreational use. Department of Defense (DOD) and Corps officials told us that no building demolition/debris removal can be conducted at this property because the buildings and structures were not unsafe at the time of transfer out of DOD jurisdiction. They said that MROSD is responsible for maintaining all buildings and structures on the property, beginning on the date they took title. DOD and Corps officials also said the Defense Environmental Restoration Program (DERP) authority does not extend to the removal of buildings and structures that become unsafe after they are transferred out of DOD jurisdiction and then not maintained by the subsequent owner. In fiscal year (FY) 2009, MROSD requested $4 million from Congress for economic adjustment programs, including feasibility studies, legal services, and other activities related to cleaning up the site and language in the National Defense Authorization or Appropriations Acts directing DOD to clean up the site under the Defense Base Closure and Realignment Act of 1990. No language or funding regarding Almaden was included in either law. To determine how the U.S. Army Corps of Engineers (Corps) addresses emerging contaminants at formerly used defense sites (FUDS), and the extent to which the Corps reevaluates sites to determine the need to address emerging contaminants, we reviewed key laws, regulations, policy, and guidance for the Department of Defense (DOD), the Department of the Army, the Corps, and the Environmental Protection Agency (EPA). We interviewed officials from DOD’s Office of the Deputy Undersecretary of Defense for Installations and Environment and Chemical and Material Risk Management Directorate; the Department of the Army’s Office of the Assistant Secretary of the Army for Installations and Environment and Office of the Assistant Chief of Staff for Installation Management, and the Corps Directorate of Military Programs; and EPA’s Office of Solid Waste and Emergency Response and Federal Facilities Restoration and Reuse Office. We also interviewed officials at two state associations—the National Governors Association and the Association of State and Territorial Solid Waste Management Officials—to obtain their perspectives on the approaches DOD and the Corps use to address emerging contaminants. We reviewed program information obtained from FUDS program managers in four of seven Corps military divisions—the North Atlantic, Northwestern, South Atlantic, and South Pacific divisions—and 4 of the 14 districts responsible for executing the FUDS program—the New England, Omaha, Sacramento, and Savannah districts—and technical experts at the Corps’ Environmental and Munitions Center of Expertise. We selected the four divisions based on (1) geographic dispersion, (2) the number of FUDS sites within each division, and (3) planned obligations for fiscal year (FY) 2009, and, within these four divisions, we selected 4 of the 8 districts with FUDS program management responsibility. We reviewed additional information from the Corps on their 5-year review process from the South Atlantic division and districts in Kansas City and Los Angeles, and examined the completed 5- year review reports from the North Atlantic, Northwestern, and South Pacific divisions. To evaluate the Corps’ process for addressing emerging contaminants and prioritizing sites for cleanup, we reviewed and analyzed the nationwide property and project data in the Corps’ Formerly Used Defense Sites Management Information System (FUDSMIS) through September 30, 2008, the end of their most recent reporting cycle. We assessed the reliability of relevant fields in this database by electronically testing for obvious errors in accuracy and completeness, reviewing information about the data and the system that produced them, and interviewing agency officials knowledgeable about the data. When we found inconsistencies, we worked with DOD and Corp’s officials to correct the discrepancies before conducting our analyses. We determined that the data needed for our analyses were sufficiently reliable for the purposes of our report. To assess DOD’s process for determining funding levels for cleanup among FUDS and other sites with defense waste, we spoke with officials at the Office of the Deputy Undersecretary of Defense for Installations and Environment and officials at Corps headquarters who manage the FUDS program about how budget requirements are determined, and the targets or goals that exist for the overall Defense Environmental Restoration Program (DERP). We also reviewed DOD’s budget justification documents for FY 2004 through 2009 and budget data from officials at the Office of the Deputy Undersecretary of Defense for Installations and Environment and DOD’s Defense Environmental Programs Annual Report to Congress for FY 2004 through 2008. In order to determine the Corps’ criteria for prioritizing FUDS for cleanup and how closely the Corps follows these criteria, we obtained and reviewed relevant policy, guidance, laws, and regulations directing DOD’s cleanup activities, including relevant risk ranking protocols for contaminated sites. We interviewed and obtained information from officials from the Office of the Deputy Undersecretary of Defense for Installation and Environment, Corps headquarters personnel in charge of managing FUDS, three of seven Corps military divisions and 4 of 14 districts responsible for executing the FUDS program, and the Corps’ Environmental and Munitions Center of Expertise. We also gathered and analyzed data from FUDSMIS, as well as the Defense Environmental Programs Annual Reports to Congress. In addition, we interviewed officials at two state associations—the National Governors Association and the Association of State and Territorial Solid Waste Management Officials—to obtain their perspectives on the approaches DOD and the Corps uses to prioritize FUDS for cleanup. To review the components and total amounts of management and support costs for the FUDS program and how these costs have changed over time, we reviewed DOD’s budget justification documents for FY 2004 through 2009 and interviewed and obtained budget data from officials at the Office of the Deputy Undersecretary of Defense for Installation and Environment, who are in charge of compiling the overall DERP budget, as well as Corps officials in charge of budgeting for the FUDS program. We also reviewed relevant federal accounting standards, financial management regulations, and guidance. To determine the Corps’ accountability measures for these costs, we interviewed Corps headquarters personnel in charge of managing FUDS, and conducted interviews and gathered data from three of seven Corps Divisions responsible for executing the FUDS program, and 4 of 14 Corps Districts. We did not conduct a financial audit of the FUDS program. In addition, at the request of the committee, this report provides information on the status of the Corps’ cleanup efforts at the former Almaden Air Force Station. We conducted interviews and obtained information from the Corps district and division officials in charge of cleanup at Almaden and, in addition, we visited the site and interviewed and obtained detailed site information from the current owners, the Midpeninsula Regional Open Space District. We conducted this performance audit from September 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. The Department of Defense (DOD) defines an emerging contaminant as a contaminant that (1) has a reasonably possible pathway to enter the environment; (2) presents a potential unacceptable human health or environmental risk; and (3) either does not have regulatory standards based on peer-reviewed science or has regulatory standards that are evolving due to new science, detection capabilities, or exposure pathways. Tables 10 through 13 provide information on the occurrence of emerging contaminants in groundwater, surface water, soil, and sediment at formerly used defense sites (FUDS) with hazardous, toxic, and radioactive waste (HTRW). The tables are based on the sampling information the U.S. Army Corps of Engineers used in assigning risk levels to HTRW FUDS through its Relative Risk Site Evaluation (RRSE) process. More specifically, they include the numbers of HTRW sites where contaminants on DOD’s action and watch lists were detected and the range of the maximum concentrations detected across these sites. The data shown in Tables 11 through 14 do not necessarily represent all FUDS where these contaminants may have been detected, for several reasons. For example: Some sites do not have a relative risk score. Certain sites are excluded, such as those with containerized hazardous, toxic, and radioactive waste and those that have achieved the remedy-in-place or response complete (RIP/RC) milestone. For other sites, the Corps has not completed the relative-risk site evaluation process. Naturally occurring contaminants are not included in the RRSE if they are detected within established background concentration ranges. The contaminant data used in the RRSE are collected in the early phases of the cleanup process. Based on our interviews with selected Corps divisions and districts, the extent to which districts update the RRSE later is unclear. The Corps is testing for some of these contaminants at munitions sites as part of the MMRP site inspections—those data are not included in these tables and are not yet available. Perchlorate is a chemical used in propellant for certain rockets and missiles and is also found in fireworks, road flares, automobile air bags, and other manufactured items. Perchlorate can also occur naturally and is found in certain fertilizers. Exposure to perchlorate can affect the thyroid gland by blocking the uptake of iodide and may cause developmental impairments in fetuses of pregnant women. Perchlorate has been found in drinking water sources nationwide, although the extent of perchlorate contamination was not revealed until 1997, when new analytical methods enabled measurement of perchlorate at low concentrations. According to the Environmental Protection Agency (EPA), in testing of 3,865 public water supplies between 2001 and 2005, approximately 160 systems (4.1 percent)—located in 26 states and 2 territories—had at least one detection of perchlorate at levels greater than or equal to 4 micrograms per liter (µg/l, or parts per billion (ppb)). In addition, the Food and Drug Administration and Centers for Disease Control and Prevention have identified perchlorate in a wide variety of foods, as well as commercially available powdered infant formulas. There are currently no federal standards for the presence of perchlorate in water. DOD has used perchlorate in propellant for certain rockets and military missiles since the 1940s. In 2003, DOD issued an Interim Policy on Perchlorate Sampling, which directed DOD components to sample for perchlorate at any previously unexamined sites—including formerly used defense sites (FUDS)—where (1) there was a reasonable basis to suspect that a release has occurred as a result of DOD activities, and (2) a complete human exposure pathway was likely to exist; and consider, in determining the likelihood of perchlorate occurrence, the volume of perchlorate used or disposed and/or the intensity of perchlorate-related activities at the site. Because of uncertainties as to the concentration at which perchlorate should be regulated, DOD, the Department of Energy, the National Aeronautics and Space Administration, and EPA asked the National Research Council to assess the potential adverse health effects of perchlorate. At the conclusion of its study in 2005, the Council recommended a reference dose of 0.7 µg per kilogram of body weight per day, which translates to a drinking water equivalent level of 24.5 ppb. EPA adopted this recommended level and, in January 2006, directed its regional offices to use this concentration as a preliminary remediation goal when cleaning up sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the National Oil and Hazardous Substances Pollution Contingency Plan, the regulation that implements CERCLA. In response to the Council’s study and EPA’s new guidance, DOD updated its perchlorate policy in January 2006. With regard to FUDS, the policy directed DOD to (1) test for perchlorate, (2) conduct a site-specific risk assessment if perchlorate levels in water exceed 24 ppb, and (3) prioritize the site for risk management if the risk assessment indicates that the perchlorate contamination could potentially result in adverse health effects. According to DOD, the sampling requirement applied to all media, and the “level of concern” of 24 ppb was intended to apply to current and potential sources of drinking water. In December 2008, EPA issued an Interim Drinking Water Health Advisory for perchlorate, which established 15 ppb as the advisory level for perchlorate in water. Unlike the previous level of 24.5 ppb, this new level incorporates exposure to perchlorate from food sources. In January 2009, EPA directed its regional offices to use 15 ppb as a preliminary remediation goal when cleaning up sites under CERCLA where there is an actual or potential drinking water exposure pathway and no applicable or relevant and appropriate requirements (ARAR) for perchlorate. In April 2009, DOD responded by again updating its perchlorate policy, adopting a preliminary remediation goal of 15 ppb for perchlorate where (1) there is an actual or potential drinking water exposure pathway, and (2) no ARARs exist under federal or state laws. While EPA has taken some steps to consider regulation of perchlorate under the Safe Drinking Water Act, it issued a preliminary determination in October 2008 not to regulate the chemical in drinking water, citing the lack of a “meaningful opportunity for health risk reduction” through a national drinking water regulation. As of August 2009, EPA is considering its final regulatory determination for perchlorate and expects to issue a final health advisory concurrent with the final regulatory determination. In the absence of a federal perchlorate standard, some states have established standards for the chemical—for example, Massachusetts and California have promulgated drinking water standards for perchlorate. In addition, some states have established nonregulatory action levels or advisories for perchlorate. The Corps has sampled, and is continuing to sample, for perchlorate at FUDS. As of April 2008, the Corps had sampled 95 FUDS properties for perchlorate. According to DOD data, sampling performed at FUDS before June 2006 detected perchlorate at 13 of 32 FUDS properties sampled, five of which had concentrations exceeding 4 ppb in water. The Corps took action at 5 of the 13 FUDS properties where perchlorate was detected and determined that the remaining 8 FUDS properties did not require any actions to address perchlorate. Table 15 presents data for the perchlorate sampling conducted at FUDS between June 2006 and April 2008, by environmental media. According to DOD, there are only two FUDS properties where DOD- caused perchlorate concentrations in groundwater have exceeded EPA’s and DOD’s current preliminary remediation goal of 15 ppb. Specifically: At the Spring Valley FUDS property in Washington, D.C., perchlorate was detected in 45 of 51 groundwater samples between June 2006 and April 2008 at concentrations ranging from 0.093 ppb to 146 ppb. Perchlorate concentrations in six samples exceeded EPA’s and DOD’s preliminary remediation goal of 15 ppb. During this period, perchlorate was also detected in 22 of 23 surface water samples at concentrations ranging from 0.361 ppb to 7.18 ppb. At the Boardman Air Force Range FUDS property in Oregon, perchlorate was detected prior to June 2006 in seven of nine groundwater samples at concentrations ranging from 0.2 ppb to 20.1 ppb, as well as at 0.34 ppb in the single surface water sample collected. The Corps is testing FUDS for perchlorate during the site inspections currently being conducted under the Military Munitions Response Program (MMRP), which DOD established in September 2001 to address potential explosive and environmental hazards associated with munitions at active installations and FUDS. The MMRP includes sites with munitions and explosives of concern, munitions constituents, and chemical warfare material. Many of the FUDS sampled prior to FY 2007 will be resampled as part of the MMRP. According to DOD officials, sampling conducted as part of the FUDS MMRP site inspections, as of July 2009, had identified perchlorate in: 116 of 247 water samples analyzed, at concentrations ranging from 0.0088 ppb to 1.91 ppb. These samples were collected from 85 FUDS MMRP sites. 9 of 38 soil samples analyzed, at concentrations ranging from 0.27 ppb to 3.0 ppb. These samples were collected from 6 FUDS MMRP sites. TCE has been widely used as a degreasing agent in metal cleaning for industrial and maintenance processes since the 1950s. Low levels of exposure to TCE have been documented to cause headaches and difficulty concentrating. High-level exposure may cause dizziness, headaches, nausea, unconsciousness, cancer, and possibly death. TCE in groundwater can take decades to clean up—for example, cleaning up TCE at the Former Nebraska Ordnance Plant site is estimated to take 130 years. According to officials with the Corps’ Center of Expertise, TCE is the most significant emerging contaminant in terms of prevalence at FUDS and is the most significant emerging contaminant in terms of the cost of cleanup at FUDS. The Corps has detected TCE at a minimum of 166 sites—15 percent of the hazardous, toxic, and radioactive waste (HTRW) sites—on 143 FUDS properties. EPA has regulated TCE in drinking water since 1989 with a maximum contaminant level of 5 ppb. However, concerns about this contaminant have increased in recent years. For example, in 2006, NRC reported that the evidence on carcinogenic risk and other health hazards from exposure to TCE has strengthened since 2001. New information may lead to changes in the toxicity values used to assess risks of TCE exposure. In making cleanup decisions for FUDS, the Corps uses toxicity values for contaminants in conducting assessments of a site’s risks to human health and the environment. EPA’s Integrated Risk Information System (IRIS), a database that contains EPA’s scientific position on the potential human health effects of exposure to more than 540 chemicals, is DOD’s and EPA’s preferred source for the fundamental toxicity information needed to develop human health risk assessments. However, EPA has not finalized its IRIS assessment of the risks TCE may pose. Given EPA’s ongoing assessment and different preferences among regulatory agencies, DOD has used a variety of different toxicity values in assessing risks of TCE exposure at FUDS. In January 2009, EPA issued interim guidance recommending toxicity values to use in assessing potential cancer and noncancer risks from inhalation of or oral exposure to TCE. However, EPA withdrew this guidance in April 2009, stating that the agency would further evaluate the recommendations regarding the noncancer TCE toxicity value to use in assessing the risk of inhalation exposures. DOD plans to use the interim values in the withdrawn EPA guidance, but DOD officials noted that an EPA regional office or state regulatory agency may press DOD to use a value preferred by an individual risk assessor at that agency. According to DOD, in these cases, DOD works with EPA and state officials to develop an agreed-upon value. In addition, intrusion of TCE vapors from soil or groundwater into buildings is a relatively newly-identified exposure pathway. A federal standard exists for TCE in indoor air at places of work, but not in residences or other buildings. EPA, the Army, and DOD have issued guidance on vapor intrusion, and officials told us that the Corps evaluates the vapor intrusion pathway, when appropriate, through the site-specific risk assessment. In 2002, EPA issued its Office of Solid Waste and Emergency Response (OSWER) Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils (Subsurface Vapor Intrusion Guidance), which has not been finalized and, according to DOD, is not followed by all state health agencies. In 2006, the Army released its Interim Vapor Intrusion Policy for Environmental Response Actions, which established environmental response actions related to vapor intrusion modeling and investigation for existing and future buildings. It also noted that potential vapor intrusion risks in existing or future buildings will be evaluated as part of the CERCLA Five-Year Review, consistent with the guidelines in the policy, if these risks were not evaluated in the Record of Decision or Decision Document for the site. In January 2009, DOD published its Tri-Services Handbook for the Assessment of the Vapor Intrusion Pathway, a technical guidance manual that discusses various approaches for evaluating the vapor intrusion pathway, including information on developing and interpreting vapor intrusion investigations. As of July 2009, DOD was revising its 2001 Defense Environmental Restoration Program Management Guidance, which will outline the conditions under which the DOD components are instructed to evaluate whether contamination in soil or groundwater poses a potential for unacceptable risk from vapor intrusion into overlying or nearby existing structures. The revisions call for appropriate response actions for a vapor intrusion pathway in existing structures when the potential for vapor intrusion exists and “a site-specific risk assessment indicates an unacceptable risk to human health due to a release to the environment that is the responsibility of DOD and not the responsibility of any other party.” In addition, the revisions note that the DOD components are to notify non-DOD property owners in writing of potential vapor intrusion risks and, as appropriate, include this information in decision documents and/or transfer documents. Further, the revisions state that a transferee will address the potential for vapor intrusion in future structures at its own expense by adding appropriate mitigating measures during construction, and that these obligations are to be included in decisions documents and/or transfer documents for the site. Tables 16 through 18 show the completion status of Department of Defense (DOD) sites and those that require long-term management under the Installation Restoration Program (IRP), the Military Munitions Response Program (MMRP) and the Building Demolition/Debris Removal (BD/DR) Program by military component, for fiscal year (FY) 2004 through 2008. Table 19 shows the Department of Defense’s (DOD) obligations for cleanup at active sites for the Installation Restoration Program (IRP), the Military Munitions Response Program (MMRP), the Building Demolition/Debris Removal (BD/DR) Program, and program management and support for fiscal year (FY) 2004 through 2008. Table 20 shows DOD’s obligations for cleanup at installations that have been closed or are designated to be closed or realigned under the Base Realignment and Closure (BRAC) process under the IRP, MMRP, and for program management and support for FY 2004 through 2008. Table 21 shows DOD’s obligations to clean up formerly used defense sites (FUDS) under the IRP, MMRP, and BD/DR Program, and program management and support for FY 2004 through 2008. Table 22 shows the DOD’s estimated cost to complete environmental clean up for sites located at active installations, BRAC installations, and FUDS under the IRP, MMRP, and BD/DR Program for FY 2004 through 2008. Table 23 shows the total inventory of Department of Defense (DOD) sites and number ranked high risk in the Installation Restoration Program (IRP) and the Military Munitions Response Program (MMRP) by military component, for fiscal year (FY) 2004 through 2008. Table 24 shows the total inventory of Base Realignment and Closure (BRAC) sites and number ranked high risk in the IRP and the MMRP by military component, for FY 2004 through 2008. Table 25 shows the total inventory of formerly used defense sites (FUDS) and number ranked high risk in the IRP and MMRP for FY 2004 through 2008. Table 26 shows all of the line item costs for the formerly used defense sites (FUDS) program for fiscal year (FY) 2004 through 2008. It includes expenses for the Installation Restoration Program (IRP), the Military Munitions Response Program (MMRP), Building Demolition/Debris Removal (BD/DR) Program, and all program management costs (including direct and indirect costs). Table 26 shows the percentage of the total FUDS budget that is accounted for by each line item for FY 2004 through 2008. The subcomponents of the overall Program Management and Support budget are separately calculated as a percentage of total FUDS budget and the overall Program Management and Support budget is also calculated as a percentage of the total FUDS budget. In addition to the individual named above, Vincent P. Price, Assistant Director; Krista Anderson; Melissa Hermes; and John Smith made key contributions to this report. Mark Braza, Antoinette Capaccio, Pamela Davidson, Arthur James, Jr., and Allison O’Neill also made important contributions. | The Department of Defense (DOD) estimates that cleaning up known hazards at the over 4,700 formerly used defense sites (FUDS)--sites transferred to other owners before October 1986--will require more than 50 years and cost about $18 billion. This estimate excludes any additional needed cleanup of emerging contaminants--generally, those not yet governed by a health standard. DOD delegated FUDS cleanup responsibility to the U.S. Army Corps of Engineers (Corps). In addition to FUDS, DOD is responsible for cleaning up about 21,500 sites on active bases and 5,400 sites on realigned or closed bases. The House Armed Services Committee directed GAO to examine (1) the extent to which the Corps reevaluates sites to identify emerging contaminants; (2) how DOD allocates cleanup funds; (3) how the Corps prioritizes FUDS for cleanup; and (4) FUDS program overhead costs. GAO analyzed nationwide FUDS property and project data; policies, guidance and budget documents; and interviewed DOD and Corps officials. The Corps has not often re-examined sites after they have been cleaned up to determine whether emerging contaminants are present or need to be addressed. Generally, the Corps reevaluates sites only when requested by states or others, or when reviewing the completed remedy to ensure its continuing protectiveness. Such reviews are required every 5 years for sites where the chosen remedy does not allow for unlimited use and unrestricted exposure. Corps officials said that they had not received many requests to re-examine sites and few FUDS had required 5-year reviews. Reports on the 15 5-year reviews completed as of May 2009 within four Corps divisions indicated that the Corps has not consistently (1) conducted required 5-year reviews on time, (2) conducted reviews when they are not required but may be appropriate, as EPA recommends, and (3) submitted reports on these reviews for technical evaluation, as required by Corps policy. Also, DOD and the Corps lack accurate, complete information on the status of these reviews. Without timely, accurate, and complete reviews, the Corps cannot ensure that remedies continue to protect human health and the environment. DOD proposes funding to clean up defense sites based on the department's environmental restoration goals and obligations are generally proportional to the number of sites in each site category. Funding is directed toward reducing risks to human health and the environment, among other goals. The Army, Navy, Marine Corps, Air Force, and Defense Logistics Agency each determine the funding requirements to clean up sites based on these goals. The Corps prioritizes individual FUDS for cleanup on the basis of risk and other factors. The Corps assigns each site a risk level, considering such factors as the presence of hazards, the potential for human contact, and the concentrations of contaminants and their potential for migrating, among others. According to DOD officials, sites' risk levels are the single most important criterion in determining cleanup priorities. However, the Corps also takes into account specific FUDS program goals, and other factors--such as regulators' and the public's concerns--that can influence the Corps' decisions about which sites to address first. Consequently, high risk sites are not always addressed before low risk sites. Direct program management and support costs for the FUDS program have decreased slightly in recent years, mostly due to structural changes in the program. The Corps' obligations for FUDS direct program management and support costs have declined from 11.0 percent of total program obligations in fiscal year 2004 to 9.0 percent in fiscal year 2008. In addition, to further reduce certain components of these costs to make more funds available for FUDS cleanup, the Corps reduced the number of employees managing the program and the number of districts responsible for FUDS from 22 to 14. Furthermore, Corps officials told GAO that they have implemented a number of controls--such as assigning tracking codes--to ensure that program management and support funds are spent only on approved items. |
Job Corps was established in 1964 as an employment and training program aimed at providing severely disadvantaged youth with a comprehensive array of services, primarily in a residential setting. Administered by the Department of Labor, Job Corps services are provided at 110 centers located throughout the United States. All but four of the states have at least one center operating within their boundaries. The program receives annual funding of approximately $1 billion to serve about 100,000 youths. The program enrolls youths aged 16 to 24 who are severely disadvantaged, in need of additional education or training, and living in a disruptive environment. Our previous report contained an analysis of characteristics of those terminating from Job Corps in program year 1993, which showed that over two-thirds of the program’s participants had multiple barriers to employment. Enrollment is voluntary, and training programs are open entry and self-paced, allowing participants to enroll throughout the year and to progress at their own pace. On average, participants spend about 8 months in the program but can stay up to 2 years. Each of the centers provides participants with a range of services including basic education, vocational skills training, social skills instruction, counseling, health care (including dental), room and board, and recreational activities. Skills training is offered in a variety of vocational areas, such as business occupations, automotive repair, construction trades, and health occupations. These programs are taught by center staff, private contractors, or instructors provided under contracts with national labor and business organizations. One feature that makes Job Corps different from other youth training programs is its residential component. About 90 percent of the approximately 63,000 youths enrolled each year live at the centers, allowing services to be provided 24 hours a day, 7 days a week. The premise for boarding participants is that most come from a disruptive environment and therefore can benefit from receiving education and training in a different setting where a variety of support services is available around the clock. Job Corps typically employs residential staff to oversee dormitory living and security staff for the safety and well-being of its participants. Furthermore, Job Corps participants must have permission to leave the Job Corps center grounds, and participants “earn” home leave, which must be approved before being taken and can be denied for a number of reasons such as failure to follow a center’s rules of conduct. The Job Corps program recently implemented a “Zero Tolerance” policy for violence and drugs in order to ensure a safe and drug-free environment. This policy includes a “one-strike-and-you’re-out” provision for the most serious violent or criminal offenses as well as for drug violations. Job Corps enrollees receive periodic allowance and incentive payments. For example, initially a participant receives a base allowance of about $50 per month, which increases to about $80 per month after 6 months. In addition, participants are eligible to receive incentive bonuses of between $25 and $80 each if they earn an exceptional rating on their performance evaluations, held every 60 days. Participants can also earn bonuses of $250 each for graduating from high school or receiving a general equivalency diploma, completing vocational training, and getting a job. Participants receive an additional $100 if the job is related to the vocational training they received while in Job Corps. Participants obtain jobs through a variety of mechanisms, including finding the job on their own, being referred by their vocational instructor, and being placed by the Job Corps center or a contracted placement agency. Participation in Job Corps can lead to placement in a job or enrollment in further training or education. It can also lead to educational achievements such as attaining a high school diploma and reading or math skill gains. However, the primary outcome for Job Corps participants is employment; about 60 percent of those leaving the program get jobs. Recently, the Department of Labor placed emphasis on participants receiving a job related to the occupational training they received by including training-related employment among its program performance measures. State and local entities have established a wide array of youth training programs using funds from various sources, including federal, state, and local governments and private contributors. While many of these programs share some individual characteristics with Job Corps, we found that the extent to which the four characteristics were present in state or locally established youth training programs was limited. However, we did identify two programs that had all four characteristics. Most state officials we surveyed told us their states had programs that provided disadvantaged youth with basic education. For example, the Learning Center, operated by a Boston community-based antipoverty organization, offers a specialized year-round alternative education program for youth that includes alternative high school, general equivalency diploma, and school-to-work programs. The program is not residential nor does it provide vocational training. Furthermore, some programs identified by state officials as offering basic education also provided vocational training. The vocational training, however, consisted of preemployment preparation or introduction to the working world but not training in a specific occupation. For example, the Youth Opportunities Unlimited program in Arkansas is a high school intervention program, administered by the state’s Department of Higher Education, designed to encourage economically disadvantaged youth to remain in school. In addition to basic education, program participants receive classroom training in preemployment and work maturity skills combined with the practical application of skills provided through on-campus employment. No job-specific skills training, however, is provided. Residential programs operated by the states generally targeted specific populations—such as youths who have been involved with the court system, disabled individuals, or substance abusers. For example, one state-funded program, the Gulf Coast Trades Center in Texas, integrates in a residential setting vocational training, basic education, and support services for delinquent youth. The program is designed to prepare young people for employment in one of nine trades including auto mechanics, construction trades, and culinary arts. In addition, the program provides a range of other services including counseling, health care, transitional living assistance, and job search skills development. We found that state and local youth corps programs most closely resembled Job Corps. Both youth corps programs and Job Corps operate in a large number of states, typically serve disadvantaged youth, and provide instruction to enhance basic education skills. On the other hand, few youth corps programs are residential. We found two that contained all four characteristics that describe Job Corps. Youth corps programs originated in the 1930s when President Roosevelt founded the Civilian Conservation Corps to provide alternative employment for young men during the Great Depression. The program was disbanded in 1942 but was revived with the enactment of legislation in 1970 that created the Youth Conservation Corps—a summer work program. In 1977, the enactment of the Young Adult Conservation Corps provided youths with year-round conservation-related employment and educational opportunities. Both programs were virtually eliminated through dramatic federal budget reductions in 1981. By that time, however, many states had begun to support these programs directly. According to the National Association of Service and Conservation Corps, 81 year-round state and local youth corps programs operated in 32 states and the District of Columbia in 1994, providing services to about 9,300 full-time participants. (See app. I for a listing of the 81 programs.) Funding for these programs was about $166 million in 1994. Approximately one-fourth of this funding was from federal sources, such as the Job Training Partnership Act, the National and Community Service Act, and the Community Development Block Grant. The remaining funds came from state and local governments and private contributions. Over half of the youth corps programs are operated by independent, nonprofit organizations; the remainder are part of state and local governments. We found two youth corps programs that most closely resembled the Job Corps program from among the youth programs we identified; that is, they operated residential sites; served disadvantaged youth; offered basic education; and, to an extent, provided vocational training. We visited both programs—California Conservation Corps, which had multiple locations in California, and Seaborne Conservation Corps in Galveston, Texas—to obtain detailed information on how these programs operated compared with Job Corps. The California Conservation Corps was established in 1976 to assist youth in becoming more employable by providing educational opportunities and meaningful work aimed at protecting and enhancing California’s natural and human resources. The program’s motto “hard work, low pay, miserable conditions” provides prospective enrollees with a preview of corps life and reflects the nature of the program. For example, each year about 85 youths participate in the Backcountry Trails Project and spend an entire 6-month period in remote areas of California’s parks and forests doing trail work. During this time, participants live in spartan tent camps supplied by mule train and helicopter, hike as much as 15 miles each day while clearing trails, and earn minimum wages for their efforts. In 1994, the California Conservation Corps had an annual budget of about $50 million and served about 1,700 youths at its 44 locations statewide, 13 of which were residential. Participants average 7.4 months in the program, and almost two-thirds of participants live in the residential component. As shown in figure 1, the program receives its operating funds from a variety of sources—the largest source being the state’s general fund, which contributes about 56 percent of the program’s operating budget. About a third of the operating budget comes from revenue generated by program activities, such as reimbursements for public service conservation work and installation of energy-efficient lighting in public buildings. In addition, the California Conservation Corps requires youths participating in the residential component to pay the program for a portion of their room and board. This accounts for approximately 10 percent of the program’s operating funds. Several differences exist between the California Conservation Corps and Job Corps. For example, Job Corps seeks to enroll the most severely disadvantaged youths who have multiple barriers to employment, while the California Conservation Corps does not specifically target disadvantaged youth—any California resident not on probation or parole is eligible. However, over half of the participants are high school dropouts. Job Corps participants receive an allowance of $50 to $80 per month and receive free room and board and medical and dental services, whereas California Conservation Corps participants earn a weekly wage but must pay $225 per month for their room and board and another $50 per month if they elect the optional health insurance. Whereas Job Corps provides training in specific vocational areas and emphasizes job placement in related occupations, the California Conservation Corps seeks to improve the employability of its participants primarily by providing work experience through environmental and public conservation projects. Some of the skills involved in these projects may be transferable to related fields in the labor market when the participants leave the program, but employment in occupations related to the training received is not a primary focus of the California Conservation Corps. California Conservation Corps participants have been involved in such projects as rebuilding trails at Yosemite National Park, fighting wildfires in Southern California, installing solar panels at a state training facility in Galt, landscaping San Diego’s Wild Animal Park, and cleaning up an oil spill near Oxnard. According to program officials, many former participants become employed as rangers with the National Park Service and National Forest Service. Others who were enrolled in the energy conservation program have found jobs in the private sector performing similar work. We visited two of the residential sites in California—Placer Service District in Auburn and Delta Service District in Stockton. The Placer site is located about 1 hour northeast of Sacramento, in a rural setting. The site is self-contained, having been built in 1952 as a conservation camp for convicts. The facilities consist of two dormitories (housing about 100 youths), an administration building, auto shop, wood shop, energy lab, cafeteria, and recreation hall. Participants are not restricted to facility grounds and can maintain their own vehicles. About half of all Placer participants are in the energy conservation program, while most of the other members participate in resource conservation activities. A few opportunities also exist for specialist training as cook, auto mechanic, and office clerk. The Delta site is on the grounds of the Stockton Development Center, a former state mental hospital. The site is located in an urban area and has open access. The main building consists of an administrative area, a large classroom, and several smaller classrooms. The building contains adjacent wings for dormitories housing about 75 participants. Except for administrative and operations staff, no other professional or medical staff are on site. Most of the training opportunities at Delta are in the environmental conservation area, such as fire fighting, flood control, and erosion control. The Seaborne Conservation Corps is a relatively new program, having been established by Texas A&M University at Galveston in September 1994 through a partnership among the university, the Department of the Navy, and the Texas National Guard, with support from the Corporation for National and Community Service’s AmeriCorps. About two-thirds of its $2 million budget is funded by the Department of Defense (Civil-Military Cooperation) and the remainder is funded by AmeriCorps. Because of funding uncertainties from both the Department of Defense and AmeriCorps, program officials hope to turn to the state of Texas for funding beyond its current class, which is scheduled to graduate in May 1996. Seaborne is a residential training program targeted to high school dropouts. Its 7-month training program provides basic education, life skills instruction, and vocational skills training. However, differences exist between Seaborne and Job Corps. For example, Seaborne’s training program has fixed start and end dates, whereas Job Corps uses an open-entry/open-exit format. In addition, Seaborne participants train in a military-style environment, including undergoing a 4-week boot camp, observing military standards and discipline, and typically training and working 16 hours a day, 6 days a week. Participants are required to perform 900 hours of community service, which program officials believe promotes a strong work ethic while instilling a sense of community pride. All participants live aboard the T/S Texas Clipper, the Texas A&M University training ship supplied by the Maritime Administration for training students in the Texas State Maritime Training Program. While no income requirement exists, participants must be high school dropouts. Furthermore, the program will not accept delinquent youths or youths who test positive for drugs. The program requires participants to pass a military-type physical examination and prefers to enroll those who can read at or above the grade 7 level, although exceptions may be made. All interested youths are also interviewed by program staff in an attempt to assess their motivation. Seaborne maintains a drug-free policy similar to Job Corps’ Zero Tolerance policy. Seaborne tests each participant for drugs at enrollment and then randomly tests a sample of participants (10 to 12 percent) each month. In addition, Seaborne tests any participant for cause or suspicion and may command a 100-percent drug test at any time. For example, all participants in the current class have been tested for drugs following each home leave. If a participant tests positive at any time, he or she is dismissed immediately from the program. Seaborne’s vocational training component is tied directly to the local economy by focusing on the maritime industry. Participants receive maritime training on board the Clipper and perform an internship at the University’s Center for Marine Training and Safety. According to the program’s Director, the maritime industry has a critical need for entry-level workers. He stated that he could easily find jobs for 300 youths every year. However, not all participants want to work in the maritime industry. In fact, of the 76 graduates from Seaborne’s first two classes, only 21 (28 percent) became employed in the maritime industry. As shown in figure 2, about 42 percent of Seaborne’s first two classes either dropped out or were dismissed before completing the program. The attrition rate has been reduced with each class—from 48 percent in the first class to about 15 percent in the third (current) class. The program Director attributed the 48-percent dropout rate in the first class to the staff’s not fully explaining to prospective participants the program’s difficult lifestyle, especially the military structure and discipline, the 16-hour days, and the rigorous physical requirements. A distinguishing feature of the Seaborne program is the interrelationship of a number of organizations. Seaborne is operated by a local university specializing in ocean sciences. The university provides the ship that participants live and train on, and all program staff are university employees. Program staff have developed links with local maritime companies, who have indicated they are willing to hire all Seaborne graduates interested in maritime careers. The program has also cultivated close relationships with area school districts, which are a major source of prospective recruits. In addition, a private foundation and local bank have cooperated in developing a guaranteed loan program for Seaborne graduates. This low-interest loan program not only provides participants with money to help them transition to the workplace but also gives them a credit history. Seaborne also works closely with the Texas National Guard, using its facilities and medical staff. Program staff use local Navy, Marine, and National Guard recruiters for outreach and placement. Youths who interview with military recruiters but are not eligible for the military are often referred to Seaborne. In comments on a draft of this report, the Department of Labor generally agreed with the information contained in the report. We have incorporated Labor’s comments where appropriate. Labor pointed out that a fifth feature of Job Corps that should not be overlooked is its emphasis on job placement following program separation. We recognize Job Corps’ overall goal of placement in a job or additional education and training and have so noted this in our report. Labor also stated that, unlike most other programs, Job Corps focuses on severely disadvantaged youth. Labor believed that this distinction could be made clearer. We made minor adjustments to our draft to clarify this distinction. Labor’s comments are printed in appendix II. We also provided pertinent sections from our draft report to officials from the California Conservation Corps and Seaborne Conservation Corps for their review. They agreed with our characterization of their programs and provided minor technical clarifications. We incorporated their comments where appropriate. We are sending copies of this report to the Secretary of Labor; the Director, Office of Management and Budget; relevant congressional committees; and other interested parties. If you or your staff have any questions concerning this report, please call me at (202) 512-7014 or Sigurd Nilsen at (202) 512-7003. Major contributors to this report include Thomas Medvetz, Wayne Sylvia, and Marquita Sylvia. | Pursuant to a congressional request, GAO identified state and local youth training programs that incorporate four basic characteristics of the Job Corps Program: (1) serving a severely disadvantaged population; (2) providing basic education instruction; (3) focusing on vocational training services; and (4) providing those services in a residential setting. GAO found that: (1) while many state and local youth training programs feature, to some extent, some of the Job Corps' basic characteristics, most do not feature all four characteristics; (2) most youth training programs provide disadvantaged youth with basic education; (3) states' residential youth programs generally target specific populations such as youths involved in the court system, disabled youth, or substance abusers; (4) although state and local youth corps programs most closely resemble the Job Corps, few are residential; and (5) the California Conservation Corps and Seaborne Conservation Corps in Galveston, Texas, feature all four Job Corps characteristics, but differ from Job Corps in program operations. |
Between 1975 and 1989, over 2 million Indo-Chinese, many of them Vietnamese, left their countries of origin seeking asylum elsewhere in the region. Most were ultimately resettled in Western countries, including the United States and Canada. However, by the late 1980s an unabating outflow, large numbers of asylum seekers already in asylum camps, and continuing resettlement placed increasing burdens on neighboring countries and territories and Western countries, and the need for a durable solution to the problem became critical. In June 1989, 75 countries, including the United States, Great Britain, Association of Southeast Asian Nations (ASEAN) countries, and Vietnam adopted by declaration the CPA agreement to deal with the problem. The agreement’s primary objectives were to deter clandestine departures, provide temporary refuge to all asylum seekers, establish procedures for determining their refugee status, resettle in third countries those found to be refugees, and repatriate those determined not to be refugees. The agreement stipulated that refugee status determination screening was the responsibility of the national authorities of individual first-asylum countries, in accordance with the 1951 U.N. Convention relating to the Status of Refugees and its 1967 Protocol, bearing in mind the 1948 Universal Declaration of Human Rights, and taking into account the special situation of asylum seekers and the need to respect the family unit. Refugee status determination procedures were to be structured in accordance with international norms and were to employ internationally accepted refugee status determination criteria. International screening procedures include prescreening counseling for applicants, first-instance screening, and an appeal process for denied applicants. Notwithstanding the responsibilities vested with the first-asylum countries under the CPA, the agreement placed a number of important responsibilities on UNHCR. The CPA’s drafters envisioned the agreement’s implementation as a dynamic process that would require continued coordination and possible adaptation to respond to changing situations. To ensure its effective implementation, the plan, among other things, established that UNHCR, with the financial support of the donor community, would be in charge of continuing liaison and coordination with concerned governments and intergovernmental and nongovernmental organizations to implement the agreement; UNHCR was to participate in the refugee status determination process in an observer and advisory capacity; and UNHCR would be responsible for (1) providing training to first-asylum country officials to help ensure fairness and consistency in the screening process; (2) coordinating the timely resettlement of those found to be refugees; and (3) administering a safe, dignified repatriation program for those found to be nonrefugees. Appendix I discusses UNHCR’s responsibilities under the CPA relative to its U.N. chartered authorities and responsibilities. The Charter of the Office of High Commissioner authorizes UNHCR to make its own determinations about individuals’ refugee status. This authority is commonly referred to as mandate authority. In what is essentially an additional procedure in the refugee status determination process, UNHCR has examined under mandate authority many asylum seekers that were denied refugee status by national authorities. Some first-asylum countries, such as Hong Kong, have recognized UNHCR’s mandate authority; others have not. Although not a requirement of the CPA, UNHCR has also carried out a returnee monitoring program designed to ensure that asylum seekers returning to Vietnam did so under conditions of safety and dignity and in conformance with Vietnamese and international law. According to State Department statistics, over 120,000 Vietnamese were screened under the CPA. As of March 1996, about 33,200 had been screened and resettled in third countries. About 75,500 had returned to Vietnam. A total of 36,623 remained in asylum camps in the region as of March 1996. (See fig. 1.) In March 1996, the Steering Committee of CPA member countries announced the CPA’s formal closure as of June 30, 1996. The Committee reaffirmed that the only viable option for Vietnamese determined to be nonrefugees was for them to return to Vietnam, either voluntarily or under a mandatory repatriation program. The Steering Committee directed UNHCR to, therefore, phase down its care and maintenance activities and staffing in the first-asylum countries as of that date. In the case of Hong Kong, mindful of the special circumstances prevailing in the territory and the large number of asylum seekers still in the camps, UNHCR was to make other appropriate arrangements to resolve the asylum seeker problem as soon as possible. The application of international and U.S. refugee screening criteria can differ somewhat and could result in different screening decisions. For example, under U.S. criteria an asylum seeker could be properly considered a refugee solely on the basis of past persecution, but under international criteria, this is only one of several elements to be considered. Other elements include whether (1) the past persecution was distant in time, (2) the individual was subsequently able to lead a normal life, and (3) it is reasonably likely that the individual will be persecuted on return to his or her country. Therefore, individuals considered refugees under U.S. criteria may not be refugees under international criteria. (See app. I for a more complete discussion of these differences.) A total of 60,275 persons were screened under the CPA in Hong Kong. Table 1 shows the results of first-instance and appeals screening and the UNHCR mandate review. Hong Kong government reports stated that refugee screening procedures were carried out under UNHCR guidelines in accordance with internationally accepted refugee status determination practices. According to Hong Kong Immigration Department officials, CPA screening was conducted in accordance with the UNHCR Handbook on Procedures and Criteria for Determining Refugee Status, and no additional criteria were developed. Hong Kong Immigration Department officials stated that selection of interviewing officers was based on rank, experience, education, and language and writing skills. The selected interviewing officers were experienced naturalization officers, visa officers, and Hong Kong entry point supervisors in the Immigration Department. UNHCR reports and interviews with UNHCR and government officials in Hong Kong indicate that UNHCR took an active role in training government officials involved in the screening process. The officers’ training program included a 9-day seminar of lectures and workshops and an extensive list of readings, including articles and books on Vietnam and human rights topics. Immigration Department officials told us most of the interviewing officers were also sent to Vietnam for 7-day familiarization visits. We were told that an extensive library of materials on conditions in Vietnam was established for the officers’ use. At the height of CPA screening there were approximately 220 interviewing officers. According to UNHCR officers in Hong Kong, informal monthly staff meetings were held during the initial phases of the screening program at which Hong Kong’s procedures were discussed and critiqued. We were told that if issues or points were raised that needed to be brought to the government’s attention they were passed on to Immigration Department officials. The UNHCR officials also said that in accordance with a 1988 agreement with the Hong Kong government, UNHCR monitored and advised the government on its refugee screening procedures and provided the government periodic formal assessments of its procedures. According to UNHCR officials, these assessments identified various problems and suggested improvements. Early problems with Hong Kong first-instance screening procedures that UNHCR brought to the government’s attention included inadequate interpretation of applicants’ statements during screening interviews, questionable interviewing practices and techniques by interviewing officers, and inadequate assessments of applicants’ claims by interviewing officers. Hong Kong government officials with whom we met also acknowledged such problems with screening procedures. UNHCR officials told us the Hong Kong government was very responsive to the problems raised and endeavored to correct them. The Chairman of the Refugee Status Review Board told us that the quality of interviewing officers’ first-instance screening decisions varied widely initially but that the officers had good training and learned quickly. To gain greater insights into Hong Kong’s screening procedures, and as a limited test of them, we examined 10 selected cases in which asylum seekers had been screened out by the Hong Kong authorities and denied mandate by UNHCR. Five of the cases were provided to us by Boat People S.O.S.; we selected the other five at random from a list of cases another advocacy group had requested that UNHCR reexamine. Among the first five cases, one had been accepted by the United States on family reunification grounds and was awaiting resettlement. Another had been offered resettlement in the United States but refused the offer unless his son, who was screened separately as an adult and denied refugee status, could join him. In two other cases, we concluded, based on the documentation in UNHCR’s files, that the applicants had failed to establish a well-founded fear of persecution. In the fifth case, the applicant was screened out due to a lack of plausibility about portions of his claims. However, when we raised questions about portions of his claims and pointed out to UNHCR the strength of those aspects of the claim where plausibility had not been questioned, UNHCR reexamined his case and mandated refugee status for him. A UNHCR official acknowledged judgmental errors in this case. According to the official, any system dependent upon human judgments will sometimes produce errors. In the other five cases, documentation in UNHCR’s case files indicates that the applicants could not establish a well-founded fear of persecution for any of the reasons specified in the 1951 Convention. On the basis of available documentation, it appears these cases were reasonably adjudicated. Both Indonesian government and UNHCR officials stated that refugee screening procedures were generally carried out under UNHCR guidelines, in accordance with internationally accepted refugee status determination criteria. Our review of the process indicated that it met the basic structural requirements of the international guidelines, such as provision for appeal of negative first instance decisions and the application of international refugee status determination criteria. UNHCR trained both P3V and appeals level officials in the application of the procedures, according to UNHCR officials. A total of 18,131 persons were screened under the CPA in Indonesia. Appendix III describes Indonesia’s screening process. Table 2 shows the results of first-instance and appeals screening. Of 13,048 persons screened out at first-instance, 12,222 filed appeals. The appeals process in Indonesia consisted of a Review Committee, which reviewed all appeals, and an Appeals Board, which reviewed those cases on which the Review Committee could not reach a decision. The Review Committee decided the large majority of the appeals, confirming 9,392 negative decisions and reversing 2,592 (about 21.6 percent). The Committee could not reach a decision on 238 cases, and these were referred to the Appeals Board. The Board reversed 167, or about 70 percent of the cases referred to it, to positive decisions. UNHCR officials in both Jakarta and Galang (the island asylum camp in northern Indonesia) told us they were most concerned with ensuring that deserving asylum seekers were screened in and concentrated their efforts to that end. They said that in their view Indonesian officials were too generous in screening in weaker cases, but UNHCR (in keeping with its policy) did not challenge the Indonesians’ decisions on asylum seekers they believed to be undeserving. A UNHCR official told us it was in the Indonesian government’s interest to screen in and have resettled in third countries as many applicants as possible, because those remaining in the camp represented a problem for the government. Rumors of corruption began appearing in Indonesia at the inception of the status determination process. The first documented reporting of corruption appeared in June 1991, when a UNHCR official at Galang in a memorandum to his office in Jakarta reported rumors of P3V officials soliciting sexual favors from female asylum seekers and offerings of such services by the asylum seekers in exchange for favorable screening decisions. Boat People S.O.S. provided us numerous statements, affidavits, and referrals of individuals who had been asked for or had paid bribes or other demands for themselves or family members in exchange for favorable screening decisions. The alleged corruption involved not only Indonesian government officials in Galang and Jakarta, but two Indonesian legal consultants employed by UNHCR, as well. The allegations included assertions that asylum seekers with genuine refugee claims were screened out due to their inability to met corruption demands. Affidavits and interviews with individuals referred to us by Boat People S.O.S. and discussions with UNHCR officials in Jakarta and Galang and inhabitants of the Galang camp indicated potentially widespread corruption in the screening process. UNHCR officials told us that there was undoubtedly corruption in the camps during the screening process. And, residents in the camp indicated that corruption existed. A Vietnamese camp leader told us, for example, that P3V officials actively solicited bribes and asylees willingly offered payment in exchange for help in the screening process. UNHCR officials told us that despite widespread rumors of corruption they had no hard evidence of it. A senior UNHCR official told us that UNHCR had no authority to investigate Indonesian government officials’ activities and that UNHCR could only urge Indonesian authorities to pursue the matter. The official told us that Indonesian authorities regularly conducted investigations at Galang and that a number of cases were overturned as a result. He said, because P3V officials were removed and cases were overturned, he concluded that corruption was involved. He said he never saw a documented corruption case, however, and Indonesian authorities did not acknowledge corruption. Indonesian officials also denied to us that any corruption existed in the refugee determination process. UNHCR officials in Indonesia told us they took various steps to combat corruption by pressuring the Indonesian government to minimize it. These included mentioning allegations to Indonesian authorities, discussing rumors with high-level foreign government officials during consultations and visits to the Galang camp, and publishing allegations in quarterly operations reports, all in the attempt to embarrass the government into acting. UNHCR officials acknowledged there were no posters or leaflets distributed in the camps urging residents not to participate in corruption and to report any bribery solicitations. There were no UNHCR notices or warnings to camp officials. There were also no provisions, such as hot lines, established for residents to report anonymously. A UNHCR official at Galang told us that on his own initiative he conducted a 15-month investigation into corruption in the camp. The official, who for a time lived in the camp and had his own network of informants, was unable to obtain proof of corruption. During his investigation, the official compiled a list of about 40 corruption cases, all instances of individuals paying bribes but being screened out nonetheless. The official said he heard of these cases only because the individuals were complaining in an attempt to recoup their bribe money. According to the official, none of the cases in his investigation involved individuals with strong refugee claims being screened out because they could not pay bribes. The official concluded that asylum seekers were active participants in corruption and were unwilling to provide direct evidence because it benefited those with weak claims. In response to intense criticism by nongovernmental organizations and some members of the U.S. Congress in late 1994 and early 1995, UNHCR launched a series of four reviews of screening procedures and the impacts of corruption on the screening caseload in Indonesia. The reviews, conducted by UNHCR attorneys and senior program personnel from outside Indonesia, examined a total of 486 nonrandomly selected cases, representing about 10 percent of the remaining camp population. The selected cases included high-visibility cases, such as the 22 cases screened positive by UNHCR but negative by Indonesian officials, all the cases examined by UNHCR’s two Indonesian legal consultants who had corruption allegations lodged against them, and 21 cases previously referred from the U.S. Department of State and nongovernmental organizations. The reviews also included both positive and negative cases on which UNHCR consultants and Indonesian officials had reached the same decisions. The reviews upheld the screening decisions in 481 of the 486 cases reviewed. The remaining five cases were given refugee status under UNHCR’s mandate authority, although this status had not yet been recognized by the Indonesian government or communicated to the asylum seekers at the time of our field work in January 1996. The reviews concluded that, overall, Indonesia’s screening procedures properly identified and screened in cases with serious protection concerns, but that a small number of borderline cases could possibly have benefited from more sympathetic application of the screening criteria. The reviews found that corruption was a factor that impinged on screening procedures, but was rarely, if ever, substantiated in the case files, and that the chief effect was to inflate the number of positive decisions by also screening in weak cases. The reviews did not support the assertion that strong cases failed because they could not pay corruption demands. The reviews also concluded that UNHCR did not take adequate steps to detect or prevent corruption in the screening process, allowing corruption to undermine the integrity of the process. They also indicated that UNHCR took no actions with regard to the two Indonesian legal consultants alleged to have been involved in corruption. In a limited test of Indonesia’s processing procedures and screening decisions, we examined a sample of 10 cases. All were cases alleged by Boat People S.O.S. to have been improperly screened out and included seven cases where the individuals were allegedly screened out because they could not pay bribes demanded of them. Our review of UNHCR case files in the branch office near Galang (the files did not contain P3V or appeals data) indicated that in five of the seven cases allegedly screened out due to the applicants’ inability to pay bribes, the decisions reached appeared to be reasonable and consistent with screening criteria. In two of the cases, however, the applicants appeared to have reasonable claims and the screening decisions appeared to be incorrect. Both cases had been examined by UNHCR as part of its 1995 review, however, and both were among the five cases mandated during the review. Of the three remaining cases, one appeared to have a reasonable claim for refugee status but was screened out at first instance. However, he fled Galang for Australia before his case was appealed. UNHCR officials told us that had he been screened out on appeal, he probably would have received UNHCR mandated refugee status. The second case appeared to be reasonably adjudicated. In the third case, we raised questions that resulted in UNHCR’s mandating the individual. In this case, Indonesian authorities screened the individual out at both first instance screening and upon appeal. UNHCR representatives had recommended that the individual be screened in at first instance, but UNHCR concurred in the appeal decision. UNHCR also rejected the individual at mandate review, on the bases that elements of the individual’s claims did not constitute persecution and additional important representations presented at appeal lacked credibility. UNHCR reconsidered and mandated the case after we raised questions about whether elements of the individual’s and his family’s treatment after 1975, taken together, could afford the individual the benefit of a doubt—even without considering the information provided at appeal. As a participating country and a major contributor to the CPA, the United States has a strong interest in the CPA’s effective implementation. The Department of State has responsibility for ensuring that U.S. interests in international programs that receive U.S. funding are protected. Despite widespread concerns that corruption affected the refugee screening process, State Department officials told us they had only a general awareness of the problem in Indonesia and elsewhere in the region. Our review indicated that while State Department’s Washington and embassy officials were familiar with the CPA program and had in-depth knowledge of asylum seekers’ care and maintenance and resettlement issues, they possessed only cursory knowledge of the first-asylum countries’ screening processes and weaknesses in them. It was not until advocacy groups began petitioning State and UNHCR in mid-1994 (after the screening process had essentially concluded) to look into charges of corruption that the scope of the alleged corruption became known. It appears that until that time, State relied on UNHCR reporting to determine how the screening process was being implemented and confined its oversight and management to care and maintenance and resettlement issues. State officials acknowledged to us that the Department failed to become aware of the problems in the camps early enough and that the Department did not adequately monitor the screening processes of the countries of first-asylum to ensure their integrity. UNHCR’s monitoring efforts in Vietnam began with the voluntary repatriation of 75 persons from Hong Kong in March 1989, thereby pre-dating the June 1989 CPA. The legal basis for UNHCR’s program is a Memorandum of Understanding between UNHCR and Vietnam, signed in December 1988, which committed the Vietnamese government to “. . . ensure that the voluntary return from the countries of first-asylum will take place in conditions of safety and dignity in conformity with national and international law.” This translated, in practice, to ensuring that no voluntary returnees would be subjected to punitive or discriminatory measures related to their illegal departures, stays abroad, or returnee status, and that they would not be subjected to intimidation or harassment. The Memorandum of Understanding also stipulated that UNHCR would have full access to voluntary returnees. Involuntary returnees were not covered by the Memorandum of Understanding, but subsequent Memoranda between the Vietnamese and first-asylum governments relating to repatriation of nonrefugees provided the same assurances for involuntary returnees that the UNHCR/Vietnam agreement afforded voluntary returnees. We found UNHCR’s monitoring program to be well structured and implemented, achieving broad national coverage and contact with large numbers of returnees. Together with a network of contacts made up of western governments, nongovernmental organizations, journalists, and other interested individuals, UNHCR was able to maintain visibility over a significant portion of the returnee population, thus helping to monitor the Vietnam government’s adherence to internationally agreed terms of returnee admission, reception, and reintegration. As of January 1996, UNHCR monitors had visited all 53 provinces in Vietnam, 360 of the 363 districts with resident returnees, and about 20,000 (about 26 percent) of the approximately 77,000 returnee population. UNHCR and other officials we spoke with in Vietnam told us that they had no knowledge of any political persecution among returnees. Appendix IV describes UNHCR’s returnee monitoring process. Both UNHCR and British monitoring officials told us they had found no evidence of persecution among the returnee population. We also met with officials of the U.S. Embassies in Hanoi and Bangkok and Immigration and Naturalization Service officials who administer the Orderly Departure Program; the European Union and several nongovernmental organizations who were conducting returnee assistance programs; Asia Watch; and numerous individuals with personal knowledge of returnee cases who had traveled independently in Vietnam. They told us they were not aware of any instance of persecution among the returnees. In a limited test of the status of returnees, we examined 12 cases referred to us by Boat People S.O.S. and Asia Watch as examples of persecution or cases for special concern. Our discussions on these cases with UNHCR monitoring officers and examination of UNHCR’s case files indicated that none of the individuals had been subjected to persecution by the government related to their departure. According to UNHCR monitoring officers, three of the individuals were in prison for predeparture criminal offenses, such as murder and armed robbery. Three others were briefly arrested for criminal activities but were released from prison and had re-integrated well, as had the other individuals. In addition, we interviewed 22 returnees from northern and southern Vietnam and discussed their experiences since returning. All of the returnees told us that they had not experienced problems with government officials since their return. Our discussions indicated that all had assimilated well and had been welcomed back into their communities. The returnees’ most common complaints were economic difficulties and establishing family registration when attempting to relocate to new provinces. The absence of protection-related problems for returnees does not mean that there are not concerns over the Vietnamese government’s human rights conduct. Political opposition is not tolerated by government authorities, even in the present mood of reforms. According to Asia Watch, those who publicly question the authority of the Communist Party have been detained and imprisoned, be they proponents of multiparty democracy, advocates of civil and political rights, or religious leaders seeking greater autonomy from official control. UNHCR officials told us that returnees who were forcibly returned or were politically active and outspoken in the camps of first-asylum often faced extended questioning by government security officials upon return. Though a matter of concern, an Asia Watch official told us that in their opinion these interrogations do not rise to the level of persecution. We were told by UNHCR officials that the government questioning ends soon after the individuals’ return to their homes. UNHCR’s monitoring effort in Vietnam is unprecedented: There has been no other refugee situation where UNHCR has conducted individual case monitoring. UNHCR has expended $8.8 million, including an estimated $1.6 million for 1996, to maintain its monitoring operation in Vietnam. In addition, between 1993 and 1995, UNHCR allocated $34.4 million to support the economic and social reintegration of returnees. This assistance included cash grants of $240 to $360 to each returnee, the operation of two reception centers, in-country travel costs of returnees, and additional assistance to unaccompanied minors and other vulnerable returnees. The assistance also included approximately $9 million in micro-projects (such as the construction of schools, health clinics, water delivery systems, and bridges). The micro-projects were designed to benefit local populations that absorb the returnees as well as returnees themselves. UNHCR views the projects as an important mechanism for cultivating goodwill among local officials who assist in the monitoring effort and prevents resentment among the local populations who are often jealous of returnees’ reintegration allowances. In annual funding appeals for the CPA program, UNHCR requested voluntary contributions of about $640 million between 1990 and 1995. It received substantially less in contributions, expending an estimated $444 million in Special Program (CPA) and General Program (regional) funds between 1989 and 1995. (See table 3.) Table 4 shows U.S. contributions of $150.83 million to UNHCR’s General and Special Programs in support of the CPA during fiscal years 1990-96. The United States also contributed $9.05 million to various nongovernmental organizations for CPA-related activities between fiscal years 1992 and 1996. Recipient organizations included Save the Children Federation ($3.40 million), World Vision ($1.46 million), International Catholic Migration Commission ($2.23 million), Southeast Asia Resource Action Center ($1.77 million), Hmong National Development ($0.13 million), and InterAction ($0.06 million). The Department of State and UNHCR generally agreed with this report. (UNHCR comments are reprinted in app. V; State did not provide written comments.) The Immigration and Naturalization Service (INS) provided technical clarifications (which we incorporated as appropriate), but did not provide written comments. We conducted our review at the Department of State and INS in Washington, D.C., and at UNHCR Headquarters in Geneva, Switzerland; in Hong Kong and Indonesia; and in Vietnam. At all these locations, we examined available program records and files and interviewed knowledgeable officials involved with the program. We did not examine in depth all of the CPA first-asylum countries’ programs but limited our review to Hong Kong and Indonesia. We selected Hong Kong because of the large asylum seeker population, which included Vietnamese from both the North and South, and Indonesia because its distinctly southern Vietnamese asylum seeker population was representative of the other first-asylum country populations, and because it was one of the countries with alleged corruption in the screening process. Our review of the refugee status determination process was limited in that we were not permitted to review Hong Kong or Indonesian government files, nor did we interview asylum seekers in these countries. However, we did review documents contained in UNHCR files, and took notes on them. UNHCR also provided us with written summaries of the cases. We do not believe the information contained in UNHCR’s files was sufficient for us to make conclusive, independent determinations on the asylum seekers’ refugee status. However, we determined whether the decisions made by Hong Kong, Indonesia, and UNHCR officials on the cases appeared reasonable based upon international refugee adjudication standards and information available to us in the files. We assessed the cases on these bases. Our scope was limited to examining how the CPA was implemented in these countries and did not include an examination of subsequent resettlement activities involving UNHCR and the resettlement countries. This included resettlement activities in which the U.S. Department of State and the INS may have been involved. We took several steps to assess whether CPA refugee status determination procedures were implemented in accordance with international standards and criteria. We interviewed and reviewed documents and testimonies by critics of the asylum screening process—Lawyers Committee for Human Rights, Refugees International, United States Catholic Conference, Refugee Concern Hong Kong, among others, to obtain an understanding of the problems they alleged were prevalent. To obtain an understanding of the program and its alleged weaknesses, we interviewed UNHCR officials currently involved in the CPA program and numerous officials who had first-hand knowledge of the status determination process from their tours of duty in Geneva and the countries of first-asylum during the early stages of the CPA. In these meetings we obtained detailed information on each step of the screening process, including training of first-asylum country screening officials, prescreening counseling provided asylum seekers, appeals counseling, case monitoring by UNHCR, and other procedures to ensure the fairness of the process. To obtain U.S. and international refugee determination standards and criteria, we interviewed U.S. and UNHCR officials and examined pertinent U.S. legislation and U.N. documents, which establish refugee determination criteria and describe adjudication procedures. The latter included INS Refugee Processing Guidelines and the UNHCR Handbook on Procedures and Criteria for Determining Refugee Status. In Hong Kong, we met with government officials responsible for each phase of the status determination process and obtained pertinent documents descriptive of the process. In these meetings, we inquired into how the screening process was designed and implemented and evaluated those processes against criticisms levied by nongovernmental organizations that represent asylee interests. We met with a prominent local attorney and an official from the refugee legal advocacy organization, LAVAS, who provided legal counsel to asylum seekers to obtain their insights, evaluations, and criticisms of the screening process. As a limited test of both screening procedures and screening decisions, we examined 10 cases represented by the Lawyers Committee for Human Rights (five cases) and Boat People S.O.S. (five cases) as having been wrongly screened out. We reviewed these cases from both the merits of the claim and the soundness of the process perspective. However, our access to case files was limited. The government of Hong Kong denied us access to its screening files. UNHCR officials reviewed their case files with us and allowed us to take notes. They also provided us with written summaries of the cases. They did not permit us to make copies of material contained in the case files. UNHCR files did not contain transcripts or detailed interview write-ups of the first-instance screening interviews by Hong Kong screening officials or transcripts from the Refugee Status Review Board. Also, we did not interview asylees. However, UNHCR’s case files contained the Hong Kong authorities’ decisions and the stated reasons for them; the asylum seekers’ biographical profiles; written appeals of first-instance screening decisions by the asylum seekers and/or their UNHCR-provided or private legal counsellors; and statements by UNHCR officials reviewing the cases for mandate status. The latter included the asylum seekers’ claims, summaries of the applicants’ claims made to the Hong Kong authorities and their decisions, and UNHCR’s independent assessments and recommendations regarding mandate status. The files also sometimes contained other documentation, such as reports from UNHCR monitors in Vietnam verifying some aspect of asylum seekers’ claims. In Indonesia, we met with government, UNHCR, and U.S. Embassy officials, the chairman of the refugee camp committee, and other individuals with first-hand experience with the screening process in order to determine how the process was designed and implemented. To test the screening process, we examined 10 cases represented by Boat People S.O.S. as examples of cases wrongly screened out due to corruption or inappropriate application of refugee criteria. In conducting our case reviews, we reviewed documentation made available to us by UNHCR and discussed the merits of the cases and the adjudication process with UNHCR officials. Similar to Hong Kong, our access to case files was limited. As in Hong Kong, UNHCR officials in Indonesia reviewed their case files with us and allowed us to take notes. They also provided us with written summaries of the cases. The Indonesian government denied us access to their screening files and UNHCR’s files did not contain P3V documents or documents related to the appeals process. Therefore, we could not make definitive determinations on the accuracy of the Indonesian authorities’ screening decisions. We reviewed the decisions to determine whether they appeared reasonable based on information in the UNHCR case files and UNHCR reviewers’ assessments of the claims. To develop information about alleged corruption in the CPA program, we interviewed State Department, UNHCR, and nongovernmental organization officials, and other persons knowledgeable of the screening process and camp life. From Boat People S.O.S., we obtained documents, affidavits, and reports that Boat People S.O.S. represented to us as proof of corruption in the screening process. We did not verify the authenticity of the information provided to us by Boat People S.O.S. We reviewed documents and files at the Department of State and at UNHCR offices in Geneva and Indonesia for reporting on corruption in an attempt to determine what actions were taken to respond to corruption charges. We also interviewed seven former residents of first-asylum camps in the region who said they had first-hand experience with corruption in their status determination proceedings. In Indonesia, we examined seven cases represented to us by Boat People S.O.S. to have been wrongly screened out due to corruption in order to determine whether (1) the individuals presented strong refugee claims and (2) there were any indications of corruption. We also reviewed three other cases represented to us by Boat People S.O.S. to have been improperly screened out. As in Hong Kong, we did not interview the asylum seekers whose cases we examined. To obtain additional insight into corruption allegations, we interviewed a UNHCR official who conducted a 15-month investigation on corruption in Galang camp. We also examined the results of a series of UNHCR case reviews conducted in 1995, which included cases handled by UNHCR’s Indonesian legal consultants alleged to have engaged in corruption. While UNHCR officials did not provide us the full reports or case files on their 1995 reviews, they discussed the results with us and provided us a brief summary of the review. We were denied access to Indonesian government files, and high level Indonesian government officials we met with denied the existence of corruption in the screening process. To determine whether those who returned to Vietnam were subject to persecution by the government, we examined UNHCR’s program for monitoring returnees and the skills, access, and independence of their monitors. We met with U.S. Embassy officials in Bangkok and Hanoi and officials from the INS who administer the Orderly Departure Program and were familiar with conditions in Vietnam. We inquired into their freedom of movement and access to returnees in Vietnam and whether the government of Vietnam was abiding by its commitments not to persecute returnees. We met with the human rights group, Asia Watch, to obtain names of returnees of concern to them and reviewed that organization’s reporting on Vietnam. We met with officials from the British Embassy in Hanoi who monitor persons forcibly returned to Vietnam from Hong Kong and obtained their assessment of the Vietnamese government’s treatment of this caseload. We also met with officials from several nongovernmental organizations who work with the returnee population, and with numerous individuals who had traveled independently within Vietnam and had personal knowledge of some returnee cases to determine how the returnees were faring as a whole and whether they were aware of any instances of persecution. While in Vietnam, we interviewed 22 returnees from both the north and south of Vietnam to determine what challenges they have faced since returning home and whether they have experienced any problems from the government. We also observed UNHCR officials as they (1) met an Orderly Return Program flight from Hong Kong and (2) conducted a monitoring mission to observe their freedom of movement, access to returnees, and whether the presence of Vietnamese authorities inhibited the candidness of returnees’ statements. We also examined UNHCR’s returnee monitoring database and obtained information on 12 returnee cases presented to us from Boat People S.O.S. and Asia Watch as examples of persons being persecuted or of special concern. To determine costs of the CPA, we obtained financial data from the UNHCR and the Department of State. We did not verify the accuracy of the data provided. We conducted our review from November 1995 to August 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Committees on Appropriations, the House Government Reform and Oversight Committee, the Senate Governmental Affairs Committee, and other interested committees; the Secretary of State and the Attorney General; the United Nations High Commissioner for Refugees; and others upon request. If you or your staff have any further questions concerning this report, please contact me at (202) 512-4128. Major contributors to this report were David R. Martin, Assistant Director, and Patrick A. Dickriede, Senior Evaluator. The Comprehensive Plan of Action (CPA) agreement called for a consistent, regionwide refugee status-determination process to be conducted by first-asylum countries’ national authorities in accordance with established international refugee criteria and procedures. The United Nations High Commissioner for Refugees (UNHCR) was to participate in the process in an observer and advisory capacity and was to institute a comprehensive regional training program for the national officials involved in the process. The refugee screening criteria to be followed were those recognized in the 1951 Convention relating to the Status of Refugees and its 1967 Protocol, bearing in mind the 1948 Universal Declaration of Human Rights and the special circumstances and needs of the asylum seekers. The UNHCR Handbook on Procedures and Criteria for Determining Refugee Status was to serve as an authoritative and interpretative guide in developing and applying CPA screening criteria. . . . owing to well-founded fear of being persecuted for reasons of race, religion, nationality, membership of a particular social group, or political opinion is outside the country of his nationality and is . . . unwilling to avail himself of the protection of that country; or who, not having a nationality and being outside . . . of his former habitual residence . . . is unable or, owing to such fear, is unwilling to return to it. The Handbook includes detailed discussions of the international instruments defining a refugee; the criteria for determining refugee status (including exclusion clauses, special cases, and the principle of family unity); and the procedures for determining refugee status (including principles and methods for establishing the facts in a case, and the application of benefit of the doubt). CPA screening procedures to be followed by the governments of the countries of first-asylum were to be in accordance with those endorsed by the Executive Committee of UNHCR, as follows: The competent interviewing official shall have clear instruction for dealing with the case and should act in accordance with the principle of non-refoulement. The applicant should receive the necessary guidance as to the screening procedures to be followed. There should be a clearly identified authority—whenever possible a single control authority—with responsibility for examining requests for refugee status and making a decision in the first instance. The applicant should be given the necessary facilities, including the services of a competent interpreter, for submitting his or her case to the proper authorities. The applicant should also be given the opportunity to contact a UNHCR representative. If recognized as a refugee, the applicant should be informed accordingly and provided written documentation certifying his or her refugee status. If not recognized as a refugee, the applicant should be given a reasonable time to appeal for a formal reconsideration of the decision. The applicant should be permitted to remain in the first-asylum country pending a decision on his or her initial request, and any appeal to higher authority. The Office of the United Nations High Commissioner for Refugees was established by statute adopted by the U.N. General Assembly on December 14, 1950, as an annex to U.N. Resolution 428 (v). The statute stipulated that the work of the High Commissioner is humanitarian and social in nature and of an entirely nonpolitical character and that the High Commissioner is to provide international protection, under the auspices of the United Nations, to refugees falling within the competence of his or her office. In establishing the Office, the General Assembly called upon governments to cooperate with the High Commissioner in the performance of the Office’s functions concerning refugees falling under its competence. While recognizing that the Office’s effectiveness depended upon the cooperation of U.N. member and nonmember states, the statute gave UNHCR no directional or enforcement authority over them. The statute states that the High Commissioner should follow policy directives of the General Assembly or the Economic and Social Council. The Executive Committee of the High Commissioner’s Program, a 49 member-state advisory committee on refugees, approves and supervises the material assistance program of the High Commissioner’s Office and advises the High Commissioner on the implementation of the Commissioner’s functions under the statute. UNHCR’s responsibilities under the CPA were consistent with those envisioned by the Office’s enabling statute. The agreement charged UNHCR with coordinating the CPA’s implementation with involved countries and devising procedures for monitoring its progress. The CPA stipulated that first-asylum countries were to be responsible for screening asylum seekers for refugee status, and that UNHCR was to participate in the process in an observer and advisory capacity. UNHCR’s responsibilities in the screening process were to include: assisting the first-asylum countries in designing and implementing their providing comprehensive training for national officials involved in asylum advising asylum seekers about the screening processes and procedures. UNHCR was also charged under the agreement with coordinating with first-asylum and third countries the timely resettlement of those found to be refugees and with administering a safe, dignified repatriation program for those found to be nonrefugees. A UNHCR senior legal officer in Geneva told us that, with regard to refugee status determinations, the CPA’s authors recognized that the first-asylum countries were sovereign decisionmakers, and the CPA authors did not expect UNHCR to ensure a proper decision in every case. The CPA’s authors, he said, did not view UNHCR as the final arbiter in refugee determinations, and UNHCR was not the decision-making body. As previously noted, the Statute of the Office of High Commissioner authorizes UNHCR to make its own determinations about individuals’ refugee status. This authority is commonly referred to as mandate authority. In what was essentially an additional procedure in the refugee status determination process, UNHCR could examine screened out asylum seeker cases for mandate (refugee) status. The CPA agreement did not make specific reference to UNHCR’s mandate authority, but Hong Kong nonetheless recognized this authority. The other countries of first-asylum had not formally recognized this UNHCR authority as of June 1996, but some, such as the Philippines and Indonesia, indicated to us that UNHCR’s mandates would be honored. . . . any person who . . . is unable or unwilling to return to . . . [his or her country of nationality or habitual residence] because of persecution or a well-founded fear of persecution on account of race, religion, nationality, membership in a particular social group, or political opinion . . . . The Immigration and Naturalization Service’s (INS) 1983 refugee processing guidelines state that the burden of proof of refugee status rests with the applicant. According to INS’ guidelines, the applicable burden to be met by the applicant is a well-founded fear of persecution, based on one of the reasons for persecution in the refugee definition. In determining an applicant’s refugee status, INS officers must evaluate whether the applicant’s statements and feelings lead to a finding of well-founded fear of persecution based on their consistency and credibility in light of known conditions and practices in the country from which refuge is sought. In addition, Public Law 101-167 states that certain categories of aliens (including Vietnamese who are members of categories of individuals determined by the Attorney General to be targets of persecution) may for purposes of refugee status determination establish that they have a well-founded fear of persecution based on one of the five reasons for persecution by asserting such a fear and asserting a credible basis for concern about the possibility of such persecution. Categories of Vietnamese found by the Attorney General to be of interest to the United States include former South Vietnamese government officials and members of the military; persons formerly closely affiliated with the U.S. or Western institutions; those sent to re-education camps, or to New Economic Zones because they were considered politically or socially undesirable; members of certain ethnic or religious groups; and family members of the above. According to INS guidelines, these categories of aliens shared common characteristics that identified them as targets of persecution in their countries. The facts surrounding the establishment of the categories were sufficiently known and established to permit what was, in essence, “judicial notice” to be taken without further proof. Thus, according to INS guidelines, if applicants clearly proved themselves to come within one of the established categories they would have also established themselves likely targets of persecution. INS guidelines state that if in interviewing an applicant the INS officer is satisfied that he or she falls within a designated category, a strong likelihood will have been established that the applicant is qualified for refugee status. The interviewing officer should then obtain information regarding the applicant’s actual persecution or well-founded fear of persecution. Statements indicating that category applicants fled their country for fear of persecution or due to actual acts of persecution, if credible, are generally sufficient for findings of refugee status, according to INS guidelines. Notwithstanding the view by some that the U.S. refugee definition fully replicates the international definition, both U.S. and UNHCR officials acknowledged that the definitions—and their applications—can differ. According to senior INS officials, the international definition is forward-looking “owing to well-founded fear of being persecuted,” while the U.S. definition can look to the past “persecution or a well-founded fear of persecution.” Thus, under the U.S. definition an applicant can be adjudicated a refugee on the basis of past persecution. Indeed, INS guidelines state that refugee status may be based upon persecution suffered in the past or upon the likelihood of future persecution. The presence of either is sufficient: Both conditions are not required. According to UNHCR officials, refugee screening under international standards assesses and takes into account past persecution, but also when the persecution took place and ended, and the reasonable likelihood of future persecution upon the individual’s return to his or her country of origin. The officials stressed that while past persecution is an element in establishing whether an individual has a well-founded fear of persecution upon return, it is not sufficient to establish refugee status. They added, however, that past persecution can be the basis for refugee status on humanitarian grounds when the persecution was so egregious that the individual could not reasonably be expected to resume a normal life upon return. UNHCR officials stated that changing conditions in asylum seekers’ countries-of-origin must also be taken into account in assessing individuals’ well-founded fear of persecution. UNHCR’s assessment of conditions in Vietnam, based on reports from nongovernmental organizations, governments, and UNHCR’s monitors in Vietnam indicated significantly improved conditions in the country. UNHCR reports on the CPA stated, for example, that what may have been a borderline case in the past could well fail to establish a well-founded fear of persecution now in light of improved conditions in Vietnam. All Vietnamese migrants arriving in Hong Kong before June 16, 1988, were automatically given refugee status, making them eligible for resettlement. However, according to Hong Kong government documents, it became increasingly clear during the mid-1980s that the large majority of arriving Vietnamese migrants did not have a well-founded fear of persecution in Vietnam and thus were not entitled to refugee status. According to the documents, departures from Vietnam appeared to be motivated principally by the desire for resettlement, rather than asylum, and resettlement countries were becoming increasingly reluctant to take people from Hong Kong. The Hong Kong government therefore decided that it could no longer grant automatic refugee status, and on June 16, 1988, initiated refugee screening procedures. These procedures were amended in September 1988 following an agreement with UNHCR, and again in June 1989, following implementation of the CPA agreement. Between March 1989 and December 1995, 60,275 asylum seekers in Hong Kong were screened for refugee status under the CPA. About 11,300 (18.8 percent) were screened in and resettled. The remaining 48,900 were determined not to be refugees and were either voluntarily or involuntarily repatriated to Vietnam or remained in Hong Kong asylum camps. Hong Kong government and UNHCR officials acknowledged mistakes in the implementation of Hong Kong’s CPA processing procedures, particularly early in the process, but said the process improved as it matured. We also noted errors. However, we believe the process was generally implemented in accordance with CPA guidelines. We interviewed UNHCR and Hong Kong government officials and reviewed various documents they provided us in developing a description of Hong Kong’s refugee screening procedures. Refugee screening in Hong Kong was a multitiered process involving both government bodies and UNHCR. The process included initial screening and an appeals process by the government, mandate review by UNHCR, and possible judicial review through the Hong Kong courts. The process is depicted in figure II.1. According to Hong Kong government reports, asylum seekers were informed upon interception in Hong Kong waters that they were entering the territory illegally and if they stayed would be subject to screening to determine their refugee status. They were told that those accorded refugee status would be resettled and those found not to be refugees would be detained pending repatriation. Prior to initial, or first-instance, screening, both the Hong Kong Immigration Department and UNHCR were to provide asylum seekers orientation and process familiarization interviews and materials. UNHCR legal consultants and Australian lawyers (who were working under a Jesuit Refugee Service project) were to provide asylum seekers legal advice and assistance prior to first-instance screening. Private Hong Kong attorneys entitled to practice in Hong Kong, when hired by asylum seekers, could also provide legal advice at this stage. At first-instance screening Immigration Department assistants, using UNHCR-approved questionnaires, interviewed asylum seekers to collect biographical information. This included the individuals’ personal and family histories; military service data; involvement in political parties or resistance organizations; religious activities; any denial of economic and social rights; prosecution; and motives for leaving and not wishing to return to Vietnam. There was also provision for any additional points or comments the individual wished to make. Immigration officers, assisted by government-provided interpreters, interviewed the asylum seekers, using the completed questionnaires as baseline data, and recorded their claims to refugee status. The officers made preliminary refugee status determinations from this data. These decisions were reviewed by senior immigration officers before the applicants were notified of the screening results. Notices of determination explaining the decisions were to be given all applicants. If screened in as refugees, the applicants were moved to a refugee camp to await resettlement. If screened out, applicants were advised of their right to appeal. Screened out applicants could appeal to the Refugee Status Review Board, a body composed of government and nongovernment officials. The review process was to be initiated by submitting the cases to the Review Board within 28 days of receipt of the initial status determination. On the day applicants were notified of negative determinations, copies of their files were to be given to UNHCR legal consultants—Agency for Volunteer Service counselors, who met and advised them on the merits of their cases. If the counselors believed particular claims warranted reconsideration, the counselors prepared the submissions to the Review Board. If not, they provided applicants counseling and guidelines for submitting their own written submissions. According to UNHCR and Review Board officials, Agency for Volunteer Service consultants filed about 25 percent of the approximately 49,000 appeals filed. Private Hong Kong attorneys could also file appeals on behalf of their clients. Review Board officials estimated that about 8 percent of those whose cases were not appealed by UNHCR counselors retained private attorneys who submitted their appeals for them. The Review Board was organized into two-person panels, each of which heard cases. No legal representation or oral evidence could be given at the Review Board, although according to the Board chairman about 25 percent of the asylum seekers making appeals were re-interviewed by Board members. A positive decision by either panel member could overturn negative Immigration Department decisions. The Review Board provided the asylum seekers written notification of its decisions, with reasons for decisions. If screened in at this review, the asylum seekers were transferred to refugee camps to await resettlement. If screened out, they were informed that they would be permitted to remain in Hong Kong pending their repatriation. According to a representative of the Hong Kong Attorney General’s Office, under Hong Kong administrative law asylum seekers could seek judicial review of the Review Board’s negative decisions in the Hong Kong courts if they believed the decisions were unreasonable or illegal, or involved procedural improprieties. Judicial review was not a review of the cases’ merits but, rather, the procedures employed in deciding them. Asylum seekers apply for judicial review of their cases through the Hong Kong Legal Aid Department, which determines the merits of the applicants’ claims. The Department can reject the applications, request the Refugee Status Review Board to reconsider (rescreen) the cases, or refer them to the courts for judicial review. According to a Legal Aid Department official, 3,651 asylum seekers had applied for assistance as of July 1996. Of that number, 450 had been granted Legal Aid Department assistance, and another 1,354 applications were under active consideration. The Legal Aid Department official could not provide us the number of cases rescreened by the Review Board or heard by the courts. According to the official, those statistics were not kept. However, the official said that few cases actually go to court as the Department usually processes deserving cases through the Review Board. According to the Attorney General’s Office representative we spoke with, there was only one instance where the court ordered a decision by the Review Board set aside. In that case, the court ruled that both the first-instance and Review Board decisions were flawed by procedural irregularities. In what became essentially another level of review, the Hong Kong government recognized UNHCR’s right to grant refugee status under its own authority. This meant that in cases the Hong Kong government rejected but UNHCR considered meritorious, UNHCR was able to recognize persons as refugees under its own mandate. UNHCR viewed recognition of its mandate as an important safety net for ensuring that no persons with valid claims were improperly screened out and returned to Vietnam. According to UNHCR officials in Hong Kong, all screened-out applicants’ cases, about 46,000, were examined for the possibility of mandate and about 11,000 were selected for mandate review. UNHCR granted mandates (refugee status) to about 1,550. Refugee screening in Indonesia was a two-phased process that met basic international structural screening standards but did not contain some of the checks and balances we found in the Hong Kong process. UNHCR played a major role in the process, although the Indonesian authorities retained decision-making responsibilities. Refugee screening in Indonesia began in September 1989 and ended in September 1993. All asylum seekers arriving after March 17, 1989, were screened for refugee status. (Those arriving before that time were automatically accorded refugee status and the opportunity to resettle in third countries.) The process in Indonesia was essentially a two-stage (first-instance and appeals) system, involving both Indonesian government authorities and UNHCR. This process is depicted in figure III.1. First-instance screening was conducted at Galang, the island asylum camp located several hundred miles north of Jakarta, the capital. Upon arrival at the camp, asylum seekers registered and provided basic biographical information to P3V, the Indonesian inter-ministerial task force created to deal with Vietnamese boat people. Later, UNHCR staff provided group prescreening counseling and materials and explained screening procedures and criteria. UNHCR staff, assisted by Vietnamese camp volunteers, then administered a more comprehensive questionnaire, designed to elicit more detailed information about the individuals’ claims for refugee status. We did not evaluate the adequacy of the information provided to asylum seekers during prescreening counseling. However, an independent observer with long experience at Galang told us UNHCR provided the asylum seekers ample information on the screening process and that asylum seekers were well prepared for the screening process. At first-instance screening, preliminary interviews were conducted by UNHCR legal consultants, attorneys trained in international refugee determination procedures and criteria. The consultants were assisted by UNHCR interpreters. The consultants prepared written case evaluations and screening recommendations, on the basis of the applicants’ biographical data and the interviews. The consultants worked under the supervision of a senior UNHCR legal officer, who was responsible for reviewing the consultants’ case evaluations. The asylum seekers’ files, containing their biographical data, the UNHCR questionnaires, and the consultants’ evaluations and screening recommendations were then passed to P3V. Teams of P3V officials, consisting of an interviewing officer and an interpreter, interviewed the asylum seekers to assess their credibility and verify the accuracy of the information in the UNHCR consultants’ preliminary interviews. (UNHCR representatives were free to monitor the interviews, but only spot checked them, according to UNHCR officials.) The interviewing officers then prepared the first-instance screening decisions. The UNHCR consultants’ interviews were, in effect, the substantive first-instance screening interviews. According to UNHCR officials, P3V officials placed strong credence in the consultants’ evaluations, and rarely disagreed with their recommendations. A UNHCR official told us that of the more than 3,000 cases screened positive by UNHCR at first-instance, P3V disagreed with the consultants’ recommendations in only 22 cases. A UNHCR official informed us that some P3V interviewing officers asked only a few questions of applicants, relying on the consultants’ evaluations in reaching their decisions. Written screening decisions were served to each applicant. Screened-in cases were processed for resettlement in third countries; those screened out were informed of their right to submit a written appeal. Screened out applicants had 15 days from the date of notification to appeal their decisions. UNHCR legal consultants counseled applicants, mostly in group sessions, on how to submit their appeals. UNHCR-trained camp-resident volunteers assisted applicants in drafting their appeals. Applicants’ appeals were considered by the inter-ministerial Review Committee in Jakarta. The Committee based its deliberations on the applicants’ appeals submissions and case files, which had been forwarded from Galang. It did not reinterview asylum seekers, according to UNHCR officials. The Committee could uphold or reverse negative first-instance decisions depending upon whether it believed the appeals submissions provided additional credible information and whether the cases had been screened in conformance with international refugee status determination criteria. Most appeals were decided at the Review Committee level. These decisions were considered final; however, according to UNHCR, many of the positive decisions were delivered to the applicants as late as 1 year or more after the decision was made. This was contrary to the CPA’s guidance concerning prompt notification, and, according to a UNHCR program officer, provided an opportunity for corruption to occur. The Committee had the option of referring questionable or unclear cases to a 10-member Appeals Board for final determination. The Committee referred only those cases on which it could not make a clear determination. A UNHCR representative attended Review Committee and Appeals Board meetings as an observer and advisor. The representative was also responsible for presenting UNHCR’s views on cases at appeal. UNHCR officials involved in the screening process told us applicants’ case files and appeals were forwarded to the UNHCR office in Jakarta at the same time they were sent to the Review Committee. They said UNHCR in Jakarta reviewed all asylum seekers’ appeals before they were discussed by the Review Committee to determine those with merit. They said that while P3V at Galang had almost always accepted UNHCR positive screening recommendations at first instance, there were occasionally cases that P3V denied despite the recommendations. The Galang consultants noted those cases for Jakarta’s review. The officials told us they instructed their representative to present UNHCR’s views on the cases it felt strongly about to the Review Committee and/or Appeals Board. According to UNHCR officials, UNHCR and the Review Committee or Appeals Board reached consensus on every case UNHCR believed merited refugee status. The Indonesian authorities accepted UNHCR’s positive first-instance recommendations on all but 22 cases, screening out those cases during the appeals process. During the appeals process UNHCR concurred with the Review Committee’s and/or Board’s negative decisions. Thus, according to UNHCR officials, because no meritorious claims remained in question, UNHCR had no need to exercise its mandate authority. (Later, however, UNHCR mandated seven cases as a result of its reviews of screening decisions.) The CPA charged UNHCR with administering the repatriation of asylum seekers determined not to be refugees but did not specifically charge the agency with the monitoring mission. However, U.N. Secretary General Javier Perez de Cueller did so in a September 1990 letter to the High Commissioner for Refugees, when he requested that the High Commissioner, independent of the mandate as High Commissioner for Refugees and on an exceptional basis, serve as the Secretary General’s Special Representative to coordinate and monitor the returnees program to Vietnam. In his letter, the Secretary General noted that the CPA’s success depended upon a balanced implementation of all its aspects, including that of the return and reintegration of persons determined not to be refugees, and that humanitarian consideration argued strongly for the United Nation’s continued involvement in the matter. As of February 1996, UNHCR employed seven international staff as monitoring officers (four based in Hanoi and three in Ho Chi Minh City) and a contingent of national administrative and support staff to implement its monitoring program. All of the monitoring officers were fluent in Vietnamese—several were also fluent in regional dialects. Five of the monitoring officers had worked in first-asylum country programs prior to taking positions as monitors in Vietnam. None of the monitoring officers needed or used interpreters in their work. The UNHCR monitoring system is built around and keyed to priority cases, returnees of special significance or concern or those who specifically request monitoring upon their return. UNHCR offices in the first-asylum countries are to notify the Hanoi office of pending returnees, both priority and routine cases. This information is to be placed in returnee databases in UNHCR’s Hanoi and Ho Chi Minh City offices. Returnees, who usually arrived by air in Hanoi or Ho Chi Minh City, were to be met by UNHCR officers and first-asylum country embassy representatives, in addition to Vietnamese authorities. If the flights comprised involuntary returnees from Hong Kong, they were also to be met by British Embassy officials, as Hong Kong’s involuntary return program, called the Orderly Return Program, was being carried out under a bilateral agreement between the British and Hong Kong governments and Vietnam. British Embassy monitoring officers were to independently monitor Hong Kong’s involuntary returnees, including priority cases. British and UNHCR officers viewed their dual monitoring of these cases as positive reinforcement of each other’s efforts. The British viewed their monitoring effort as necessary to be consistent with their orderly return Memorandum of Understanding with the Vietnam government, notwithstanding UNHCR’s monitoring program. Returnees were to be transferred from the airports to reception centers, where they were to undergo registration and reintegration processing by government agencies and foreign nongovernmental organizations, such as Nordic Assistance to Returning Vietnamese. They were also to be visited by UNHCR monitors, who were to answer any questions, pass out business cards with addresses and telephone numbers where they could be reached, and take names and addresses of individuals who requested priority monitoring. From the returnee databases, UNHCR planned monitoring missions—field trips designed to visit specific priority cases. These cases were supplemented with names of routine returnees in the area. The monitors notified the government authorities of their monitoring mission destinations (by province, district, and village) and in the south provided lists of all returnees in the provinces to be visited. According to UNHCR monitoring officials this approach had several advantages. It ensured government authorities of UNHCR’s openness, while securing the assistance of local officials as guides in finding individual returnees; ensured systematic planning so that all priority cases would be visited; was more efficient than random visits; and did not specify individual priority cases to be visited. This approach also enabled UNHCR to visit with local government officials and help ensure that local officials were adhering to government commitments not to persecute returnees. Monitoring missions, which normally consisted of two monitoring officers in the south and one in the north, were designed to contact 100 to 150 returnees per mission. Monitoring officers had conducted 363 monitoring missions as of our visit in February 1996. As they traveled, the monitors stopped at villages to ask village leaders and local citizens how local returnees were faring as a whole. They also visited outlying areas to ask similar questions. The monitors then visited individual returnees. UNHCR monitors told us that through these practices they gained a good knowledge about a much larger proportion of returnees than the numbers visited would indicate. If the officers sensed a returnee was reluctant to speak candidly they employed the technique of either occupying government officials with one officer while the other took the individual aside, or simply taking the returnee aside, to discuss the situation. According to UNHCR officials, as well as our observations while interviewing returnees in Dong Nai province, government officials normally did not attend the interviews but rather waited in places such as coffee shops until the monitoring visits were completed. Monitors, as well as others with extensive experience in Vietnamese culture told us, however, that Vietnamese speak their minds freely and would not be reticent to voice their concerns of treatment in front of government officials. The government’s attitude and attention toward monitoring has evolved over time; returnee monitoring initially drew considerable government attention, according to UNHCR monitoring officers. They said their monitoring missions drew entourages of 10 to 12 persons, including officials from the Ministry of Interior and the Ministry of Labor, War Invalids, and Social Affairs; but, over time the government’s attitude grew more relaxed. Over the last several years UNHCR monitoring officers were usually accompanied only by an official from the Labor and Social Welfare Department under the provincial Peoples’ Committee and the Labor Ministry. These departments are UNHCR’s counterparts and hosts in the provinces. They organize and administer the distribution of UNHCR’s individual cash grants and support the planning and implementation of UNHCR’s micro-projects. The following are GAO’s comments on the United Nations High Commissioner for Refugees letter dated September 9, 1996. 1. We agree that the CPA Steering Committee’s March 1996 announcement reaffirmed language in the CPA that asylum seekers found not to be refugees should be repatriated, and we revised our report accordingly. 2. Hong Kong Immigration Department officials we spoke with stated that refugee screening was conducted in accordance with UNHCR guidelines and that no additional screening criteria beyond that stipulated in the CPA were applied. 3. While our draft report referred to mandates resulting from UNHCR’s 1995 reviews, we modified the report to reflect the number of mandates resulting from all UNHCR reviews in Indonesia. 4. We modified the report to incorporate this suggestion. 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 implementation of the Comprehensive Plan of Action (CPA) for the resettlement of asylum seekers from Vietnam and southeast Asia, focusing on: (1) whether Hong Kong and Indonesia implemented CPA refugee status determination procedures in accordance with international standards and criteria; (2) alleged corruption in the program; (3) whether asylum seekers who returned to Vietnam encountered persecution; and (4) U.S. and United Nations High Commissioner for Refugees' (UNHCR) costs associated with CPA implementation. GAO found that: (1) the CPA agreement stipulated that the first-asylum countries' refugee screening procedures be carried out in accordance with established international criteria and procedures; (2) GAO's examination in Hong Kong and Indonesia indicated that both programs met the CPA's basic structural requirements for refugee adjudication criteria and screening procedures; (3) GAO believes Hong Kong's screening process contained sufficient checks and balances to provide reasonable assurances that asylum seekers' cases could be heard and errors could be identified and corrected; (4) Hong Kong government and UNHCR officials acknowledged screening errors, but officials told GAO they had worked to correct the errors and that the process had improved over time; (5) GAO believes the Hong Kong government and UNHCR officials' screening decisions appeared to be reasonable in 9 of the 10 cases GAO examined; (6) in Indonesia, GAO believes the large majority of asylum seekers with strong claims for refugee status were screened in, due in part to UNHCR's heavy involvement in the screening process; (7) the process in Indonesia provided for both first-instance screening and an appeals procedure involving Indonesian authorities and UNHCR legal consultants; however, few asylum seekers received individual legal assistance; (8) according to UNHCR, it concentrated its efforts in Indonesia on trying to ensure that those with well-founded refugee claims were screened in; (9) rumors of corruption in Indonesia's screening process began at the inception of the screening process; (10) reports, files, and documents provided to GAO by nongovernmental organizations, advocacy groups, former asylum seekers, UNHCR, and other knowledgeable sources indicated widespread corruption in the Indonesia process; (11) GAO did not conduct an independent investigation of allegations of corruption, but, on the basis of documentation available to GAO, discussions with UNHCR officials in Geneva and Indonesia, and UNHCR reviews of the process in 1995, it appeared that corruption was likely; (12) UNHCR monitors in Vietnam have reported that they found no evidence of persecution of returned asylum seekers by Vietnamese authorities; (13) UNHCR had implemented a comprehensive monitoring program that provides reasonable assurance that returnees were not persecuted; (14) UNHCR spent an estimated $444 million on the CPA from 1989 through 1995, excluding unpaid obligations of $139 million in Hong Kong; (15) U.S. contributions to UNHCR for the CPA during the period were an estimated $151 million; and (16) the United States also contributed about $9 million to voluntary agencies in support of CPA activities. |
We have identified three fundamental principles that can serve as a framework for considering large-scale federal assistance efforts. These principles are (1) identifying and defining the problem, (2) determining the national interests and setting clear goals and objectives that address the problem, and (3) protecting the government’s interests. Identify and define the problem: The government should clearly identify and define the specific problems confronting the industry— separating out those that require an immediate response from those structural challenges that will take more time to resolve. According to the auto manufacturers, the most immediate threat to the industry comes from inadequate cash reserves and negative projected cash flows combined with a tightening or denial of credit by commercial lending institutions. General Motors and Ford have not been profitable since at least 2006, and sales have decreased substantially for the Big 3 in 2008. In this regard, deteriorating financial and real estate markets, weakening labor markets, and high fuel prices have contributed to reductions in consumers’ demand for new vehicles, particularly less fuel-efficient vehicles. In addition, tightening consumer credit has made it difficult for some consumers to obtain auto loans. The industry, however, also faces structural challenges that will need to be dealt with, including higher labor and pension costs than competitors, dealership relationships and structure, and fleet characteristics—especially in the area of fuel efficiency. Determine national interests and set clear goals and objectives that address the problem: After defining the problem, Congress must determine whether a legislative solution best serves the national interest. If Congress determines that the benefits of federal intervention exceed those of bankruptcy reorganization for one or more of the domestic manufacturers, Congress could draft legislation to guide the availability and use of federal assistance. It is important that the legislation include a clear and concise statement of the objectives and goals of the assistance program. A statement of the objectives and goals of the program would help Congress and program administrators determine which financial tools are needed and most appropriate for the industry and for company- specific circumstances; provide criteria for program decisions; and serve as a basis for monitoring progress. Finally, although Congress may decide that there is a compelling national interest in providing financial assistance to help ensure the long-term viability of the Big 3, companies receiving assistance should not remain under federal protection indefinitely. Identifying the conditions that will signal an end to that protection would serve as congressional guidance on when the industry should emerge from the assistance program. Protecting the government’s interest: Because these assistance programs pose significant financial risk to the federal government, appropriate mechanisms should be included to protect taxpayers from excessive or unnecessary risks. Mechanisms, structures, and protections should be implemented to ensure prudent use of taxpayer resources and manage the government’s risk consistent with a good faith attempt to achieve the congressional goals and objectives of any federal financial assistance program. This can be achieved through the following four actions—all of which have been used in the past. 1. Concessions from others: Congress should require concessions from others with a stake in the outcome—including management, labor, suppliers, dealers, and creditors. The concessions are not meant to extract penalties for past actions, but to ensure cooperation and flexibility in securing a successful future outcome. 2. Controls over management: The government must have the authority to approve an aid recipient’s financial and operating plans and new major contracts. The authority is meant to ensure a restructuring plan with realistic objectives and to hold management accountable for achieving results. 3. Collateral: To the extent feasible, the government should require that the recipient provide adequate collateral, and that the government be in a first lien position. 4. Compensation for risk: The government should receive compensation through fees and/or equity participation in return for providing federal aid. The government’s participation in any upside gains is particularly important if the program succeeds in restoring the recipient’s financial operational health. Congress could apply these principles if it decides to offer financial assistance to the domestic auto manufacturers. If Congress determines that the systemic, economic consequences of risking the immediate failure of any or all of these companies are too great, a two-pronged approach in applying the principles could be appropriate. Specifically, Congress could 1) authorize immediate, but temporary, financial assistance to the auto manufacturing industry and 2) concurrently establish a board to approve, disburse, and oversee the use of these initial funds and provide any additional federal funds and continued oversight. This board could also oversee any structural reforms of the companies. Among other responsibilities, Congress could give the board authority to establish and implement eligibility criteria for potential borrowers and to implement procedures and controls in order to protect the government’s interests. The federal government has a range of tools it could use to provide such bridge assistance, including loans and loan guarantees. Historically, the federal government has used loans and loan guarantees in its financial assistance to specific companies. In providing such credit assistance, the government has assumed that the federal role is to help the industry overcome a cyclical or event-specific crisis by gaining access to cash in the short term that it otherwise cannot obtain through the markets. Credit assistance assumes that the aided companies will eventually return to financial health and have the capacity to pay back the loans. The government has offered such assistance in return for companies providing various forms of collateral and/or equity to protect taxpayer interests, as well as for various concessions by interested parties to share the risk and promote shared responsibility. For example, any federal assistance to an auto manufacturer might seek to ensure that all parties, including labor and management, share responsibility for bringing the company back to profitability, and that no party makes excessive concessions relative to the other parties. Finally, accountability should be built in so that Congress and the public can have confidence that the assistance was prudent and consistent with the identified objectives. For example, as a condition for receiving federal assistance, the auto manufacturers should be required to provide program administrators and appropriate oversight bodies with access to their financial records and submit detailed operating and financial plans indicating how the funds and other sources of financing will be used to successfully return the companies to profitability. Such information would allow program administrators to oversee the use of funds and to hold the companies accountable for results. Congress should concurrently establish a board to approve, disburse, and oversee the use of these initial funds and provide any additional federal funds and continued oversight. This board could also oversee any structural reforms of the companies. The federal government has established boards to implement past financial assistance efforts, including when providing assistance to Lockheed in 1971 and Chrysler in 1980. More recently, in the aftermath of the 2001 terrorist attacks on the United States, Congress created the Air Transportation Stabilization Board (ATSB) to provide loan guarantees to the airline industry. The voting members of ATSB included a member of the Board of Governors of the Federal Reserve System and representatives from the Departments of the Treasury and Transportation. While the exact membership of a board to provide financial assistance to the Big 3 auto manufacturers could differ, past federal financial assistance efforts suggest that it would be prudent to include representatives from agencies knowledgeable about the auto manufacturing industry as well as from those agencies skilled in financial and economic analysis and assistance. In creating such a board, it will be crucial for Congress to ensure that the board, similar to boards created to implement past federal financial assistance efforts, has access to all financial or operational records for any recipients of federal assistance so that informed judgments and reviews can occur. It would also be important to ensure that the board has the authority and resources to hire or contract for necessary legal, financial, and other expertise. For example, ATSB hired an executive director, financial analyst, and legal counsel to help the board carry out its duties. Beyond access to records and expertise, however, to succeed in achieving the goal of a restructured industry, the board is likely to need the authority to implement procedures and controls to protect the government’s interests. This would include bringing the parties with a stake in a successful outcome to the table. Our review of past large-scale financial assistance efforts leads us to conclude that all of these parties must make concessions—not as penalties for past actions but rather to ensure cooperation in securing a successful future. The board would also need authority to approve the borrower’s operating and financial plans and major new contracts to ensure the plans are realistic and to assess management’s efforts in achieving results. In addition, the federal government should be the first creditor to be repaid in the event of a bankruptcy or when the company returns to profitability. In 1980, when providing assistance to Chrysler, Congress mandated that Chrysler meet additional policy-oriented requirements such as achieving certain energy efficiency goals and placed limits on executive compensation. More recently, as a condition of receiving federal assistance in the wake of the September 11 terrorist attacks, the Air Transportation Safety and System Stabilization Act required that airlines limit executive compensation. In addition, the board, consistent with congressional direction, could require that manufacturers, with the cooperation of labor unions, take steps to help control costs. Such steps could include reducing excess capacity by closing or downsizing manufacturing facilities, reducing work- rule restrictions that limit flexibility in terms of which workers can do what types of jobs, and ending contracts with dealerships that require the manufacturer to pay a large buyout to a dealer if a product line is eliminated. Some of these steps should be specifically addressed in the legislation. It will be important to keep in mind, however, that the affected parties will cooperate only if the assistance program offers a better alternative than bankruptcy. The government should not expect creditors, for example, to make concessions that will cost them more than they would expect to lose in a bankruptcy proceeding. Finally, Congress should provide the board with enough flexibility to balance requirements in each recipient’s business plan to achieve and maintain profitability. The board could be the logical entity to establish and implement clearly defined eligibility criteria for potential borrowers, consistent with statutory direction provided by Congress, and establish other safeguards to help protect the government’s interests and limit the government’s exposure to loss. The safeguards could vary, depending on the nature of the financial assistance tools used. Examples of safeguards over loans and loan guarantees that have been used in the past include the following: Potential borrowers have been required to demonstrate that they meet specific eligibility criteria, consistent with congressional direction as to the problems to be addressed and the objectives and goals of the assistance. Potential borrowers have been required to demonstrate that their prospective earning power, together with the character and value of any security pledged, provided reasonable assurance of repayment of the loan in accordance with its terms. Potential borrowers have been required to clearly indicate the planned use of the loans so that the board could make appropriate decisions about the borrower’s financial plan and terms and conditions, as well as collateral. The government has charged fees to help offset the risks it assumed in providing such assistance. For loan guarantees, the level of guarantee has been limited to a given percentage of the total amount of the loan outstanding. To further enhance accountability and promote transparency, the board should monitor the status of federal assistance on a regular basis and require regular reporting from companies receiving assistance. This reporting should, at a minimum, include information on cash flow, financial position, and results of independent audits. In addition, the board should be required to provide periodic reports to Congress. This reporting should include status reports on the amount and types of assistance provided to the auto manufacturing industry, periodic assessments of the effectiveness of the assistance, and status of any repayments of loans that the federal government has provided to the industry. In addition to providing oversight and accountability of the federal funds, the board could be charged with overseeing efforts of the assisted companies to implement required changes and reform. The board would likely need to consider industry-specific issues in implementing financial assistance and industry reform. Employee compensation would be one of those issues, and a very complex one. Benefits for auto industry workers represent a significant long-term financial commitment of the companies seeking assistance, much of it to retirees and their families. Although success in a company’s future will depend in part on sacrifice from all stakeholders, most of the changes in this area will necessarily take effect over the long term. The complexities of these arrangements and their interface with active workers and with existing government programs will make implementing federal assistance particularly challenging. For example, the board would need to consider the impact that a possible bankruptcy filing by an auto manufacturer would have on the Pension Benefit Guaranty Corporation, the federal agency that insures private employers’ defined benefit pensions, and whose cumulative balance is already negative. In conclusion, Congress is faced with a complex and consequential decision regarding the auto manufacturers’ request for financial assistance. The collapse or partial collapse of the domestic auto manufacturing industry would have a significant ripple effect throughout other sectors of the economy and serve as a drag on an already weakened economy. However, providing federal financial assistance to the auto manufacturing industry raises concerns about protecting the government’s interests and the precedent such assistance could set for other industries seeking relief from the current economic downturn. My remarks today have focused on principles Congress may wish to consider as it contemplates possible financial assistance for the auto manufacturing industry. These principles are drawn directly from GAO’s support of congressional efforts over several decades to assist segments of industries, firms, the savings and loan industry, and municipalities. Although the principles do not provide operational rules outlining exactly what should be done, they do provide a framework for considering federal financial assistance. By defining the problem, determining whether a legislative solution to that problem best serves the national interest, and— assuming that such a solution is appropriate—establishing an appropriate governance structure, Congress might better assure itself and the American people that the federal assistance will achieve its intended purpose. Thank you Mr. Chairman, Ranking Member Bachus, and members of the committee for having me here today. We at GAO, of course, stand ready to assist you and your colleagues as you tackle these important challenges. For further information on this testimony, please contact Katherine A. Siggerud on (202) 512-2834 (auto industry issues), J. Christopher Mihm on (202) 512-3236 (GAO’s principles), and Gary L. Kepplinger on (202) 512- 5400 (legal issues). 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 current economic downturn has brought significant financial stress to the auto manufacturing industry. Recent deteriorating financial, real estate, and labor markets have reduced consumer confidence and available credit, and automobile purchases have declined. While auto manufacturers broadly have experienced declining sales in 2008 as the economy has worsened, sales of the "Big 3" (General Motors, Chrysler, and Ford) have also declined relative to those of some other auto manufacturers in recent years because higher gasoline prices have particularly hurt sales of sport utility vehicles. In addition to causing potential job losses at auto manufacturers, failure of the domestic auto industry would likely adversely affect other sectors. Officials from the Big 3 have requested, and Congress is considering, immediate federal financial assistance. This testimony discusses principles that can serve as a framework for considering the desirability, nature, scope, and conditions of federal financial assistance. Should Congress decide to provide financial assistance, we also discuss how these principles could be applied in these circumstances. The testimony is based on GAO's extensive body of work on previous federal rescue efforts that dates back to the 1970s. From our previous work on federal financial assistance to large firms and municipalities, we have identified three fundamental principles that can serve as a framework for considering future assistance. These principles are (1) identifying and defining the problem, (2) determining the national interests and setting clear goals and objectives that address the problem, and (3) protecting the government's interests. First, problems confronting the industry must be clearly defined--separating out those that require an immediate response from those structural challenges that will take more time to resolve. Second, Congress should determine whether the national interest will be best served through a legislative solution, or whether market forces and established legal procedures, such as bankruptcy, should be allowed to take their course. Should Congress decide that federal financial assistance is warranted, it is important that Congress establish clear objectives and goals for this assistance. Third, given the significant financial risk the federal government may assume, the structure Congress sets up to administer any assistance should provide for appropriate mechanisms, such as concessions by all parties, controls over management, compensation for risk, and a strong independent board, to protect taxpayers from excessive or unnecessary risks. These principles could help the Congress in deciding whether to offer financial assistance to the domestic auto manufacturers. If Congress determines that a legislative solution is in the national interest, a two-pronged approach could be appropriate in these circumstances. Specifically, Congress could 1) authorize immediate, but temporary, financial assistance to the auto manufacturing industry and 2) concurrently establish a board to approve, disburse, and oversee the use of these initial funds and provide any additional federal funds and continued oversight. This board could also oversee any structural reforms of the companies. Among other responsibilities, Congress could give the board authority to establish and implement eligibility criteria for potential borrowers and to implement procedures and controls in order to protect the government's interests. |
The traditional financial statements, in terms of form and content, have not changed much over the years. The financial reporting model uses a mixture of historical costs and fair value to present a company’s transactions. This model has value but fails to meet the broader range of information needs of investors who want more forward-looking information and data that reflect a company’s overall performance, risk profile, and expectations for future performance. Little progress has been made in moving toward a more comprehensive reporting model that would include both financial information (financial statements and related disclosures) and nonfinancial information (such as high-level operating and performance measures used by management and forward-looking information about opportunities, risks, and management’s plans). Participants stated that the current model is too driven by accountants, regulators, corporate management, and boards of directors who have historically focused on the technical aspects of financial reporting and are more likely to move slowly and cautiously in making changes. As a result, the current model has failed to get adequate “traction” to move toward a more comprehensive reporting model. Going forward, participants believed that the impetus for change to the financial reporting model would have to come more from the investors and other users of financial information who need timely, accurate, and useful information to make value and risk judgments about publicly traded companies. Also, a safe harbor for preparers and auditors of more forward- looking information may be necessary to progress. Other suggestions by participants included moving toward more principle-based accounting rules to provide more substance versus form in reporting. There was general agreement that (1) a combination of principle-based and rule-based standards would be needed and (2) principle-based accounting rules were not a panacea to solve financial reporting problems. In that respect, some participants suggested that standard setters first needed to get the basics right with the current financial reporting model, for example in areas such as accounting for pensions, post-employment benefits, and pro-forma financial statements, to help restore investor confidence. It was also suggested that the financial reporting model have different layers of reporting, while still having full disclosure, coupled with different levels of assurances depending on users’ needs. Such layering would allow a user to “drill down” to the level of detail needed. An expectation gap between what an audit is and is not continues to exist, especially with regard to the auditor’s responsibility for detecting fraud. Some participants believed a periodic forensic audit may be needed to supplement the traditional financial statement audit to assist in detecting fraud. However, it was recognized that an audit cannot create precision or certainty where such factors do not exist, as financial statements are not as precise as users may believe. In addition, management and audit committees have important roles and responsibilities for internal control to prevent and detect fraud. The Sarbanes-Oxley Act of 2002 will help to close the expectation gap concerning the effectiveness of internal control over financial reporting by requiring management and auditor reporting on these controls. Nonetheless, an expectation gap may still exist as users may be expecting that an audit addresses internal control over the company’s overall operations and performance. Educating users on the terminology of internal control reporting, such as reportable conditions, was also urged so that the users and capital markets do not over react in interpreting the internal control reports. Participants suggested the need for a new reporting model for auditing, a renewed focus on the quality of auditing, and building more effective working relationships with the audit committee. It was recognized that the standard auditor’s report could be made more useful to users who are seeking greater information about what the auditor did and found, as well as expanded assurances. Tiered reporting that would provide expanded optional assurances was suggested. Participants stated that the quality of audits can be adversely affected by “time and fee pressures” that lead to less substantive auditing. Caution was also urged that rotation of audit partners required by the Sarbanes-Oxley Act of 2002 does not have the unintended consequence of adversely affecting the quality of audits through loss of experience with a particular company’s operations and financial reporting. It was recognized that confidence in audits needs to be restored not only for investors, but also to attract and retain the best people for the accounting profession over time. A strong, viable Securities and Exchange Commission (SEC) is needed to maintain investor confidence in the markets. Participants recognized that the SEC’s resources had not kept up with its increased workload over the years. This situation has adversely affected the SEC’s ability to adequately enforce the securities laws and also its ability to invest in technology to more efficiently manage its workload. Some participants suggested that the SEC may wish to consider pursuing the status to operate independently in setting its own funding levels, as the Federal Reserve does. It was also suggested that the SEC needed to explore how it is using its enforcement powers, as civil penalties may ultimately be hurting shareholders more than those who have violated the securities laws. In that respect, the SEC should reexamine the amount and targeting of its civil sanctions, its use of criminal statutes, and working effectively with the Department of Justice to put violators behind bars when appropriate. The new Public Company Accounting Oversight Board (PCAOB) needs to officially get up and running. Suggested priorities for the PCAOB included establishing policies and procedures for disciplinary actions and conducting inspections of registered public accounting firms. Also, decisions need to be made on the setting of standards for auditing, quality control, ethics, and independence. It was also suggested that the PCAOB should evaluate the recent events that have affected the public’s confidence in auditors to consider what further actions may be needed beyond those mandated by the Sarbanes-Oxley Act of 2002 and recent regulatory changes and proposals. In addition, the PCAOB needs to work cooperatively with the SEC and state boards of accountancy. The fragmentation of the regulatory system for the public accounting profession was not completely dealt with by the Sarbanes-Oxley Act of 2002. At a minimum, the PCAOB will need to effectively work with the other public regulators on enforcement/disciplinary matters. Participants generally believed that the provisions of the Sarbanes-Oxley Act of 2002 should be implemented and assessed before the Congress should consider adding any new legislative requirements; however, participants agreed that much can and should be done by other responsible parties, such as by regulatory and self-regulatory bodies, within their existing authority. Restoring public trust and confidence in a manner that can be sustained over the long-term will require concerted actions by a variety of parties, including accounting and auditing standard setters, regulators, management and boards of directors of public companies. The Sarbanes- Oxley Act of 2002 provides a strong framework for more effective corporate governance and regulation of the accounting profession. The SEC and the stock exchanges, along with the Financial Accounting Standards Board, have also been actively making progress to address a range of issues raised by the accountability breakdowns. However, the fundamental principles of providing the right incentives, providing adequate transparency, and ensuring appropriate accountability are even more important and relevant as the new structure and reforms are being established. It is important to recognize that rules alone will not effectively resolve the problems that resulted in massive restatements of financial statements and ultimately bankruptcy of certain public companies. The Congress cannot legislate nor can regulators establish by rule human behavior or integrity to always do the right thing in protecting the public’s interest. Public company management needs to set the appropriate “tone at the top” and that culture needs to be carried throughout the company and exhibited by the board of directors in its oversight of management and in its protection of shareholder interests. The accounting profession needs to vigorously work to rebuild its greatest asset—public trust—in order to restore faith in the integrity and objectivity of the profession. Accounting and auditing standards need to be reexamined to provide enhanced value to users of financial statements, related disclosures, and more comprehensive business reporting. Users of these products will need to step forward to help ensure the value of an enhanced financial reporting model and related auditor assurances for the effective functioning of U.S. capital markets. Accountants and regulators who have historically driven changes to the financial reporting model do not have the same set of needs as users of financial statements. In that respect, a broader performance and accountability reporting model is needed and should include not just financial statements but also performance and other information necessary to better assess institutional value and risk. GAO will continue to play a professional, objective, nonpartisan and constructive role in assisting the Congress, regulators, and the accounting profession as initiatives are proposed, agreed upon, and become operational. In that respect, the views of the participants in this forum represent considerable experience in the matters discussed and represent one way in which an independent party, such as GAO, can assist those who define and/or implement policy. The results of the forum are organized by the major areas of discussion and reflect subsequent comments we received from the participants on a draft of this report. Appendix I provides a list of the participants. For additional information on our work concerning corporate governance, the accounting profession, financial reporting, and related regulatory matters, please contact Jeffrey C. Steinhoff, Managing Director, Financial Management and Assurance, on (202) 512-2600 or at SteinhoffJ@gao.gov. I wish to thank each of the participants for taking the time to share their knowledge and to provide their insights and perspectives on the important matters discussed during the forum. I look forward to working with them on these important issues of mutual interest and concern in the future. Recent legislative and regulatory initiatives, such as the Sarbanes-Oxley Act of 2002, Securities and Exchange Commission (SEC) proposals and rules, and proposed revised stock exchange listing requirements, have addressed weaknesses in corporate governance exposed by the major financial reporting issues raised by restatements and corporate failures, placing greater emphasis on the roles and responsibilities of boards of directors. Although these reforms are not yet fully in place and not all issues have been addressed, many corporate boards are reassessing their roles. However, participants agreed that there is no “silver bullet” and that it is difficult at this time to say what is working and what is not working. Participants believed that it is important to continue working toward more effective boards of directors and discussed the importance of clearly defining and, in some cases, redefining, the roles and responsibilities of the board of directors of public companies as a significant measure to help restore investor confidence in the market. The board has a responsibility to enhance shareholder value, assess and monitor risk, and ensure management accountability. In that respect, the operations of the boards should reflect a culture that embraces these responsibilities. In addition to focusing on what accountants, regulators, and corporate management and boards of directors (the “supply side”) should do, boards need to focus more on what investors and other users of financial information (the “demand side”) want from corporate governance. In order to fulfill its responsibility of effectively overseeing management, the board must have a thorough understanding of the company, its business model and related risks, corporate culture, and the various interests the board represents. Participants believed that the board has a responsibility to educate itself through the use of external advisors or other means and not rely solely on information provided by management. This will better allow the board to raise difficult questions and probe issues to provide input on strategy, assess and manage risk, and hold management accountable for its actions. The time frame needs to be very clear, as creating value is a long-term, not a short-term, process. Investors are not looking for quick schemes that endanger the company. In addition to its responsibility to oversee management, the board also has a responsibility to shareholders and other stakeholders of the company, such as employees, creditors, and the public. Participants believed that boards need to do a better job of identifying their constituencies and understanding and addressing their concerns. For example, from the shareholders’ point of view, many believe that board structures have not been working properly to both protect shareholders’ interests and grow share value. We have become a nation of investors, and boards need to focus attention on the fact that there has been a shift from shareholders not only being individual investors but also institutional investors, such as pension plans and mutual funds, which are acting as fiduciaries for others. Institutional investors may have concerns different from those of individual investors regarding expectations for corporate governance and the role of the board of directors. Participants also felt that boards needed to reexamine how they are structured and how they operate. Many boards were not perceived to function properly for investor protection, which is a negative reflection on the entire corporate governance process. To some extent, deficiencies in the functioning of boards may have been masked by the effect of a flourishing market and may not have been readily apparent until market downturns began to occur. It is incumbent upon boards to establish processes that are appropriate and effective to restore investor confidence rather than relying on a checklist approach to corporate governance. Participants believed that information on best practices of boards would be useful to help to improve board operations. Some best practices include focusing on improving communications with management and using external advisors. It was also suggested that boards should effectively use the “gatekeepers” (auditors and audit committees) for help in the board’s oversight of financial management and reporting activities of the company. Independent committees of the board of directors, such as the auditing, compensation, and nominating committees, play an important role in effective corporate governance. Audit committees should not only oversee both internal and external auditors, but also be proactively involved in understanding issues related to the complexity of the business, and, when appropriate, challenge management through discussion of choices regarding complex accounting, financial reporting, and auditing issues. In that respect, the role of the audit committee, which in some cases has not been very active or effective in its oversight of management or auditors as related to financial reporting, is evolving into not just financial management oversight, but the overall aspects of the company’s financial reporting, such as releases on earnings expectations and quarterly financial reports. In addition, the Sarbanes-Oxley Act of 2002 defines a number of audit committee responsibilities for the hiring, compensation, and oversight of auditors. However, a serious concern exists over whether audit committee members are focusing more on procedural matters to protect themselves from liability than on improving their competence and effectiveness as a committee. Also, compensation committees need to understand the implications of compensation to provide incentives for management to do the right thing for the company and its shareholders versus themselves. Compensation committees need to focus on executive performance more related to the company’s long-term objectives rather than just short-term business results. In addition, nominating committees need to ensure that they identify the right mix of talent to do the job and make it clear to candidates what is expected of them as a board member rather than merely approving candidates identified by management. In that respect, some participants stated that boards are often made up of consensus builders and, in that case, a dominant member of the board could effectively control the board’s agenda. Participants also discussed the importance of providing reasonable transparency of key information, with regard to both financial information of the company and board operations. Boards need to focus on enhancing the quality and reliability of financial reporting, identifying key elements of disclosure, and ensuring that such information is appropriately disclosed to investors and the public. Participants also believed that there is a need for better transparency of board activities to help restore investor confidence, such as reporting on the board’s progress against best practices of leading companies noted for the effectiveness of their boards. If the board is not following best practices, it should report why it is not following these practices. The point was also made that successful companies have reinvented themselves through two fundamental focuses—ethics/integrity and respect for people. These behaviors have been demonstrated by long- term successful companies. Participants stressed the importance of independence, both in fact and appearance, as essential for the board to be able to fulfill its responsibilities. Participants expressed the belief that having the right people on the board is just as important if not more so as having the right rules under which the board operates. Nominating committees need to identify competent individuals who possess an “independent spirit” which allows board members to raise difficult questions and probe issues related to management’s decisions to ensure that the company operates honestly and effectively in the shareholders’ interest. Even if board members are independent, they can be ineffective as directors if they lack expertise or knowledge relevant to the company and its business. Therefore, board members must also be willing to educate themselves about the company and the risks it faces rather than relying on a checklist mentality of corporate governance requirements issued by the stock exchanges. Participants also noted that unfortunately, as a result of the recent major financial reporting issues leading to restatements and, in some cases, bankruptcy, board members have focused on the rules and may be concerned more about their personal reputation and financial liability rather than focusing on protecting shareholders’ interests and adding shareholder value. Participants expressed concern that disincentives such as legal liabilities, including financial and reputation risks, may limit a board’s ability to attract the right people to serve over time. Participants raised the question whether the current system of selecting directors needs to be reexamined because the existing system from a shareholders’ point of view has not been working to get the right people on boards. For example, it was viewed that individuals who serve on numerous boards at the same time and/or who serve for personal incentives, over time lose the “independent spirit” needed to be an effective board member. Participants also stated there is some evidence that the recruiting of directors is being adversely affected by the current environment that is placing ever-increasing demands on board members. Examples were cited of increased premiums for finding qualified board members and such searches needing to identify 15 candidates for a board position just to get one who is willing to serve. Other participants commented that there is no shortage of qualified people to serve on boards of directors. Many people are willing to serve higher goals and the selection process needs to go beyond “its usual pool of suspects.” Some participants suggested that perhaps serving as a director on a board should be a salaried position if shareholders were willing to bear the cost. Other participants noted, however, that having salaried board members could be problematic because shareholders would have to be able to hire and fire the directors that would cause great instability and salaried board members may also lack an “independent spirit.” Participants also discussed the appropriateness of the chief executive officer (CEO) serving as chairman of the board of directors, which could present potential conflicts resulting from a single individual functioning in these dual roles. Some participants believed that separation of the CEO and chairman of the board positions recognizes the differences in their roles and eliminates conflicts in functions. For example, management is responsible for the operations of the company and members of the board in their oversight function should have the ability to challenge the CEO in managing the company. Although the corporate governance community in the United States may not currently be receptive to requiring the separation of the CEO and the chairman of the board, such a practice does exist in the United Kingdom, where apparently there is more receptivity. Therefore, regulators may need to look beyond the United States to consider the merit of whether these positions should be held by different individuals. Other participants pointed out that not allowing the CEO to also serve as the chairman of the board of directors does not guarantee that problems will be avoided if the board lacks an independent spirit to question management, citing such examples as Enron, Global Crossing, and WorldCom, all of which had a separate CEO and chairman. Some separations of the CEO and chairman functions are successful and others are not. A CEO may lose authority when the position is too diluted. United States firms have been successful because they have had strong leaders running them, and an effective and strong board of directors can counterbalance a strong executive. Participants commented that traditional financial statements, in terms of their form and content, have not really changed over the years. The model we have today can be traced all the way back to the early 1970s (back to the Trueblood Committee). Participants attributed this lack of change to the financial reporting model being largely driven by the supply side, that is accountants, regulators, and corporate management and boards of directors. Participants referred to a landmark study on financial reporting by the Jenkins Committee as evidence that little has changed. Participants acknowledged that accounting standards have changed to capture fair value in addition to historical value, resulting in a model that is now a mixture of the two, whereas the original financial statement model was based solely on historical costs. However, the majority of the Jenkins Committee’s recommendations never got any “traction” to move them forward. The Financial Accounting Standards Board (FASB) has many of these items on its agenda. At the same time, there are many other items on FASB’s agenda. Participants felt that if stakeholders were serious about improving the financial reporting model, a group would be established and funded specifically for this purpose. Participants stated that such a group was proposed by the Jenkins Committee, but it was never established. There needs to be a sense of urgency in order to make the investment, commitment, and ultimately change the model. However, one participant questioned that since almost 10 years have gone by since the Jenkins Committee made its recommendations, is there really a demand for change? Some participants agreed that financial statements are an important aspect of overall business reporting, but were concerned that the existing model focuses too much on financial statements rather than on the broad range of information that is needed by investors to make good financial decisions. Other participants commented that financial statements that exist today, while they may be useful to some, are not used very much by investors. Financial statement disclosures are difficult to understand, as though written in a “foreign language.” Participants stated that the disclosures must be made more understandable. However, there is a lot of dialogue taking place today concerning business reporting. For example, regulators are asking what should be disclosed, what is the purpose of financial statements, and how useful are they? What are analysts doing with financial statements? What do analysts use to value stock? Are they using financial statements? If so, what information in the financial statements are they using to value stock? What additional information would assist them in more accurately valuing stock? Participants noted the need to report information about the business model, as users of financial reports first must better understand the entity’s business model in order to comprehend financial and nonfinancial information about the entity. Financial statements today focus on reliability much more than on relevance. Historical information is reliable, but not necessarily relevant. Fair value information is evolving but improvements in reliability are needed. Participants agreed that reliability is fundamental to useful business reporting; however, participants felt that financial reporting would be much more useful if it were expanded to include key performance indicators and measures (including disclosures on how the key measures were chosen). Participants raised questions about the gaps in reporting of intangibles. For example, in a knowledge-based economy, one could argue that the most important assets are people (human capital); however, current financial reporting records investments in people as an expense and liability. Participants agreed that it would be useful if financial reporting recognized people as assets, but raised the difficulty in valuing human capital. Participants generally agreed that there is a demand for both historical and fair value reporting. However, participants felt that FASB needed to better differentiate between the two. In that respect, some participants felt that FASB is marching toward a “fair value” path and cautioned that the fair value reporting model is not always good and needs to be used only where it really makes sense. Participants acknowledged that financial reporting, in addition to being largely driven by the accounting profession, also has been driven by the legal system, resulting in an overload of information that is too complex and not easily understood. Disclosures that run on for pages are not understandable. Experts are needed to interpret the disclosures and sometimes even they cannot decipher what is being reported. However, participants understand that accountants are taking a risk when they issue an opinion on the financial statements. The litigious environment has also led to a “check box” mentality where it is more important to follow the accounting rules when preparing financial statements than actually reporting the economic substance of the transaction. Participants generally agreed that financial statements are not designed to serve all business needs and that other types of business reporting are needed to assist investors and other users in making decisions. Participants also generally agreed that the demand side (investors and other users of financial information), has not been as involved as it needs to be to make financial reporting more meaningful and understandable. More needs to be done to convince investors and other users to demand different reporting. Voluntary disclosures are rare and only in industries that demand this type of information. The voluntary process has resulted in some movement toward better reporting, but it is very slow moving. Change is going to have to come from the demand side and is going to require a lot of leadership from very influential people. Input from advisory councils may also be beneficial for developing a broader business reporting model. While it is essential that a new model not be driven totally by the supply side (accountants, regulators, corporate management, and boards of directors), there cannot be a disconnect between the supply and demand sides. Participants also cautioned that we need to move forward patiently toward a new comprehensive reporting model. It was viewed that forward, real- time, qualitative information, all of which would be helpful in predicting future cash flows, may require a safe harbor from liability. It is also important to keep in mind the role of the regulator in this process since the public needs to have confidence in the regulators to enforce rules. Regulators may not be totally supportive of a more comprehensive business model because they are concerned that the information would be based on a lot of judgment and, therefore, lack of precision, which could make enforcement of reporting standards difficult. Participants discussed the lack of investor confidence in the current financial reporting model and the need to first improve the reliability of financial reporting before adding any new reporting. First, get the basics right, that is, the “blocking and tackling” of financial reporting. Participants cited accounting for pensions, postemployment benefits, and pro-forma financial statements as examples of accounting treatments that need attention before building on any new reporting requirements. Issuers of financial statements who are inappropriately bending the current accounting rules need to know they cannot get away with this anymore. Participants discussed the merits of replacing accounting rules with principle-based standards to promote more substance versus form in reporting. However, some participants cautioned that principle-based standards should not be viewed as a panacea to solve the problems with financial reporting and could lead to an undesirable situation where you would not have comparability or agreement as to the treatment of similar transactions. Also, stakeholders may not interpret principles consistently, and it is important for stakeholders to have the same conceptual framework as preparers when interpreting a principle. In addition, you would need the right kind of implementation guidance to carry out a principle. Participants agreed that while accounting rules are also needed, there should not be such blind adherence to accounting rules to result in reporting form over substance. Participants offered that an “artful” blend of both principles and rules would be useful. The Employee Retirement Income Security Act (ERISA) was cited as an example of an approach that blended both a principles-based (general fiduciary standards) and rules- based (prohibited transactions) approach to an important issue (retirement security). Participants also discussed the idea of exploring different levels or layers of reporting while still having full disclosure. Such layering will allow users to get only the information they need. For example, the basic level of reporting would include performance and risk data, an industry layer could include benchmarking information, and a company specific layer could include information management feels it is appropriate to disclose that is not contained in other layers of reporting. Along with this idea is the need to explore different levels of verification or assurances by independent parties based on the users’ need for such verification or assurances. For example, what type of assurances are needed for nonfinanical information and can auditors provide such assurances? Overall, it is critical to get the demand side (investors and other users of financial information) to weigh in on what information they need and want. It is not realistic to only expect the supply side (accountants, regulators, and corporate management and boards of directors) to come up with the best solutions for improving the financial reporting model. Although time did not permit its discussion, financial literacy was raised as an important issue that needs addressing. Participants agreed that there clearly is a need for more education and for investor assistance in this area. The participants discussed the auditor’s responsibility for detecting fraud and the meaning of the assurances provided by the auditor’s report on the financial statements. These issues have continued to plague the accounting profession since the 1970s despite actions taken by the profession to narrow the so-called “expectation gap” between what the public expects or needs and what auditors can and should reasonably be expected to accomplish. Users often equate a clean audit opinion with a seal of approval that fraud does not exist and annual reports are both complete and accurate. However, auditors do not provide absolute assurance and the scope of the opinion is limited to certain financial-related information. One participant explained that there are a lot of things an audit cannot do. For example, an audit cannot create certainty in an environment where there is no certainty. An audit cannot guarantee precision in an environment where estimates are made. An audit cannot ensure that stock prices will be achieved. We cannot lose sight of the fact that in a risk-taking environment businesses do fail. Auditing is not the “be all” and “end all” to solve the problems in the business place. However, participants generally agreed that while the accounting profession needs to take additional steps to address any misunderstanding as to the limits of an audit, there is room to improve the audit process and auditor reporting. Participants recognized that management has the responsibility for preventing and detecting fraud. At the same time, they agreed that it is fair to expect auditors to provide “reasonable assurance” of detecting any material fraud. Participants discussed the need to mitigate the opportunity and risk for fraud by educating boards of directors and ultimately changing the tone at the top of the company. Some participants liked the idea of auditors periodically performing more of a “forensic-type” audit in which auditors would be more skeptical of management, but cautioned that this approach could have a negative effect on audit quality because management and the auditor might not work as actively together on an ongoing basis. Participants agreed that an adversarial relationship between the auditor and management would not be constructive in that the cooperation of management is critical to both an effective and efficient audit. However, participants agreed that auditors should be more skeptical and should say no and walk away from clients more often than they currently do. The participants applauded the deterrent put in place by the Sarbanes-Oxley Act of 2002, which sends a signal that persons who prepare or attest to fraudulent financial statements can go to jail. This deterrent has raised awareness and conscientiousness within all levels of the financial reporting and auditing process as to the significance of their job in preparing financial statements. Participants generally viewed the new internal control reporting requirements of the Sarbanes-Oxley Act of 2002 as a good requirement. A participant added that earlier mandatory internal control reporting probably would have surfaced problems with ineffective boards of directors and audit committees. However, participants cautioned that reporting only on internal controls over financial reporting could lead to more of a gap in what investors perceive as the scope of the auditor’s work. For example, users of financial reports are interested in a company’s overall performance and outlook and, accordingly, would be interested in the effectiveness of internal control over the process that produces that data. In that respect, participants also discussed the need for auditors to expand their focus on internal control to include controls over performance data in order to better meet the needs of investors for assurances on financial statements and for understanding all business risks. Also, new information not only needs to be useful, but also needs to be understood by investors. For example, investors do not understand terminology such as “reportable conditions,” which could result in investors over- or under-reacting to problems. Participants also suggested that the one-page audit opinion should be replaced with “tiered” reporting of audit results, where firms can obtain the level of assurance they desired. For example, in today’s environment, audit committees would most likely ask for the deepest “tier” of audit reporting to better carry out their responsibilities. Participants generally agreed that the profession needs a new reporting model for audits to eliminate the misunderstanding as to what an audit of financial statements is and what its limits are. The participants acknowledged that the financial audit process is largely driven by the accounting profession and suggested that the profession needs to spend more time understanding what the demand side (investors and other users of financial information) needs and wants from auditors. However, the participants recognized that one of the big obstacles for innovation in reforming the audit process and auditor reporting is the auditor’s fear of legal liability. One participant added that the current regulatory structure has dampened the profession’s spirit for innovation. Participants commented that there are good solid audits being performed; however, some participants expressed concern that overall, time and fee pressures both from company management and from within the auditing firms have resulted in less and less auditing, particularly less substantive testing of transactions. In that respect, the financial audit is considered the “loss leader” in many audit organizations with a focus on cutting hours and costs and as a means to obtain consulting engagements. Some participants also pointed out that most of the auditing is currently being performed by inexperienced auditors. Further, several participants cautioned that the auditor rotation rules currently being developed by the regulators could further reduce audit quality by resulting in a loss of continuity, experience, and technical knowledge on an audit. Participants felt that the profession needs to elevate and restore the importance and the quality of the financial statement audit. Participants stated that the accounting profession needs to candidly discuss what it is doing to improve the audit process to restore public trust. Further, a growing concern for the profession is its ability to attract and retain the best people over time. It was stated that auditors frequently leave the profession early in their careers to join clients, and that over half of CPAs are not practicing public accounting. One participant added that the interest in the profession over the past 10 years has dropped by half, although the recent publicity stemming from Enron and WorldCom, albeit negative, has actually sparked increased interest in the profession. Participants generally agreed that the profession needs to aggressively address the issue of attracting the best people to the profession. Participants generally agreed that improvements in corporate governance will bring about improvements in auditing. It was viewed that one of the more positive outcomes of the Sarbanes-Oxley Act of 2002 is the relationship the act establishes between the auditor and audit committee by making the audit committee in essence the client, versus company management. Historically, participants felt that auditor communication with audit committees has been variable. Participants generally agreed that auditors should be able to speak more freely, openly, and honestly with audit committees on risks facing the company and on the appropriateness of the company’s accounting policies. Audit committees should be demanding more information from auditors and asking auditors if they have sufficient resources, both in number and expertise, to adequately perform the audit. Audit committees and auditors together can become good safeguards for investors. A point was also made that the role of the internal auditors, specifically their cooperation and coordination with the external auditors and the board of directors, should be improved, which ultimately could improve the quality of financial reporting and the external audit. In addition, disclosures, such as those required to be reported to the SEC on Form 8-K, should be improved to be more transparent and helpful to regulators in determining the reasons and circumstances surrounding auditor changes. Participants uniformly agreed that the nation needs a strong, viable SEC to instill investor confidence in our markets. The SEC plays an important role through its responsibilities to regulate activities of public companies and their auditors and to conduct related enforcement actions, as well as to establish and sustain the new Public Company Accounting Oversight Board (PCAOB) established by the Sarbanes-Oxley Act of 2002 until the PCAOB is certified by the SEC as ready to operate. However, participants noted the SEC may not have been provided with sufficient resources to achieve such results. For example, participants stated that the SEC has recently been operating on a budget of about $450 million. It was noted that although the Senate authorized about $750 million for the SEC for fiscal year 2003, an amount that the Senate believed would be sufficient to implement provisions of the Sarbanes-Oxley legislation to restore investor confidence, the Office of Management and Budget only proposed a funding level of about $500 million. Participants believed that a lack of sufficient funding provides constraints in two areas that are vital to the SEC—staffing and technology. To carry out its important function of restoring investor confidence, the SEC may not always be able to attract the right people and retain them under the existing structure. In addition, to effectively conduct its reviews of public companies, the SEC will require a large technology investment and related training of SEC staff. Participants questioned whether, given the current funding restraints, existing models for generating revenues for the SEC were workable. Participants believe that models that provide temporary resources to SEC, such as through fellowships from the accounting profession, are not the answer to its funding and staffing problems and can raise conflict of interest issues. Accordingly, some participants believed that it is time to think about having the SEC operate independently in setting its own funding levels, like the Federal Reserve, and to let the SEC determine and set its own fees, with industry participation, for the activities it conducts. If the SEC were able to establish its own annual budget and collect fees, the SEC would be better able to conduct its activities, attract the best people, and enhance its technology to more efficiently and effectively operate. Participants noted that even if the SEC were independent regarding its funding, the Congress could still oversee the SEC. Participants discussed the importance of effective SEC enforcement actions as a means of restoring investor confidence in the markets. The SEC tries to create deterrence and be measured in imposing sanctions. If there are no clear negative consequences to securities violations or wrongdoing, investors may perceive that the system is not working properly. Although the SEC has an array of sanctions available, all SEC enforcement actions are civil based, which ultimately results in shareholders bearing the burden of the costs of legal proceedings and sanctions. Some participants believed that shareholders were benefiting from litigation and questioned the appropriateness of civil-based enforcement actions, citing the fact that shareholders have already been financially hurt by the actions that lead to the sanctions. Participants also discussed whether the right people were being held accountable and whether the SEC’s civil-based enforcement actions were sufficient to discourage the bad actors. Participants raised questions about whether the SEC should reconsider the amount and targeting of its civil sanctions and more frequently use other types of remedies, such as criminal sanctions, to hold people accountable for wrongdoing. In that respect, participants noted that the SEC should be effectively using the option of referring cases when appropriate to the Department of Justice for investigation for possible violation of criminal statues. Participants questioned how well that process was working. The Sarbanes-Oxley Act of 2002 provides for additional enforcement authority for both the SEC and the newly created PCAOB. In response to the question of whether the Sarbanes-Oxley Act of 2002 should be revisited, participants believed that although ultimately some technical changes to the act may be necessary, the SEC and the PCAOB needed to move forward to implement the act. Also, the SEC and the PCAOB should explore integrating their activities to get the new enforcement mechanisms in place to determine how well they may address some of the issues discussed. Participants believed that the PCAOB needs to be quickly set up and establish its priorities so it can begin the difficult task of restoring public confidence. Many participants believed that the PCAOB's most immediate priority should be implementing a disciplinary process to let the public know that failed auditing will be dealt with and trust can be restored. The disciplinary process needs to have the necessary incentive measures to serve as preventative measures before problems can become more serious. Other immediate priorities should be setting up an inspection function of auditors that audit SEC registrants and determining how standards that govern the work of the accounting profession, such as auditor independence rules and standards for conducting audits, should be set. Some participants believed that the existing inspection process could be improved by looking less at the accounting firms’ internal systems for quality control and more at the quality of the judgments that were made by the auditors in conducting the audit. Participants also believed that the PCAOB also needs to evaluate the events that have lead to the lack of public confidence in the markets and take a fresh look going forward. For example, the PCAOB should consider the reasons the accounting profession is organized the way it is, including federal/state regulation such as the licensing structure, reasons accounting firms practice as partnerships, the effects of private litigation, and the structure and role of the state boards of accountancy. Participants also noted that the PCAOB should take advantage of the fact that under the current environment no one has more motivation for getting “bad auditors off the street” than the accounting firms themselves. The accounting firms do remove “bad auditors,” but this is accomplished without publicity so that their efforts are not well known. Participants also believed that a challenge facing the new PCAOB will be dealing with the complex relationship between federal and state governments involved in regulating the accounting profession. Participants identified the need for better communication and sharing of information between federal entities such as the SEC and the new PCAOB and the state licensing and regulating entities. For example, states are often hampered in their ability to take appropriate regulatory actions because they do not get referrals from the SEC and the AICPA, or because those organizations have made the information confidential. Also, ongoing litigation impedes information flow. In addition, participants stated that some states have been independently trying to address accountancy reform and, in some cases, have proposed reforms that have gone further than the Sarbanes-Oxley Act of 2002 because they feared that the federal government would not act. This has led to additional inconsistency in requirements between states. Participants encouraged the SEC and the PCAOB to work closely with the states in taking actions to restore public confidence and ensure an appropriate degree of consistency needed for viable interstate commerce. Some participants suggested that the PCAOB consider the banking industry to provide examples of the integration of federal and state regulation and lessons learned about that structure from the savings and loan and banking crises. Participants noted that with increased globalization of businesses’ operations and the need for harmonization of accounting and auditing standards, as well as the need for preemptive measures, there may be more federal involvement such as the Sarbanes-Oxley Act of 2002. Gaston L. Gianni, Jr. A.W. “Pete” Smith Jr. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents 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 daily E-mail alert for newly released products” under the GAO Reports heading. | On December 9, 2002, GAO convened a governance and accountability forum to discuss challenges facing regulators, the accounting profession, and boards of directors and management of public companies in effectively implementing the Sarbanes-Oxley Act of 2002 and related regulatory actions to improve public confidence in U.S. corporate governance and accountability systems. Major accountability breakdowns recent years, exacerbated in the last 2 years by the unprecedented massive breakdowns and bankruptcy of Enron and WorldCom, have contributed to the decline in investor confidence in U.S. capital markets. The forum focused on the four interrelated areas of corporate governance, the financial reporting model, the accounting profession, and regulation and enforcement that the accountability breakdowns have surfaced as critical areas to be strengthened. Addressing these challenges will involve the public, private, and not-for-profit sectors. In general, there must be the proper incentives, transparency, and accountability mechanisms in place to ensure the effectiveness of any system. As a result, these overarching principles were considered in connection with the issues discussed. Forum participants included individuals from federal and state government, the private sector, standards setting and oversight bodies, and a variety of other interested parties. There was general agreement among the participants that the root causes of the accountability breakdowns are systemic in nature, complex, and will require leadership and alterations to the current models in each of the four interrelated areas to transition to an overall system that is more focused on protecting the public interest and, in that regard, accountability. They also agreed that considerable actions have been taken and/or proposed towards achieving those objectives, but that having the "right people" and "stakeholders" involved was critical to successfully achieve and effectively maintain the necessary reforms. Several other key observations follow. Many boards of directors are reassessing their roles and responsibilities, and currently it is difficult to determine what is working and what is not working. Participants agreed there is no "silver bullet" to enhancing the effectiveness of boards of directors in their role of overseeing management and protecting the public interest. However, for a board to effectively perform its responsibilities, it must have the "right people" who possess an "independent spirit" and are "knowledgeable" of the company/industry and the company's constituencies. Little progress has been made moving toward a more comprehensive financial reporting model that would include such information as operating and performance measures and forward-looking information about opportunities, risks, and management's plans. The impetus for changing the financial reporting model needs more involvement of investors and other users of financial information as the current model is too driven by those who have historically focused more on the technical aspects of financial reporting, such as accountants, regulators, corporate management, and boards of directors. An "artful blend" of principle-based and rule-based accounting standards, as well as a financial reporting model with different tiers of reporting that provides full disclosure, are fundamental changes needed to improve the financial reporting model. An "expectation gap" of what an audit is and what users expect continues to exist, especially with the auditor's responsibility for fraud detection. Supplementing the traditional financial statement audit with a "forensic audit" as well as with a more informative auditor's report could help to narrow the "expectation gap." A strong, viable Securities and Exchange Commission is needed to maintain investor confidence. Concern was raised that the Commission is not fully at that status and that funding issues need to be resolved. The new Public Company Accounting Oversight Board needs to officially get up and running with immediate priorities focusing on establishing policies and procedures for performing its disciplinary, inspection, and standard-setting functions. |
The extent of foodborne illness in the United States and its associated costs are significant. CDC estimates that unsafe foods cause as many as 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths annually. In terms of medical costs and productivity losses, foodborne illnesses associated with seven major pathogens cost the nation between $7 billion and $37 billion annually, according to USDA’s estimates. According to CDC, almost 12,000 cases of foodborne illness were reported in 1997, the latest year for which data are available. Of the approximately 7,000 cases in which the food source for the illness was known, about 85 percent were associated with food products that are regulated by FDA, such as fish, shellfish, fruits, vegetables, and salads. The remaining 15 percent were associated with food products, such as meat and poultry, that fall under FSIS’ jurisdiction. The relative proportion of illness associated with foods under each agency’s jurisdiction reflects consumer expenditures for food products under the jurisdiction of each. Nearly 80 percent of consumer expenditures are for foods under FDA’s jurisdiction, while FSIS is responsible for the remaining 20 percent. While 12 different federal agencies located within six federal departments conduct food safety activities, FSIS and FDA have primary regulatory responsibility for ensuring the safety of the nation’s food supply. FSIS has responsibility for ensuring the safety of meat, poultry, and processed egg products, overseeing about 6,000 meat, poultry, egg product and import establishments. Under the governing inspection acts, FSIS, in effect, preapproves products before they are marketed. As such, FSIS operates under a mandated continuous inspection frequency for meat and poultry slaughter plants and egg processing plants and inspects meat and poultry processing plants daily. FSIS marks all inspected and approved meat, poultry, and egg products with a USDA inspection stamp. Without this marking, the products cannot be legally marketed. FSIS also reviews and assesses the effectiveness of state intrastate meat, poultry, and egg product inspection programs to ensure that their standards are at least equal to federal standards. In addition, FSIS reviews and assesses foreign inspection systems and facilities that export FSIS-regulated products to the United States for equivalency with U.S. standards. In 1998, FSIS reviewed 7 of the 26 states with intrastate inspection programs for meat and/or poultry and reviewed foreign inspection programs in 22 of the 37 countries that were eligible to export to the United States. In addition to the inspection activities, FSIS conducts emergency responses, including retention, detention, or voluntary recall of adulterated foods and epidemiological investigations of foodborne hazards or disease outbreaks. Furthermore, FSIS engages in developing and implementing cooperative strategies to prevent health hazards associated with animal production practices, coordinating U.S. participation in international sanitary standard-setting activities, and providing safety information to food handlers and consumers. FDA is responsible for ensuring the safety of a broad range of products, including foods, animal drugs and feeds, human medicines and vaccines, radiation-emitting devices, medical devices, blood and blood products, and cosmetics. Specifically, under the Federal Food, Drug and Cosmetic Act, FDA is responsible for ensuring that domestic and imported food products (except meat, poultry, and processed egg products) are safe, wholesome, and labeled properly. This includes ensuring the safety of ingredients that make up foods, such as food additives that change a food’s color or taste, and reviewing and approving new additives unless they are generally recognized as being safe. In administering the act, which generally follows the regulatory approach of allowing food products to enter the market without preapproval, FDA inspects and tests domestic and imported food products. However, the act does not mandate or specify inspection frequencies for overseeing an estimated 57,000 food establishments under FDA’s jurisdiction. Products under FDA’s jurisdiction do not require, and FDA does not place, any inspection mark on the products before they can be legally marketed. FDA is also responsible for maintaining surveillance of all animal drugs and feeds to ensure that they are safe and labeled properly and produce no human health hazards when used in food-producing animals and for overseeing more than 9,000 animal drug and feed establishments. States all have departments that are responsible for the regulation and enforcement of their own food safety laws to ensure the safety of foods produced, processed, or sold within their borders. These responsibilities are primarily within the state departments of agriculture and health and may involve others, such as state environmental protection agencies and county departments of health. States and territories may also perform inspections for FSIS or FDA under contract or form partnerships to report their results to the federal agencies. For example, in fiscal year 1998, FDA contracted with 38 states to conduct inspections in accordance with the federal regulations. Under partnership agreements, 29 states shared the results of inspections conducted under their own standards with FDA. FSIS was responsible for food safety expenditures of $678 million in fiscal year 1998 and $712 million in fiscal year 1999, or about 55 percent of the nearly $1.3 billion fiscal year 1999 federal and state expenditures. In fiscal years 1998 and 1999, FSIS employed 11,057 and 10,951 staff years, respectively. FDA food safety activities accounted for about 22 percent of the total expenditures—$253 million in fiscal year 1998 and $283 million in fiscal year 1999—and employed 2,505 and 2,609 staff years, respectively. State agriculture and health departments reported food safety expenditures of about $292 million in fiscal year 1998 and $301 million in fiscal year 1999 and employed 5,617 and 5,717 staff years, respectively. About 85 percent of FSIS’ expenditures were for field activities, while FDA’s expenditures were almost evenly divided between field and nonfield activities. The federal agencies’ expenditures reflect the regulatory approaches or inspection frequencies contained in the laws under which they operate. FSIS expended $678 million in fiscal year 1998 and $712 million in fiscal year 1999 on food safety. FSIS’ food safety activities can be separated into two major components—operations conducted in the field by district offices or in direct support of those district offices and operations conducted primarily in headquarters offices. As shown in figure 2, about 85 percent of FSIS’ fiscal year 1999 expenditures were for field activities and 15 percent were for headquarters office activities. See appendix II for details on FSIS’ activities, expenditures, and staff years for fiscal years 1998 and 1999. In aggregate, FSIS’ field activities accounted for $614 million in fiscal year1999. Specifically: Inspections at more than 6,000 slaughter, processing, and import establishments accounted for $486 million, or 68 percent, of total agency expenditures. Of the $486 million, FSIS estimates that slaughter inspections conducted at 262 establishments accounted for about $324 million; daily meat and poultry processing inspections at about 4,300 establishments accounted for about $145 million; continuous inspections at 75 egg processor establishments accounted for about $8 million; and inspections at 129 import/export establishments accounted for about $7 million. Regarding slaughter inspections, FSIS estimates that carcass-by- carcass organoleptic (see, touch, smell) inspections accounted for about $296 million of the total inspection expenditures. FSIS does not track expenditures specifically related to Hazard Analysis and Critical Control Point system inspections and thus could not provide that information. Field office administration, supervision, and compliance activities, such as following-up on inspection findings, accounted for $34.1 million, or 5 percent, of total expenditures. Field office management by the Office of Field Operations located in Washington, D.C., accounted for $79.9 million, or 11 percent, of total expenditures. The largest expenditure was for grants to states for inspections, field automation, and other activities, accounting for almost $47 million, or over half, of the office’s total expenditures for fiscal year 1999. Field laboratory analysis services provided by the Office of Public Health and Science accounted for $14 million of field activity expenditures, or 2 percent, of total expenditures. FSIS’ headquarters-based activities accounted for the remaining $98 million of fiscal year 1999 expenditures, or about 15 percent, of total agency expenditures. Four program offices—Management; Public Health and Science; Policy, Program Development, and Evaluation; and the Office of the Administrator—conduct FSIS’ headquarters food safety activities. Specifically: The Office of Management accounted for about $61.8 million, or 9 percent, of total expenditures. The office is responsible for providing centralized administrative and support services to all other FSIS program offices, including functions such as human resource management, strategic planning, procurement, and financial management. The Office of Policy, Program Development, and Evaluation accounted for about $18.9 million, or 3 percent, of total expenditures. The office is responsible for, among other things, coordinating activities, such as developing and recommending domestic and international policies for FSIS; reviewing product process standards; product labeling; and developing and evaluating inspection programs. The Office of Public Health and Science accounted for about $11.4 million, or 2 percent, of total expenditures. The office is responsible for conducting scientific analysis, providing scientific advice and data, and making recommendations involving all public health and science concerns relating to products under FSIS’ jurisdiction. This includes mission activities such as epidemiology and risk assessment, surveillance, and response to food safety emergencies. The Office of the Administrator accounted for about $6.1 million, or 1 percent, of total expenditures. The office is responsible for managing agency activities such as public affairs, food safety education, coordinating U.S. involvement in international standard-setting for food safety, and maintaining liaison with trade organizations. FSIS’ large proportion of expenditures on field and supporting activities reflects the mandate of the meat and poultry acts. The two acts require that meat and poultry slaughter plants be under continuous FSIS inspection. If a federal inspector is not present, the animals cannot be slaughtered. FSIS inspects animals both before and after slaughter. The acts also require FSIS inspectors to monitor processing plant operations, such as deboning and canning, to ensure that plants are sanitary and adhere to approved procedures and label specifications. The acts do not explicitly set inspection frequencies for meat- and poultry-processing plants; however, FSIS has interpreted the acts as requiring the daily inspection of such plants and has established its regulations accordingly. That is, an FSIS inspector must visit each meat- and poultry-processing plant for an unspecified period of time—which may be as little as an hour—each operating day. As such, the majority of FSIS expenditures are directed to conducting inspection activities based on frequencies derived from the regulatory acts, rather than on the food safety risk of a specific plant or process. In 1998, we reported that FSIS’ funds could be used more effectively if they were redirected using risk-based criteria. Specifically, the approximate $296 million in fiscal year 1999 expenditures for organoleptic, carcass-by-carcass slaughter inspections do not optimize federal resources because these inspections do not detect the most serious public health threat associated with meat and poultry—microbial contamination. Rather, some of these funds and funds used for daily inspections of meat- and poultry-processing plants could be used, for example, to increase testing for microbial and other types of contamination, risk assessment, and scientific research, or could be congressionally redirected to other food plants, such as seafood processors, based on the health risk posed. We continue to hold this view. FDA expended $253 million in fiscal year 1998 and $283 million in fiscal year 1999 on food safety activities. These activities represent the combined efforts of FDA’s three centers with food safety responsibilities: the Center for Food Safety and Applied Nutrition, the Center for Veterinary Medicine, and the National Center for Toxicological Research, as well as the field activities conducted by the Office of Regulatory Affairs in support of the centers. As with FSIS, FDA’s food safety activities can be separated into two major elements: (1) inspection and enforcement operations conducted in the field by district offices or at headquarters in direct support of those district offices, and (2) operations conducted primarily in headquarters offices. As shown in figure 3, about 56 percent of FDA’s fiscal year 1999 food safety expenditures were for field activities and about 44 percent were for headquarters-based activities of FDA’s centers. Appendix III provides detailed information on FDA’s fiscal years 1998 and 1999 activities, expenditures, and staff years. In aggregate, FDA’s field activities accounted for about $159 million in fiscal year 1999, or about 56 percent of the agency’s total food safety expenditures. The Office of Regulatory Affairs (ORA) is responsible for conducting field activities designated by the centers. ORA’s compliance, inspection, and laboratory field staff manage, supervise, and conduct enforcement, compliance, inspection, sample collection and analysis activities, as well as criminal investigation, education, and outreach activities. Specifically: The ORA-conducted field activities in support of the Center for Food Safety and Applied Nutrition accounted for about $145 million in expenditures for fiscal year 1999. Using these funds, FDA conducted over 14,600 domestic food establishment inspections, including those conducted by states under contract with FDA, at a cost of about $2 million; and about 765 inspections of food importers. About $27 million, or 19 percent, of the $145 million went to domestic and imported seafood hazard analysis and critical control point inspection activities. Also included in these total expenditures is more than $40 million for laboratory analysis of about 25,000 domestic and foreign product samples associated with field inspection activities. The ORA-conducted field activities in support of the Center for Veterinary Medicine accounted for about $13.5 million in expenditures in fiscal year 1999. With these funds, FDA conducted nearly 3,500 domestic animal drug and feed establishment inspections, including those conducted by states under contract with FDA at a cost of about $600,000. Also included in these expenditures is about $2 million for laboratory analysis of about 1,800 feed samples associated with field inspection activities. In aggregate, the headquarters-based activities of FDA’s centers accounted for about $125 million in fiscal year 1999, or 44 percent of the agency’s total food safety expenditures. Specifically: The Center for Food Safety and Applied Nutrition’s activities accounted for about $96 million in fiscal year 1999, or 34 percent of total agency food safety expenditures. The center operates FDA’s Foods Program, which is responsible for ensuring that FDA-regulated food is safe, sanitary, wholesome, and labeled properly. To attain this goal, the center implements programs that address specific food safety concerns; premarket review of food and color additives, infant formula and medical foods accounted for about $10 million in expenditures, and postmarket monitoring and response activities accounted for about $17 million in expenditures, and cross-cutting activities that address both premarket and postmarket concerns, such as regulatory policy development and education and outreach activities, accounted for about $61 million in expenditures. Food safety research and risk assessment accounted for about $32 million, or about half of cross-cutting activity expenditures. The Center for Veterinary Medicine’s activities accounted for about $28 million in fiscal year 1999, or 10 percent, of total agency food safety expenditures. The center operates FDA’s Animal Drugs and Feeds Program, which has primary goals of ensuring that only safe and effective animal drugs, feeds, and feed additives are marketed and that foods from animals that are administered drugs and food additives are safe for human consumption. The center maintains surveillance over all animal drugs and feeds to minimize threats to human health. Premarket application review for new animal drugs accounted for the center’s largest expenditures, about $12.8 million in fiscal year 1999. In the same year, FDA reviewed 36 original new animal drug applications, approving 17, and reviewed 767 supplemental applications to change the conditions of existing approvals, approving 421. The National Center for Toxicological Research located in Jefferson, Arkansas, accounted for nearly $1.5 million in fiscal year 1999, or about 1 percent of total agency expenditures. The center’s mission is to conduct peer-reviewed scientific research that provides the basis for FDA to make sound, science-based regulatory decisions and to protect the public health through pre- and post-market surveillance. During fiscal year 1999, the center conducted 10 research projects that contributed to FDA’s food safety mission; due to the center’s research focus, it did not engage in field activities related to food safety. FDA’s relatively small proportion of expenditures on field inspection and supporting activities in comparison to FSIS’ expenditures for those activities reflects the absence of specified inspection frequencies in the Federal Food, Drug and Cosmetics Act. The act, which FDA has primary responsibility for administering, generally follows the regulatory approach of allowing almost all food products to enter the market without preapproval by federal agencies. Therefore, FDA is not required to inspect foods or food firms on a given schedule. As a result, FDA inspects the more than 57,000 food establishments under its jurisdiction about once every 5 years, on average, and according to FDA officials, inspected less than 1 percent of the 3.7 million imported food entries in fiscal year 1999. State agriculture and health departments reported expenditures of about $292 million in fiscal year 1998 and $301 million in fiscal year 1999. As shown in figure 4, nearly half of the expenditures reported by state agencies, or about $144 million in fiscal year 1999, were for inspection and licensing activities. Appendix IV provides detailed information on the state agencies’ fiscal years 1998 and 1999 expenditures and staff years for food safety activities. State agriculture and health departments reported food safety expenditures in six categories: licensing and inspection, response to food safety problems, laboratory analysis, technical assistance and training, administration and support, and other expenditures. Specifically, for fiscal year 1999: Licensing and inspection activities for a wide variety of establishments, including meat and poultry slaughter and processing plants, fish and seafood plants, shellfish operations, dairy product and egg product plants, as well as groceries, restaurants, and institutions, accounted for about $144 million, or about 48 percent, of state expenditures. Laboratory analysis activities, including analysis for microbial contamination, pesticides and other chemical residues, filth and/or sanitation, and food label accuracy, accounted for about $34 million, or about 11 percent, of state expenditures. Administration and support for food safety activities accounted for about $33 million, or about 11 percent, of state expenditures. Technical assistance and training activities for a wide variety of recipients, including farmers, producers, processors, consumers, department staff, and the staff of outside departments, accounted for about $18 million, or about 6 percent, of state expenditures. Response to food safety problems, including investigation of outbreaks, recall activities, natural disasters, and regulatory enforcement activities, accounted for about $16 million, or about 5 percent, of state expenditures. Other activities that did not fit into the above categories, such as committee or council activities, computer or equipment purchases, and database development, accounted for about $5 million, or about 2 percent, of state expenditures. State agriculture and health departments reported in aggregate over 1 million establishments under their collective inspection jurisdictions and about 2 million inspections conducted each year, not counting continuous inspections at meat and poultry slaughter plants and other establishments. Groceries, other retail outlets, and restaurants were by far the largest proportion of establishments under state inspection jurisdiction, representing more than 60 percent of all establishments under state jurisdiction. Dairy farms were the next largest group of establishments under state inspection jurisdiction, representing almost 10 percent of the establishments. While state agriculture and health departments are generally charged with primary food safety responsibilities, a wide variety of other state and local agencies that were not included in our survey also have food safety responsibilities and associated expenditures. About half of the state departments of agriculture and health that we surveyed reported that other state departments or agencies had a role in ensuring food safety, but often only at a specific type of establishment or for a specific food product. States also reported that local governments are involved in conducting food safety inspections at some types of establishments, such as groceries and other retail outlets, restaurants, and at institutions, but are less involved in conducting laboratory analysis, responding to food safety problems, or providing technical assistance and training. We provided FSIS and FDA with a draft of this report for review and comment. FSIS generally agreed with the information provided but said that the report should clearly state that FSIS’ responsibilities and expenditures also involve some nonfood safety activities, such as ensuring that products meet consumer expectations for wholesomeness and quality. We believe that the report clearly identifies FSIS’ responsibilities—i.e., ensuring that meat, poultry, and processed egg products moving in interstate and foreign commerce are safe, wholesome, and marked, labeled, and packaged correctly. Regarding nonfood safety expenditures, throughout our review, FSIS officials said that the expenditure information provided to us was for food safety or food safety- related activities. As such, we believe that the FSIS expenditures in this report are appropriately characterized as “food safety” expenditures. FSIS also said that it would be useful if we included the size and scope of the products it regulates. We believe the report adequately describes the size and scope of FSIS’ activities. For example, the report includes information on the number of meat, poultry, egg product, and import establishments FSIS oversees; the number of state and foreign programs it reviewed; and the number and type of inspections it conducted. The level of detail provided on FSIS’ responsibilities and activities is similar to that provided on FDA’s activities. FSIS also said that the statistics provided in the report regarding the relative proportions of food purchases and agency food safety expenditures were misleading due to the high risk of FSIS-regulated products compared with some of the FDA-regulated products. While the relative risk of FSIS-regulated products may be greater in some cases than FDA-regulated products, it was not our intent to analyze or compare the risk of products. We believe that the data accurately reflect the proportion of each agency’s expenditures and the proportion of consumer expenditures for foods under each agency’s jurisdiction. The report also clearly identifies the food products for which each agency has responsibility. Finally, FSIS said that the report should further define its responsibilities under the Federal Meat Inspection Act and Poultry Products Inspection Act. FSIS also described court actions related to its efforts to design new inspection models that would realign roles and responsibilities of industry and federal inspectors. We modified the report to clearly identify FSIS’ responsibilities under the federal meat and poultry inspection acts and described its efforts, with guidance from the courts, to realign the responsibilities and roles of industry and federal inspectors. FDA agreed with the report and said that it contained valuable information on the allocation of food safety resources. FDA applauded the report for including important information on the efforts and resources expended by states but believed that the report was incomplete because it did not include information on the expenditures and efforts of other agencies, such as USDA’s Agricultural Research Service and Animal and Plant Health Inspection Service. We have previously reported on the resources and staffing of the 12 federal agencies involved in food safety activities. By design, the scope of this report was limited to FSIS and FDA food safety activities and expenditures. FSIS and FDA also provided technical clarifications, which we incorporated into the report as appropriate. FSIS’ comments and our responses are included in appendix VI; FDA’s comments and our responses are included in appendix VII. We conducted our review from March through December 2000 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Honorable Ann Veneman, Secretary of Agriculture; the Honorable Bernard Schwetz, D.V.M., Ph.D., Acting Principal Deputy Commissioner of the Food and Drug Administration; the Honorable Mitchell Daniels, Jr., Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. If you have any questions about this report, please contact me at (202) 512-3841. Major contributors to this report are listed in appendix VIII. To determine for fiscal years 1998 and 1999 the amount of resources that were expended by the Food Safety and Inspection Service (FSIS), the Food and Drug Administration (FDA), and the states for food safety and how the agencies actually used these resources, we conducted work at each of the federal agencies and mailed surveys to food safety agencies in 50 states, 3 territories, the Commonwealths of Puerto Rico and the North Mariana Islands, the Federated States of Micronesia, and the District of Columbia (hereafter referred to as states unless specified otherwise). Regarding FSIS and FDA, we obtained appropriations documentation showing the amount of funding provided to each agency. We collected records of expenditures and staff years for specific activities from each of the agencies as follows: FSIS provided expenditure and full-time equivalent staff-year information from its accounting system for each of its headquarters and field offices for specific food safety activities within those offices, such as inspection, education, and laboratory activities. FSIS could not provide expenditure information from its accounting system for approximately 2 weeks at the end of fiscal year 1999 because of problems created by the implementation of a new accounting system. Instead, FSIS determined the allocation of expenditures for that time period based on other expenditure records. The Office of Inspector General could not give an opinion on the U.S. Department of Agriculture’s (USDA) financial statements for fiscal years 1998 and 1999 because of weaknesses in evidence and internal controls.We did not verify FSIS’ accounting information, as it was the only information available, and such an audit was outside of the scope of our review. FDA provided records of expenditures and staff years from the agency’s Center for Food Safety and Applied Nutrition (CFSAN), Center for Veterinary Medicine (CVM), National Center for Toxicological Research (NCTR), and Office of Regulatory Affairs (ORA). Each center used its own methodology to identify and provide expenditures and staff years for specific food safety activities, using a combination of accounting system information, staff activity time records, and estimations. FDA’s Office of Financial Management reviewed the information provided by the centers for accuracy and consistency and also provided us with the share of FDA central administrative costs allocable to each center. We did not verify FDA’s accounting information; we relied on an independent auditor’s finding that FDA’s accounting records fairly reported its financial position and had no internal control weaknesses in fiscal years 1998 and 1999. At each agency, we gathered documentation and interviewed agency officials to (1) obtain additional information on the specific activities funded by the expenditures and accomplishments associated with those activities and (2) discuss the expenditure and staff-year information they provided. We also collected documentation and the transfer of funds between food safety and nonfood safety activities at each agency and discussed other financial concerns, such as FSIS’ fiscal years 1997 and 1998 anti-deficiency violations caused by the over-obligation of as much as $4 million each year. To determine the amounts that states expended on food safety and how they actually used the resources, we surveyed the agriculture and health departments of 50 states, 3 territories, Puerto Rico, and the District of Columbia; we surveyed the health departments of the Commonwealth of the North Mariana Islands and the Federated States of Micronesia, which do not have agriculture departments. In total, we sent out 112 surveys. The survey requested information on the scope of food safety activities performed by their departments, the costs and staffing levels of those activities, the scope and frequency of inspection activities, how the states allocated expenditures between various activities, and perceptions regarding the extent of local government involvement in food safety activities. In developing the survey, we coordinated with staff from FDA’s Office of Regulatory Affairs, Division of Federal/State Relations, which is also surveying the states. We pretested the survey at seven food safety departments in four states—Colorado, Louisiana, Pennsylvania and Virginia—to ensure that our questions were clear, unbiased, and precise and that responding to the survey did not place an undue burden on their agencies. We did not independently verify the accuracy of the state officials’ responses. We also reviewed each response to identify internal data inconsistencies and other issues needing clarification, called respondents to resolve questions, and made agreed-upon changes to their responses as appropriate. We received surveys from 98 of the 100 state health and agriculture departments; 6 of the 10 food safety agencies in the territories and other entities; and both the health and agriculture departments in the District of Columbia. Our overall response rate was 95 percent. In completing the survey, we asked the states to obtain information from staff who are most knowledgeable about food safety activities, that they respond only for their department’s activities, and that they submit only one survey reflecting the entire department’s activities. Regarding expenditures, we asked that states report actual expenditures for each state fiscal year, but if these were not available, to report budget allocations and to inform us which of the two data types they provided to us. Of the responding agencies, 37 reported actual expenditures, 9 reported actual budget allocations, and 55 reported estimates. The majority of the respondents did not report all indirect costs for food safety activities or in-kind contributions, although some did. We recognize that the total funding amounts reported for food safety activities, as well as the amounts reported for specific categories of activities, could be under- or over-reported because of differences in state department reporting, budgeting, and accounting practices. In some cases, states did not report expenditures, staff years, or establishments by the individual categories provided in the survey; rather, they may have pooled categories together or reported only a total amount. These amounts are reported as “uncategorized.” A few state departments sent in several individual responses from various entities, which we consolidated into a single departmental response. Some states provided a response for only one of the two departments. The reported expenditures do not reflect the full cost of food safety activities within each state, because expenditures and activities of other state agencies, local agencies, and private industry, by design, are not included in our scope. However, we believe the information presented in the report reasonably and conservatively represents the food safety activities and expenditures of the survey respondents. Appendix V contains the survey results. We performed our work from March through December 2000 in accordance with generally accepted government auditing standards. USDA’s Food Safety and Inspection Service (FSIS) is responsible for ensuring that meat, poultry, and processed egg products moving in interstate and foreign commerce are safe, wholesome, and labeled and packaged correctly. The food safety activities undertaken by FSIS to attain these goals during fiscal years 1998 and 1999, the costs and staff years associated with each activity, and outcomes associated with selected activities are presented in the following sections. FSIS accomplishes its mission to ensure that the nation’s meat, poultry, and egg products moving interstate and into foreign commerce are safe, wholesome, and labeled and packaged correctly through five program offices located in Washington, D.C. The offices include the Office of the Administrator; Office of Public Health and Science; Office of Policy, Program Development and Evaluation; Office of Field Operations (headquarters and district offices); and Office of Management. In addition, FSIS operates a Technical Service Center in Omaha, Nebraska; three field laboratories located in Alameda, California; St. Louis, Missouri, and Athens, Georgia; and 17 district offices located throughout the United States. FSIS’ food safety activities are funded through annual congressional appropriations, industry reimbursements, and trust funds for meat and poultry inspection. In fiscal years 1998 and 1999, funds available to FSIS totaled about $678 million and $714 million, respectively. For fiscal years 1998 and 1999, FSIS expended about $678 million and $712 million, respectively, for its food safety activities. As shown in table 1, about 84 percent of the expenditures were for the Office of Field Operations to conduct headquarters and district office food safety activities. The other four offices accounted for about 16 percent of expenditures in aggregate. The Office of Field Operations is responsible for managing a program of regulatory oversight and inspection for the meat, poultry, and egg product laws enforced by FSIS. As such, the office was responsible for the largest proportion of agency expenditures—$568 million and $600 million in fiscal years 1998 and 1999, respectively, or about 84 percent of agency expenditures and over 90 percent of staff years. The office is divided into two components—headquarters operations and field district operations. The headquarters unit located in Washington, D.C., sets policy and manages field operations. As shown in table 2, the headquarters unit accounted for about $69 million and $79 million in fiscal years 1998 and 1999, respectively, or about 10 percent of total FSIS expenditures. Included within this unit is the Technical Service Center, which serves as the agency’s center for technical assistance and guidance for field operations personnel and industry. The center also reviews domestic and foreign inspection programs. Three activities—grants provided to states, the Field Automation and Information Management initiative, and reviews conducted by the Technical Service Center—accounted for $70 million, or about 88 percent, of the total office expenditures in fiscal year 1999. Grants to states accounted for almost 60 percent of total office expenditures. Most of the grants, about $40 million, funded up to 50 percent of state costs to operate inspection programs for meat and poultry plants that are “equivalent to” federal programs. In fiscal year 1999, 26 states received funding through grants. The Field Automation and Information Management initiative accounted for about 17 percent of the Office of Field Operations headquarters expenditures for fiscal year 1999. This initiative provides for uniform automation of FSIS’ inspection functions at plants inspected by FSIS and state inspectors. Expenditures were for the purchase and installation of the equipment, as well as training inspectors. For example, during fiscal year 1999, over 750 federal inspectors were trained and 700 computers delivered to FSIS field locations. In addition, over 550 state inspectors were trained, and states received over 500 computers. The Technical Service Center conducted review activities that accounted for about 12 percent of field operation’s headquarters expenditures for fiscal year 1999. The center is responsible for designing and implementing guidelines and procedures for review of foreign, state, and federal domestic inspection programs. The center also conducts special inquiries and reviews, such as reviews of state inspection programs, to ensure they are equivalent to the federal programs. In fiscal year 1999, the center reviewed the program documentation of 36 countries exporting to the United States to determine if they had implemented Hazard Analysis and Critical Control Point systems and Salmonella testing programs equivalent to U.S. requirements. In that same year, the center’s review staff reviewed 96 state-inspected establishments in 11 states to determine their effectiveness and whether or not they were equivalent to the federal inspection programs. The Office of Field Operation’s field district offices conduct compliance and inspection activities for meat, poultry, and egg products. As shown in table 3, the field district offices accounted for expenditures of about $499 million and $520 million in fiscal years 1998 and 1999, respectively, or about 73 percent, of agency expenditures and about 90 percent of staff years. Within the district offices, 93 percent of their expenditures were for in-plant inspections and 7 percent for the administration of those activities and compliance activities. Under the guidance and direction of the Office of Field Operation’s headquarters District Inspection and District Enforcement offices, the districts manage and direct both inspection and compliance activities. As shown in table 4, the district offices direct inspections of meat and poultry slaughter plants, processing plants, and plants that have combined slaughter and processing operations, and other establishments such as egg product plants. In addition, the offices inspect these products at import points. For example, in fiscal year 1999, they inspected over 99 billion pounds of meat and poultry and 3 billion pounds of egg products at about 6,000 domestic plants and inspected 3.2 billion pounds of imported meat and poultry from 34 countries. The district offices also direct compliance reviews that are designed to (1) monitor businesses engaged in the production, distribution, and marketing of food products and (2) prevent the violation of laws and regulations. As a result of these reviews, in fiscal year 1999, the district offices detained approximately 20 million pounds of adulterated meat and poultry products and initiated 118 enforcement actions to stop inspection operations in federally inspected plants. The Office of Management is responsible for providing centralized administrative and support services to all other FSIS program offices, including human resource management, strategic planning, procurement, and financial management. As shown in table 5, the office accounted for expenditures of about $63 million and $62 million in fiscal years 1998 and 1999, respectively, or about 9 percent, of agency expenditures and 4 percent of staff years. About 46 percent of the office’s expenditures were for “central charges” attributed to the entire agency. Almost one-half of these charges were expenditures for benefits such as worker’s compensation and unemployment. Other charges included “other services” such as contractual and consulting services, communications, utilities, and rent. The Office of Public Health and Science is responsible for conducting scientific analysis, providing advice, collecting data, and making recommendations involving all public health and science concerns relating to products under FSIS’ jurisdiction. This includes mission activities such as epidemiology and risk assessment, surveillance, response to food safety emergencies, and laboratory analysis by the agency’s three field laboratories. As shown in table 6, the office accounted for expenditures of about $24 million and $25 million in fiscal years 1998 and 1999, respectively, or about 4 percent, of agency expenditures and 2 to 3 percent of staff years. The combined expenditures for the three field laboratories and the Office of Public Health and Science’s Office of Deputy accounted for 77 percent of all expenditures for that program office in fiscal year 1999. Three field laboratories located in Alameda, California; Athens, Georgia; and St. Louis, Missouri, accounted for more than 50 percent of the office expenditures and almost 70 percent of the staff years. These laboratories coordinate and conduct analyses in microbiology, chemistry, and pathology for food safety in meat, poultry, and egg products. Among other things, they conduct these services to (1) support both domestic and import inspections done by FSIS, (2) support the agency’s Hazard Analysis and Critical Control Point initiative, and (3) identify emerging pathogens in the food supply. In addition, the laboratories provide technical assistance to FSIS field staff. The Office of Deputy accounted for about 22 percent of office expenditures, with the majority of these being for charges attributed specifically to the Office of Public Health and Science. Most of these charges are for “other services” such as facilities renovations, equipment, or payments to other agencies for studies. For example, in fiscal year 1999, the Office of Deputy expended $1.2 million to repair its Eastern Laboratory in Athens, Georgia, and provided the Centers for Disease Control and Prevention (CDC) with $1.5 million for Food Net surveys. The Office of Policy, Program Development and Evaluation is responsible for, among other things, coordinating activities such as developing and recommending domestic and international policies for FSIS; reviewing product processes, standards, and labeling; and developing and evaluating inspection programs. As shown in table 7, the office accounted for expenditures of about $18 million and $19 million in fiscal years 1998 and 1999, respectively, or about 3 percent, of agency expenditures and 1 percent of staff years. The combined expenditures of two offices in the Office of Policy, Program Development and Evaluation—the Inspection Development Division and the Office of Deputy— accounted for over 40 percent of all expenditures for that office in fiscal year 1999. The Inspection Systems Development Division designs, develops, and tests new or modified inspection systems for food safety. This division works on developing specific changes to FSIS’ inspection procedures, including work related to hazard analysis and critical control point procedures. For example, this division has contracted for the collection of microbiological and organoleptic data in poultry and hog plants to support the proposed Hazard Analysis and Critical Control Point-based Inspection Models Project. The Office of Deputy accounted for about 20 percent of total office expenditures. Other than personnel expenditures, the majority of these were for “centrally administered” charges. According to FSIS officials, these are charges associated with the entire Office of Policy, Program Development and Evaluation office, rather than a specific division within that office. Most of these charges are for “other services,” such as production of food safety educational materials. The Office of the Administrator is responsible for overall management of the agency and activities such as public affairs, food safety education, and coordination of U.S. involvement in international standard setting for food safety and maintaining liaisons with trade organizations. As shown in table 8, the office accounted for expenditures of about $5 million and $6 million in fiscal years 1998 and 1999, respectively, or about 1 percent of agency expenditures and 1 percent of staff years. A significant portion of the Office of the Administrator’s funding, about 30 percent in fiscal year 1999, was expended on food safety education. The functions of the Food Safety Education staff are different from other units in the office because, while others primarily conduct management and policy type activities, the food safety education staff provides FSIS food safety education programs to the public. These programs are designed to educate producers, distributors, food preparers, and consumers on the prevention of foodborne illnesses. This office also operates the agency’s Meat and Poultry Hotline to answer consumer inquiries. In fiscal year 1999, this staff coordinated the agency’s food safety education campaign, FightBAC! tm, and handled about 36,000 consumer calls to the hotline. Food safety is one of the Health and Human Service’s (HHS) Food and Drug Administration’s (FDA) many responsibilities, shared by multiple units within the agency. FDA food safety activities undertaken by each unit during fiscal years 1998 and 1999, the costs and staff years associated with each activity, and outcomes associated with selected activities are presented in the following sections. FDA accomplishes its mission of protecting the public health by ensuring the safety of a broad range of products, including foods, animal drugs and feeds, human medicines and vaccines, radiation-emitting devices, medical devices, blood and blood products, and cosmetics through six centers. Three of these centers are responsible for food safety activities: the Center for Food Safety and Applied Nutrition (CFSAN) for the Foods Program; the Center for Veterinary Medicine (CVM) for the Animal Drugs and Feeds Program; and the National Center for Toxicological Research (NCTR) for research into the toxicity of products. In addition, the Office of Regulatory Affairs conducts inspections and compliance reviews and collects and analyzes product samples in support of the centers. The three centers and the Office of Regulatory Affairs are also provided administrative support through numerous offices, such as the Office of the Commissioner and the Office of Management and Systems. FDA food safety facilities are distributed nationwide. FDA headquarters and CVM are located in Rockville, Maryland, CFSAN is located in Washington, D.C., and NCTR is located in Jefferson, Arkansas. The two Centers, CVM and CFSAN, have a research facility in Beltsville, Maryland; CFSAN has a fishery research center in Dauphin Island, Alabama, and a food technology research center in Chicago, Illinois. Field facilities, primarily staffed by Office of Regulatory Affairs personnel conducting inspections and laboratory activities, are distributed across 5 regional offices, 19 district offices, and 13 laboratories, and are supported by over 120 resident posts. FDA’s appropriations for fiscal years 1998 and 1999 were about $1.050 billion and $1.130 billion, respectively. Each of FDA’s programs received a specified amount of the total appropriation to conduct both their food safety and nonfood safety-related responsibilities. For example, in fiscal year 1999, the Foods Program received about $235 million, of which about $222 million was expended on CFSAN and related field food safety activities. The difference reflects that while most of the Food Program’s responsibilities relate to food safety, the program also has other responsibilities and related expenditures for other activities, such as cosmetics safety. Similarly, in fiscal year 1999, the Animal Drugs and Feeds Program received about $43 million, of which about $38 million was expended on CVM and related field food safety activities. The difference reflects that while the majority of the Animal Drugs and Feeds Program’s responsibilities relate to food safety, the program also has responsibilities and related expenditures for nonfood animals, such as dogs and cats. The Office of Regulatory Affairs receives a specific amount of the appropriation for each program to conduct field activities in support of the centers. For fiscal years 1998 and 1999, as shown in table 9, about 56 percent of FDA’s food safety expenditures and over 60 percent of its staff years were for food safety activities conducted in the field, and the remaining 44 percent of expenditures and nearly 40 percent of the staff years were for the headquarters-based activities of the centers. Field activity expenditures of about $141 million and $159 million in fiscal years 1998 and 1999, respectively, accounted for about 56 percent of total FDA food safety expenditures each year and 62 to 64 percent of FDA’s staff years. CFSAN is responsible for directing field activities related to food products, and CVM is responsible for field activities related to feeds and drugs for food animals. These field activities, conducted by FDA’s Office of Regulatory Affairs, include the inspection of food and animal feed and drug establishments under the agency’s jurisdiction, field examination of food and feed products, and the collection and analysis of product samples to ensure that the products comply with applicable regulations. The overall results of FDA’s inspection and sample analysis fieldwork are presented in table 10. Field activities for foods accounted for about $127 million in fiscal year 1998 and $145 million in fiscal year 1999, or about 90 percent of FDA’s food safety field expenditures. Table 11 lists the fiscal years 1998 and 1999 food field expenditures of $1 million or more. FDA food field activities accounting for less than $1 million in annual expenditures each, such as criminal investigations, emergency response to foodborne outbreaks, and various unplanned activities, represented in aggregate less than $8 million in expenditures each year. The expenditures reflect the total cost of each activity, including inspection, investigation, field examination, sample collection, sample analysis, and other costs, such as Office of Regulatory Affairs management and administrative support expenditures, associated with each activity. FDA agencywide support expenditures accounted for about 8 percent of food product field expenditures. Five of the field activities listed in table 11 accounted for about $71 million, or almost 50 percent, of total food field expenditures in fiscal year 1999. Imported foods general activities accounted for about $27 million, or about 19 percent, of food field expenditures. The objective of this activity was to ensure that imported foods comply with federal law and with guidelines for gross and microbiological filth. To attain this objective, FDA conducted import field examinations of the foods most likely to be out of compliance, collected samples, and conducted analysis for filth, decomposition, and microbiological contamination. The domestic fish and fish products inspection activity accounted for about $14 million, or about 10 percent, of food field expenditures. The objective of this activity was to ensure that domestic establishments involved in the production, storage, and distribution of fish and fish products are in compliance with the applicable hazard analysis and critical control point regulations as well as with federal law. To attain this objective, FDA conducted establishment inspections, and samples were collected and analyzed when appropriate, with a priority on firms processing scombrotoxic products, smoked products, vacuum packed products, and ready-to-eat products, as well as follow-up on firms found to be in noncompliance with hazard analysis and critical control point regulations. The imported seafood products inspection activity accounted for about $13 million, or about 9 percent, of food field expenditures. The objective of this activity was to ensure a safe imported seafood supply by enforcing importer compliance with the seafood hazard analysis and critical control point regulation and federal law, focusing on importers of high-risk products and firms found in noncompliance with the hazard analysis and critical control point regulations. To attain this objective, trained investigators reviewed importers’ written documentation demonstrating that the product was produced under a hazard analysis and critical control point program, with priority assigned to firms processing scombrotoxic products, smoked products, vacuum packed products, and ready-to-eat products. The domestic food safety activity accounted for about $11 million, or about 7 percent, of food field expenditures. The objective of this activity was to ensure that domestic establishments involved in the production, storage and distribution of food products are in compliance with federal law and that manufacturers produce products under good manufacturing practices. To attain this objective, FDA conducted inspections (including hazard analysis and critical control point) and investigations and necessary sample collections and analyses to document and support inspection findings. The pesticides and chemicals in imported foods activity accounted for about $7 million, or about 5 percent, of food field expenditures. The objective of this activity was to determine the incidence and level of pesticides and industrial chemicals in imported food (including seafood and aquaculture products) and to prevent importation of products not meeting federal requirements. To attain this objective, FDA developed pesticide import sampling plans, collected samples, and analyzed samples for chemical contamination. Animal drugs and feeds field activity expenditures of about $13.7 million and $13.5 million in fiscal years 1998 and 1999, respectively, accounted for about 10 percent of FDA’s total food safety field expenditures each year. Table 12 lists the fiscal years 1998 and 1999 animal feed and drug field activity expenditures of $1 million or more. Other field activities, such as criminal investigations, response to consumer complaints, and various unplanned activities in aggregate, accounted for just over $3 million in expenditures each year. The expenditure amounts reflect the total cost of each activity, including inspection, investigation, field examination, sample collection, sample analysis, and other costs, such as Office of Regulatory Affairs management and administrative support expenditures, associated with each activity. FDA agencywide support expenditures accounted for about 8 percent of feed and drug field expenditures. Five of the field activities listed in table 12 accounted for about $9 million, or almost 70 percent, of total animal drugs and feeds field expenditures in fiscal year 1999. The feed contaminants activity accounted for about $2.4 million, or about 18 percent, of expenditures. The objective of this activity is to monitor domestic and imported animal feed and feed ingredients to prevent the widespread contamination of the nation’s food supply. To attain this objective, FDA conducts inspections and investigations and collects and analyzes samples of feed and feed ingredients, including chemical and microbiological testing for mycotoxins, pesticides, industrial chemicals, metals, and microbiologicals. The medicated feeds activity accounted for about $2.1 million, or about 15 percent, of expenditures. The objective of this activity is to ensure the marketing of safe and effective animal feeds. To attain this objective, FDA conducts inspections of registered medicated feed establishments, collects and analyzes feed samples, and audits the results of coordinated state inspection efforts. The illegal residues in meat and poultry activity accounted for about $1.8 million, or about 13 percent, of expenditures. The objective of this activity is to ensure a safe food supply by conducting follow-up investigations and inspections when illegal residues are reported to FDA by the Food Safety and Inspection Service, and to initiate regulatory sanctions against those persistently causing residues. To attain this objective, FDA works cooperatively via memorandums of understanding with the Food Safety and Inspection Service and the Environmental Protection Agency, as well as through agreements or contracts with states to inspect first-time violators. The drug processing and new animal drug inspection activity accounted for about $1.6 million, or about 12 percent, of expenditures. The objective of this activity is to fulfill FDA’s obligation to inspect animal drug establishments that are registered with FDA, ensuring that animal drug products are being manufactured, processed, and controlled under approved conditions. To attain this objective, FDA conducts inspections of registered animal drug establishments and chemical and microbiological examinations to ensure the sterility, purity, identity, and potency of the drugs. Office of Regulatory Affairs/Center directed research projects accounted for about $1.2 million, or about 9 percent, of expenditures. The objective of this activity is to develop new and/or improved methodology in support of regulatory analysis for animal drugs and feeds. To attain this objective, FDA establishes research goals in its workplan; the research results are distributed within FDA and/or published in the scientific literature. CFSAN headquarters operations, which is responsible for FDA’s Foods Program, accounted for expenditures of about $86 million and $96 million in fiscal years 1998 and 1999, respectively, or about 34 percent of total agency food safety expenditures. As shown in table 13, CFSAN’s fiscal years 1998 and 1999 headquarters activities were divided into four major categories: premarket, postmarket, crosscutting, and FDA agencywide support expenditures. CFSAN expenditures for management and administrative support of food safety activities are included in the expenditure amount for each activity. Premarket activities to evaluate the safety of products before they are available to consumers accounted for about 11 percent of CFSAN’s headquarters expenditures in fiscal year 1999. Food and color additive activity expenditures accounted for about $9 million, or nearly 90 percent, of premarket expenditures. In addition to its ongoing review of food additive petitions, CFSAN implemented procedures to expedite the review of food additives intended to decrease the incidence of foodborne illness through their antimicrobial actions against pathogens that may be present in food. Other activities addressed food contact substances and irradiation labeling. Postmarket activities to evaluate the safety of products that are in the marketplace accounted for about 18 percent of CFSAN’s headquarters expenditures in fiscal year 1999. CFSAN’s planning and policy implementation for microbial contaminants, which accounted for $6.7 million, or 39 percent, of postmarket expenditures, included surveillance to assess antimicrobial resistance, microbiological research, and risk assessment to develop science-based solutions to detect and control microbial contamination. Another $3.5 million, or 21 percent, of postmarket expenditures, were for cooperative programs with states addressing the safety of retail dairy and shellfish products. Crosscutting activities that address both premarket and postmarket food safety issues accounted for about 63 percent of CFSAN’s headquarters expenditures in fiscal year 1999. CFSAN’s food safety research and risk assessment, which accounted for $32.3 million, or 53 percent of crosscutting expenditures, included activities such as the completion of draft risk assessments for Listeria, Vibrio parahaemolytics, and methylmercury and food safety research in support of the National Food Safety Initiative. FDA agencywide support accounted for about 8 percent of CFSAN’s headquarters expenditures in fiscal year 1999. These expenditures represent CFSAN’s allocation for its share of central direction and administrative services to ensure that FDA’s efforts are effectively managed and that resources are put to the most efficient use. Functions include agencywide policy, regulatory and legislative development, scientific coordination, planning and evaluation, consumer communication and public information, and management expertise and coordination in financial management, personnel, contracts and grants administration, and procurement. CVM headquarters operations, responsible for FDA’s Animal Drugs and Feeds Program, accounted for about $26 million and $28 million in fiscal years 1998 and 1999, respectively, or about 10 percent of total agency food safety expenditures. As shown in table 14, for fiscal years 1998 and 1999, CVM headquarters activities were divided into three major categories: premarket, postmarket, and FDA agencywide support expenditures.CVM expenditures for management and administrative support for food safety activities are included in the total cost for each activity. Premarket activities to ensure that products are safe before they are available to consumers, accounted for about 46 percent of expenditures each year. CVM’s New Animal Drug Application review and approval process, including associated education, research and risk assessment activities, accounted for $12.8, or 100 percent, of its premarket expenditures. CVM is implementing a phased review process, which will provide drug application sponsors with more timely feedback and early detection of application deficiencies. CVM approved 523 original or supplemental new and generic animal drug applications in fiscal year 1999. Postmarket activities to ensure the safety of products that are in the marketplace accounted for about 46 percent of expenditures each year. CVM’s epidemiological systems and surveillance activities, which accounted for nearly $4.4 million, or about 34 percent, of postmarket expenditures, included collaborative efforts with other federal agencies to monitor nationwide changes in susceptibilities to 17 antimicrobial drugs through the National Antimicrobial Resistance Monitoring System and efforts to monitor and reduce drug residues in meats. Intramural research to detect microbial and chemical contaminants that may be present in animal feeds and animal food products consumed by humans and research on antibiotic resistance accounted for another $3.6 million, or 30 percent, of postmarket expenditures. This included the development and validation of a test for detecting bovine protein in animal feeds, an important component of its Bovine Spongiform Encephalopathy regulatory strategy. Agencywide support accounted for about 8 percent of expenditures. These expenditures represent CVM’s share of central direction and administrative services, as previously described for CFSAN. These expenditures represent CVM’s allocation for its share of central direction and administrative services to ensure that FDA’s efforts are effectively managed and that resources are put to the most efficient use. NCTR, FDA’s center for peer-reviewed scientific research upon which the agency bases its regulatory decisions, was responsible for no more than 1 percent of agency food safety expenditures. In fiscal year 1998, NCTR expended $842,000, including $75,000 from CVM, and 5 staff years on eight food safety research projects. In fiscal year 1999, NCTR expended nearly $1.5 million and 10 staff years on 10 research projects, including $500,000 to expand food safety method development research.The annual expenditures include about $100,000 for agencywide support. NCTR’s expenditures do not include any field activities related to food safety. States (used hereafter to refer collectively to states, territories, commonwealths, federated states, and the District of Columbia) play an important role in overseeing the nation’s food supply. State and local (e.g., county and city) governments conduct the majority of inspections in the United States, including food retailers, manufacturers, processors, and distributors within their state boundaries in accordance with their own laws and authorities. State agriculture departments and health departments are the two primary agencies that are responsible for food safety in states. As shown in table 15, states devoted various amounts of resources for activities to ensure the safety of foods under its jurisdiction in fiscal years 1998 and 1999. State food safety responsibilities can be grouped into four categories that cover a broad range of activities: licensing and inspection, response to food safety problems, laboratory analysis, and training and technical assistance. States reported a high degree of involvement in some activities within each category and little involvement with others. For example: Regarding licensing and inspection activities, more than 40 states reported that they were involved to a great or very great extent in registering and licensing food producers, processors, sellers, and others and inspecting dairy farms and dairy product plants. The number of states engaged in inspection activities at other types of establishments such as meat and poultry slaughter and processing plants, egg and egg product plants, groceries and restaurants varied more widely. Forty-five states reported that they engaged in little or no inspection activity at nondairy food- producing farms. In response to food safety problems, 48 states reported a great or very great involvement in activities to enforce food safety regulations, and 45 states reported a great or very great level of involvement in response to natural disasters that effect food safety, such as tornadoes, hurricanes, and floods. Regarding laboratory analysis, 41 states reported great or very great involvement in analyzing food products for microbial contamination. States were generally involved in laboratory analysis for pesticides and chemical residues, filth, or food labeling accuracy to a lesser extent. Fifty-one states reported providing training and technical assistance to a great or very great extent to staff employed by their own departments, and more than half reported providing such assistance to grocery, restaurant, and other retail food service workers to a great or very great extent. States provided training and technical assistance to farmers, processors, consumers, health professionals, and others to a lesser extent. As shown in table 16, state expenditures reported for these categories of activities, as well as administrative and support, other, and uncategorized activities, were about $292 million in fiscal year 1998 and about $301 million in fiscal year 1999. In fiscal year 1999, federal funds accounted for 13 percent of state expenditures, other funding sources such as license fees accounted for 18 percent, and state revenues funded the remaining 65 percent of these expenditures. In aggregate, states dedicated 5,617 staff years to food safety activities in fiscal year 1998 and 5,717 staff years in fiscal year 1999. State expenditures for licensing and inspection food safety activities were $142 million in fiscal year 1998 and $144 million in fiscal year 1999. As shown in table 17, states reported over 1 million establishments under their jurisdiction in fiscal years 1998 and 1999. This includes over 370,000 restaurants, about 300,000 groceries and other retail outlets, and about 90,000 dairy farms. States also reported their typical frequency of inspection for each type of establishment, which ranged from continuous, meaning that an inspector is onsite at all times during production, to once per year. In total, states reported that they actually conducted about 2 million inspections annually, not counting continuous inspections. As shown in table 18, states reported how much of their expenditures of over $140 million annually for food safety licensing and inspection were allocated to specific activities within the category. The activities that were allocated a large amount of resources by states include inspections at groceries and other retail outlets and restaurants. As shown in table 19, states reported how much of their total expenditures of about $15 million annually to respond to food safety problems were allocated to specific activities within the category. States allocated a moderate amount of expenditures to enforcement of food safety regulations and lesser amounts to other response activities. As shown in table 20, states reported how much of their total expenditures of more than $30 million annually for food safety laboratory analysis were allocated to specific activities within the category. The activity that the states most often allocated a large amount of expenditures was laboratory analysis for microbial contamination. As shown in table 21, states reported how much of their annual expenditures of about $15 million to $17 million for food safety technical assistance and training were allocated to specific activities within the category. The states allocated a large amount of expenditures to training and technical assistance for staff employed by their own agriculture or health department. Although state departments of agriculture and health generally have primary responsibility for overall food safety activities in each of the states, other state departments and local governments also have responsibility for such activities. According to the states we surveyed, these other agencies generally had responsibilities for a specific type of establishment, such as restaurants, jails or prisons, childcare facilities, and nursing homes or for specific food products. For example, in the state of Florida, restaurants are under the jurisdiction of the Department of Business and Professional Regulations. And, in several states—Delaware, Louisiana, Maine, Mississippi, New Jersey, New York, and Texas—seafood or shellfish products are the responsibility of a state agency other than agriculture or health. States also reported that local governments have an extensive role in food safety inspection activities at certain types of establishments such as restaurants, institutions, groceries, and other retail locations. For example, although Georgia’s health department has jurisdiction over almost 20,000 restaurants and institutions, county staff inspected all of those establishments under contracts with the state. In some cases, state health departments reported that local government inspections were conducted primarily through state contracts or agreements. In a few cases, states reported large expenditures by local governments. For example, the Idaho Department of Health reported that most of the state’s expenditures for food safety were made by local multicounty health districts, which spent about $1 million on food safety in fiscal year 1999, while the state spent about $650,000. 1. The report clearly identifies FSIS’ responsibilities—i.e., ensuring that meat, poultry, and processed egg products moving in interstate and foreign commerce are safe, wholesome, and marked, labeled, and packaged correctly. Regarding nonfood safety expenditures, FSIS officials assured us during the review that the expenditure information that they provided was for food safety or primarily food safety related activities. As such, we believe the FSIS expenditures in this report are sufficiently related to food safety to be appropriately characterized as “food safety” expenditures. 2. We believe the report adequately describes the size and scope of FSIS activities. For example, the report includes information on the number of meat, poultry, egg product, and import establishments FSIS oversees; the number of state and foreign programs it reviewed; and the number and type of inspections it conducted. The level of detail provided on FSIS’ responsibilities and activities is similar to that provided on FDA activities. 3. It was not our intent to analyze or compare the relative risks of products under the jurisdiction of FSIS and FDA. While the relative risk of FSIS-regulated products may be greater in some cases than FDA-regulated products, we believe that the data accurately reflect the proportion of each agency’s expenditures and the proportion of consumer expenditures for foods under each agency’s jurisdiction. The report also clearly identifies the food products for which each agency has responsibility. 4. We modified the report to clearly identify FSIS’ responsibilities under the federal meat and poultry inspection acts and to describe its efforts, with guidance from the courts, to realign the responsibilities and roles of industry and federal inspectors. 1. By design, the scope of this report was limited to FSIS and FDA food safety activities and expenditures. However, the report recognizes that 12 federal agencies conduct food safety activities and cites our testimony Food Safety: U.S. Needs a Single Agency to Administer a Unified, Risk-Based, Inspection System (GAO/T-RCED-99-256, Aug. 4, 1999), which provides the fiscal year 1998 funding and staffing levels for these federal agencies. In addition to those named above, Brad Dobbins, Kathy Colgrove-Stone, John Nicholson, and Carolyn Boyce made key contributions to this report. | The Food and Drug Administration (FDA), the Food Safety and Inspection Service (FSIS), and the state agriculture and health departments spent about $1.3 billion in fiscal year 1999. FSIS and FDA spent about $1 billion, and the states reported spending about $300 million. The amounts and proportions of food safety expenditures for fiscal year 1998 were similar. Regarding the $1 billion in federal funds spent in fiscal year 1999, FSIS spent about 70 percent, overseeing about 20 percent of federally regulated foods; FDA spent about 30 percent, overseeing about 80 percent of federally regulated foods. These outlays reflect the regulatory approaches or inspection frequencies contained in the laws under which each agency operates. |
The Authority has designed an integrated transportation network for Los Angeles County called the Metro System. To develop part of that system, it has signed three grant agreements with FTA to help fund the final design and construction phases of a heavy rail system called the Red Line. As shown in figure 1, the Red Line links with other parts of the Metro System—the Blue and Green lines, which are light rail systems. The Green Line and part of the Blue Line are operational; both have relied solely on local funds to pay the construction costs. The Authority will use state and local funds for the Pasadena Blue Line, which is under construction. In contrast, the Red Line project is being designed and constructed using federal, state, and local funds. As of February 1996, about $3.3 billion had been appropriated for the project: $1.8 billion from the federal government; $393 million from the state government; and $1.1 billion from local governments. KENNETH HAHN/103RD ST. Map not to scale. Effective December, 1995. (Figure notes on next page) The Authority is responsible for the design, construction, and operation of the Red Line project. Day-to-day design activities are managed by an engineering management consultant, while construction activities are managed by several construction management consultants, all under contract to the Authority. FTA approves and oversees expenditures of federal funds for the project and has hired a contractor, Hill International, Inc., to help ensure that the Authority maintains a reasonable process for successfully designing and constructing the project and to monitor the Authority’s development and implementation of the project. As of February 1996, the Authority estimated the project’s total cost at $5.9 billion, an 8 percent ($427 million) increase over the $5.5 billion estimated in the grant agreements. As shown in table 1, this increase was the result of construction problems, new construction requirements, and enhancements of the project. For example, on segment one, unanticipated groundwater and soil contamination resulted in costs for cleanup as well as for purchasing property on the right-of-way for a new station alignment that avoided the contaminated area. In addition, on segment two, the Authority’s Board of Directors approved $65 million to add a new station entrance and make some modifications to stations for commercial development. Furthermore, during the construction of segment two, a small part of Hollywood Boulevard collapsed into the subway tunnel being dug under the roadway, creating a 70-by-70-foot-wide sinkhole. As a result of this and prior problems, the Authority fired the contractor. Contract costs resulting from the firing and from the rebidding of the remaining work will add about $67 million to the project’s costs. The Authority believes its cost containment program has helped to keep cost increases to a minimum. The project’s cost could increase beyond the $5.9 billion estimate. For example, on segment three, the design of the Mid-City extension was suspended following the discovery of high concentrations of hydrogen sulfide gas on the planned tunnel alignment. The Authority is considering two alternatives: (1) constructing shallow underground stations and a tunnel, estimated to cost an additional $190 million, or (2) constructing a subway with aboveground stations, estimated to cost an additional $130 million. A third option—constructing a deep tunnel with a different alignment—is being studied because of public opposition to the proposed aboveground stations and the estimated costs of the first two alternatives. Authority officials estimate that it could take up to 8 years to complete the Mid-City extension after the Authority’s board chooses an alternative. The Authority has made management decisions that may increase costs in the short term but that could provide better quality design work and forestall costly water damage to the tunnel. For instance, the final design of the East Side extension is behind schedule because the Authority is requiring the design contractor to, among other things, implement new quality control and cost containment procedures and perform additional geotechnical studies of fault areas before proceeding. In addition, the Authority has implemented some mitigation measures for the North Hollywood extension that are delaying construction, including performing additional grouting to stabilize the soil and prevent water from flowing into the tunnel. Pending lawsuits could also increase costs. For example, tunneling under Runyon Canyon Park is scheduled to begin at the end of May 1996. However, a lawsuit filed by two environmental groups seeks to prevent digging and tunneling below the canyon until federal, state, and local agencies develop a supplement to the 1989 environmental impact statement. If the tunneling is delayed, the project’s schedule would be extended, thereby increasing costs. Other lawsuits could also increase costs because they include financial claims against the Authority. The lawsuits are by retail establishment owners affected by settlement on Hollywood Boulevard and the construction contractor fired by the Authority for inadequate construction techniques. Depending on the outcome of the lawsuits and the ability of the Authority’s existing insurance to cover any awards against the Authority, the risk remains that the project’s cost will increase. The Authority estimates that it has secured sufficient federal, state, and local funding to finance $5.9 billion, its current estimate of the project’s total cost. However, about $380 million in financing commitments may not be realized. Furthermore, as noted earlier, the cost could increase beyond the current estimate. Therefore, to cover current and future funding shortfalls, the Authority may have to make difficult decisions, such as reducing the funding or scope of other rail capital projects; deferring or cancelling planned transit projects; or extending the schedule for completing the Red Line, which could further increase the project’s cost. The Authority plans to fund $3.1 billion of the project’s $5.9 billion total cost with federal funds and the remainder from state and local funding sources. Most of the federal funds—$2.8 billion—are from FTA’s new starts discretionary capital program. An additional $300 million has been provided from other federal programs, including the Surface Transportation and Congestion Mitigation and Air Quality programs—highway programs that provide states with the flexibility to use these funds for transit projects. California has committed about $539 million of the project’s funding. The majority of these state funds, about $500 million, are being provided from state gas tax revenues, which are allocated to both highway and transit projects. The remainder of the state’s share of the cost of the project will come from revenues generated from general obligation bonds for rail capital projects. Local funding for the project—about $2.3 billion—comes from three sources: Los Angeles County, the city of Los Angeles, and assessments levied on properties adjacent to the planned stations. Los Angeles County dedicates revenues from a 1-cent sales tax to the Authority for existing transit systems and new transit projects in the Los Angeles area; the Authority has allocated about $1.6 billion of these revenues to the Red Line. Some funds from the county’s dedicated sales tax are returned to the surrounding cities. The city of Los Angeles uses a portion of these funds to finance the 7 percent of the project’s costs that it has committed. The Authority estimates that the remainder of the local funding for the project will be derived from assessments levied on the retail properties adjacent to planned Red Line stations on all three segments because the Authority has or will designate the areas to be taxed as “benefit assessment districts,” since these areas may derive benefits from the project. About $380 million committed by federal, state, and local governments toward the current cost estimate of $5.9 billion may not be realized. On the federal level, there is currently a $94 million shortfall. Under the grant agreements for the Red Line, the federal government committed, subject to annual appropriations, $2.8 billion for the expected life of the project. The agreement breaks this total down into yearly amounts that are also contingent upon congressional action to appropriate funds. In fiscal years 1995 and 1996, the Congress did not provide the annual commitments identified in the grant agreements, resulting in the funding shortfall. While the grant agreements allow the federal government to provide additional funds at a later date to cover any annual shortfalls, and the Authority’s long-range plan assumes that the shortfalls will be made up, federal budget constraints could make it difficult to make up existing or additional shortfalls in the future. Authority officials indicated that they could absorb an additional small shortfall in fiscal year 1997 but may not be able to complete the Red Line as scheduled if there are future shortfalls in the federal funding. In 1995, the state legislature diverted $50 million in state sales tax revenues that had been committed to the Authority for its bus operations.Since the legislature specified that the shortfall could not be allowed to affect the bus program, the Authority provided to bus operations $50 million in county sales tax revenues that had been slated for segment three. Authority officials told us that they must offset this loss through operating efficiencies over the next 4 years and may delay segment three by 1 year. Some of the Authority’s local revenue commitments may also not be realized. The Authority is currently working with the city to reach agreement on its commitment to contribute $200 million for segment three. The Authority’s long-range plan indicates that if the city’s contribution to the project does not materialize, funds slated for current and planned rail construction projects, such as the Pasadena Blue Line and further extensions to the Red Line, would be needed to make up the shortfall. Diverting these funds could delay the affected projects by up to 3 years. Furthermore, the Authority’s long-range plan also states that $36 million of the expected $75 million in estimated revenues from assessments levied on retail properties adjacent to the planned stations for segments two and three may not be realized because retail property owners oppose the assessment. Apart from the revenues from the county’s dedicated sales tax, the Authority’s funding sources for cost increases beyond the $5.9 billion estimate are somewhat limited. Federal funds will likely not be forthcoming to finance further cost increases for the Red Line project. The grant agreements essentially limit the federal government’s exposure to increased costs for the project by capping the federal share from the new starts discretionary grant program at $2.8 billion. However, an extraordinary cost provision in the agreements allows the Authority to seek additional federal funds under certain circumstances, such as higher-than-estimated inflation. In 1995, the Authority requested an additional $30 million in federal funds under this provision for segment one. While FTA has not formally responded to the Authority’s request, FTA officials told us that because of the amount of competition for new starts discretionary grant funds, FTA is unlikely to grant this or future requests for funds above the level in the grant agreements. In fact, FTA has approved only one of several requests for extraordinary costs from grantees in the new starts program—for the St. Louis Metrolink—in the last 5 years. Without increased federal funds, the Authority will have to turn to state and local funding sources. However, the state will provide funds only in the case of extraordinary costs. On the other hand, the city of Los Angeles will pay 50 percent of the cost increase for segment one—up to $100 million—and has committed to pay up to $90 million for segment two. The city has made no commitment to fund cost increases for segment three. The remaining local funding source is the county’s dedicated sales tax. FTA and Hill International officials believe that one way the Authority can absorb increases above the current cost estimate is by using revenues that the Authority currently allocates to other rail capital projects. However, Authority officials told us that the amount of flexibility the Authority has in a given year is limited, in part because about 70 percent of discretionary sales tax revenues are allocated to the bus program and the Authority does not plan to use these funds for the Red Line project. Therefore, any decision to use sales tax revenues could adversely affect other rail capital projects. For example, when the recent recession reduced planned revenues, the Authority allocated these losses to the Pasadena Blue Line project. This delayed the project, which was not yet under construction, for 3 years. This decision meant that the Red Line would not lose revenues and could maintain its construction schedule. To determine how much flexibility it has to address a cost increase and/or revenue loss, the Authority assesses the magnitude of the increase and/or loss, the Red Line’s completion schedule, the available bonding capacity based on sales tax revenues, other potential sources of funding, and the impact on other rail capital projects. For example, the Authority recently determined that it had enough bonding capacity to provide $40 million toward the cost increase for segment two and still maintain the Red Line’s construction schedule. However, Authority officials acknowledge that if the bonding capacity is not sufficient and no other funding sources are available, the Red Line’s completion schedule would have to be extended and the project’s cost could increase. According to Authority officials, the Red Line is their number-one rail priority and the decision on the new alignment for Mid-City—not expected for about a year—is the single most costly increase currently expected for the project. They stated that the project would have to be assessed at that time to determine whether revenues are available to fund construction or whether that extension will have to be delayed. Depending on how long the Mid-City extension is delayed, funding slated for other projects, such as the San Fernando extension, scheduled to begin in 2003, could be used for Mid-City. FTA’s monitoring of financing capacity for the project, particularly once the cost of the Mid-City extension is determined, will be critical to help ensure that funding is available to proceed with design and construction. In November 1994, the Authority and FTA agreed to a plan to improve the overall management of construction of the Red Line project. However, this plan did not come about until FTA took action to stop tunneling under Hollywood Boulevard for the Red Line and temporarily suspended federal funding for the project to compel the Authority to address long-standing problems. Among these long-standing problems was the lack of a mechanism for elevating safety and quality assurance concerns to the appropriate level within the Authority’s and the construction management contractor’s organization. For example, during 1993 and 1994 several inspection reports alerted the resident engineer about weaknesses in the installation of the initial tunnel lining under Hollywood Boulevard. However, the issue was not elevated to the Authority’s Director of Quality until excessive surface settlement occurred on Hollywood Boulevard in the summer of 1994. The tunnel lining support was cited as a possible cause. Because of concerns about the management attention given to quality assurance, FTA recommended that this function be placed sufficiently high in the Authority’s and the construction management contractor’s organization to help ensure independence and adequate attention to deficiency reports by quality control inspectors. Because corrective actions were not taken, on this and other issues, FTA took action to stop tunneling under Hollywood Boulevard for the Red Line and suspended federal funding—from October 5 to November 10, 1994—for the project. As a condition for resuming federal funding, the Authority and FTA agreed to a plan in November 1994 that called for transferring quality assurance, quality control, and safety from the construction management contractor to the Authority and increasing staffing for quality assurance. These actions are now being implemented. For example, the Authority increased the number of quality assurance positions from 4.5 staff years in 1994 to 6 staff years in 1995, and it plans further increases. Also, in September 1995 FTA increased the number of permanent Hill International staff, from 5 to 7; provided 3 temporary staff, who have been extended at least through May 1996; and increased the frequency of interactions between Hill International, FTA, and the Authority. With more staff, according to Hill International, four rather than one staff members are present on the construction sites daily. Our past work has shown that FTA has rarely exercised the enforcement tool of withholding funds to compel grant recipients to fix long-standing problems. With its action on the Red Line project, FTA has seen the success of withholding funds to compel change. Given the cost and potential risks of underground tunneling and a history of resistance to certain quality control recommendations made in the past, timely enforcement actions could help to ensure that the Authority addresses key recommendations in the future. We provided copies of a draft of this report to FTA and Los Angeles County Metropolitan Transportation Authority officials for their review and comment. We met with FTA officials, including the Director, Office of Oversight, and the Program Manager for the Project Management Oversight Program in Headquarters and with the Director of the Office of Program Management in FTA’s Region IX. We also met with Authority officials, including the Deputy Executive Officer for Program Management, Director for Strategic Funding Analysis and Director for Grants Management. FTA and the Authority generally agreed with the facts as presented. However, both suggested that the report’s presentation of FTA’s oversight of the project’s quality assurance and quality control practices heavily emphasized past problems rather than focused on recent positive changes. We have revised that section of the report to clearly describe the actions FTA and the Authority have taken to improve construction management of the Red Line project. FTA and the Authority also commented that our discussion of the project’s future growth and potential financing issues are speculative. We agree that future projections are speculative, but the report describes clear examples of potential reasons for cost increases, such as the decision to realign the Mid-City extension and design delays for the East Side extension, as well as the Authority’s potential solutions to financing these increases. The Authority was also concerned that our discussion of cost growth, particularly in table 1, could be misconstrued because the cost growth for segment three is an estimate. To address their comments, we changed the title of the table to reflect that the figures are estimates and added a footnote stating that cost mitigation measures have reduced the estimated cost growth for the East Side extension from $29 million to $8 million. Both FTA and the Authority offered technical comments to clarify information in the report, and we have incorporated these comments, as appropriate. To prepare this report, we reviewed the Authority’s February 1996 Project Manager’s Status and Construction Reports for each segment of the Red Line. We reviewed supporting documentation and discussed costs, financing, and oversight issues with officials at FTA’s headquarters in Washington, D.C.; FTA’s Regional Office in San Francisco; Hill International, Inc. in Los Angeles; and the Los Angeles County Metropolitan Transportation Authority. We also reviewed the Authority’s 20-year transportation plan and February 1996 financial update and discussed them with officials at FTA, Hill International, and the Authority. We performed our work from October 1995 through April 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Transportation, the Administrator of the Federal Transit Administration, the Chief Executive Officer of the Authority, and cognizant congressional committees. We will also make copies available to others upon request. Please call me at (202) 512-2834 if you or your staff have any questions. Major contributors to this report are listed in appendix II. Gary Hammond Roderick Moore James Moses 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 Los Angeles County Metropolitan Transportation Authority's Red Line subway project, focusing on the: (1) project's estimated cost; (2) Authority's financing plans; and (3) Federal Transit Administration's (FTA) oversight of the project's quality control and assurance practices. GAO found that: (1) as of February 1996, the project's estimated total cost was $5.9 billion; (2) project costs have increased due to construction problems, new construction requirements, and project enhancements; (3) additional design problems and pending lawsuits may further increase project costs; (4) the Authority plans to use $3.1 billion in federal funds and $2.8 billion in state and local funds to finance the project, but it may not realize about $380 million of the total; (5) the Authority may have to reduce the funding or scope of other rail projects, defer or cancel planned projects, or extend the project's construction schedule to cover current or future funding shortfalls, but extending the project's construction schedule could also increase costs; (6) in response to FTA actions, the Authority is reorganizing its quality control and assurance programs and increasing program staff; and (7) FTA has increased the number of on-site oversight personnel to improve project monitoring. |
A juvenile is an individual at or below the maximum age of juvenile court jurisdiction. Established by state statute, the maximum age of juvenile court jurisdiction is the oldest age at which an individual can be processed in juvenile court. Individuals who are above the maximum age of juvenile court jurisdiction are considered adults and therefore are under criminal court jurisdiction. In 39 states and the District of Columbia the maximum age is 17. In 11 states, the maximum age is either 15 or 16. Except for Wyoming (where the maximum age dropped from age 18 to 17), the maximum age had not changed in any state, when comparing the state laws in 1978 with the laws in 1994. Although the organization of state juvenile justice systems varies, two options are generally provided for processing juvenile delinquency cases—formal and informal. An authorized court official (e.g., juvenile prosecutor or juvenile probation officer) decides whether to process the case formally through the court system or informally by diverting the case from the juvenile court. For handling formal cases, a petition must be drafted and filed to provide notice of the offenses that will be pursued and to request the court to adjudicate—judicially determine (judge) whether or not the youth is a delinquent offender. For informal cases there is no formal court petition or legal instrument requesting the court to adjudicate the youth as a delinquent. Whether the case is handled formally or informally, juveniles receive dispositions. Disposition options may include dismissal of the case, probation, fines or restitution, community service, and placement. A juvenile who is at or below the maximum age of juvenile court jurisdiction may be sent to criminal court by one of the following three methods: judicial waiver, which allows juvenile court judges to transfer juveniles to criminal court. Generally, prosecutors initiate judicial waiver by filing a waiver petition asking the judge to consider the case for waiver; prosecutor direct filing, which allows prosecutors to decide whether to file certain cases in juvenile or criminal court; application of statutory exclusion laws, which specify crimes or juveniles with certain prior records that are excluded from juvenile court jurisdiction. For each method, the prosecutor plays an important role in determining whether a juvenile will be sent to criminal court. For example, the offense with which the prosecutor charges the accused can determine whether the juvenile falls under a state’s criteria for criminal court prosecution. Juveniles prosecuted in state criminal court are subject to the same state court procedures and sentencing guidelines as other defendants in criminal court. To determine the frequency with which juveniles were sent to criminal court, we developed estimates of the number of juvenile cases transferred to criminal court by juvenile court judges (judicial waiver) using the NCJJ national data—National Juvenile Court Data Archive (NJCDA)—for calendar years 1988 through 1992. As part of our analysis of judicial waivers, we developed estimates of the age, sex, race, and offense profiles of juveniles transferred to criminal court by judges in Arizona, California, Florida, Missouri, Pennsylvania, South Carolina, and Utah. Data limitations precluded us from developing estimates of the total number of juvenile cases filed directly in criminal court by prosecutors (prosecutor direct filing) and those juveniles excluded from juvenile court because of the offense committed and/or prior court records (statutory exclusion) in those states permitting these methods. We did, however, contact state court officials in the District of Columbia and 10 states that we identified as having direct filing laws and analyzed data they provided. We analyzed the statutory exclusion laws in the District of Columbia and 37 states that we identified as having these laws to determine the types of offenses and/or prior court records that exclude juveniles from juvenile court. To analyze the sentences of juveniles tried in criminal court, we used criminal court data from the Bureau of Justice Statistics. We identified offenses, conviction rates, and incarceration rates in California, Minnesota, Missouri, Nebraska, New York, Pennsylvania, and Vermont. To gather prosecutors opinions on data related to the processing of juveniles in criminal courts, we sent a survey to a nationally representative sample of district prosecutor offices that dealt with juveniles in juvenile court. To determine the conditions of confinement for juveniles in correctional facilities, we visited seven prisons in Florida, Michigan, North Carolina, and Ohio. To provide a summary of state laws governing which juveniles may be sent to criminal court, we reviewed the statutes for all 50 states and the District of Columbia. Appendix I presents more details about our objectives, scope, and methodology, including a discussion of how we selected the states and prisons we visited. Our results apply to states and prisons for which we collected data and cannot be projected to other locations. We did not verify data provided by the states. We did our work from May 1993 through April 1995 in accordance with generally accepted government auditing standards. Since no federal agency has responsibility for the issues addressed in this report, we did not obtain comments on a draft of this report. However, we did discuss our results with NCJJ and OJJDP officials and, where appropriate, incorporated their comments. Limited nationwide and state data existed on the total number of juvenile cases sent to criminal court. However, we obtained information on the number of juvenile cases sent to criminal court by judicial waiver and some information on the number sent by prosecutor direct filing. Since data on statutory exclusions were not available, we analyzed state statutes to identify the possible impact of the statutes on juveniles. According to our analysis of NCJJ data, the rate at which juvenile court judges sent formal delinquency cases to criminal court has remained less than 2 percent from 1988 to 1992. Additionally, data available from 5 states, the District of Columbia, and a few counties in 5 other states on the number of prosecutor direct filing cases filed in criminal court annually showed that it ranged from 4 cases in one state to about 7,200 cases in another state. Our analysis of statutory exclusion laws indicated that the laws generally established specific criteria that focused on juveniles (1) charged with serious violent offenses and/or (2) with previous court records. In addition, our analysis showed that legislation passed in the last 16 years included two primary types of changes: (1) in 24 states and the District of Columbia legislative changes tended to increase the population of juveniles who may be sent to criminal court and (2) in 17 other states, recent legislation changed the method in which certain juveniles may be sent to criminal court (e.g., from the judicial waiver to the prosecutor direct filing). The results of our national survey of state prosecutors suggested that in most prosecutorial offices, judicial waivers accounted for a higher percentage of juveniles arriving in criminal court than direct filings or statutory exclusions. We identified (1) judicial waiver laws in 47 states and the District of Columbia, (2) prosecutor direct filing laws in 10 states and the District of Columbia, and (3) one or more statutory exclusion laws in 37 states and the District of Columbia. We also identified 21 states with provisions that allow criminal court judges to transfer cases from criminal court to juvenile court under circumstances specified in the law (reverse waiver). For example, in Arkansas, when a prosecutor directly files a case in criminal court, the criminal court judge may remand the case to juvenile court. In addition, we identified 19 states that allow juveniles prosecuted and convicted in criminal court to receive dispositions as a juvenile under specified circumstances. For example, in California a juvenile convicted in criminal court may receive a disposition as a juvenile if the California Youth Authority determines that the juvenile is amenable to treatment. See table 1 for a summary of the state statutes and appendix IV for a detailed summary of statutes in all 50 states and the District of Columbia that govern which juveniles may be sent to criminal court. The percent of formal delinquency cases judicially waived to criminal court (judicial waiver rate) increased by 33 percent from 1.2 percent in 1988 to 1.6 percent in 1992, which represented a growth from about 7,000 to almost 12,000 cases a year, as shown in table 2. This increase occurred while the total number of formal delinquency cases increased by about 31 percent; the number of waived cases increased about 68 percent. Data showed that judicial waiver rates varied by offense type, as shown in table 3. The judicial waiver rate for person offenses in 1992 was 2.4 percent in contrast to the waiver rate for property offenses, which was 1.3 percent. Therefore, judges were more likely to waive cases to criminal court involving juveniles charged with person offenses than juveniles charged with property offenses in 1992. While the waiver rates for all the offenses increased from 1988 through 1992, the waiver rates for drug offenses increased the most; however, the rate decreased between 1991 and 1992. While the chances of juvenile cases being waived to criminal court were highest for juveniles charged with person and drug offenses, property offenders made up the largest proportion of waived cases, as shown in table 4. This was due to the prevalence of property offenses versus person or drug offenses. For example, NCJJ data showed that in 1992, referrals to juvenile court were about 401,000 or 54 percent for property offenses, about 165,000 or 22 percent for person offenses, and 46,000 or 6 percent for drug offenses. Also shown in table 4, the offense profile of judicially waived cases changed from 1988 to 1992. For example, person offenses increased from 29 percent of the cases waived in 1988 to 34 percent in 1992. In addition, property offense cases decreased from 53 percent of the cases waived in 1988 to 45 percent in 1992. Similar to the offense profile, the demographic profile of juvenile cases waived to criminal court had changed slightly from 1988 to 1992 (see table 5). For example, the percentage of waived cases for juveniles age 16 or older decreased from 93 percent in 1988 to 88 percent in 1992. Also, the racial makeup of juveniles whose cases were waived changed since 1988 when about 54 percent were white, 43 percent were black, and 2 percent were of other races. In 1992, about 47 percent of juveniles whose cases were waived were white, 50 percent were black, and 3 percent were of other races. To provide perspective on patterns of waiver rates across the six states, we examined data on the number of juveniles charged with violent, property, and drug offenses. We used these three offenses because the number of cases for each offense allowed comparisons. Our analysis focused on the potential effects on waiver rates for five variables—age (for six states), sex (for six states), race (for six states), nature of locality (metropolitan or nonmetropolitan, for four states), and number of prior referrals (for five states). We examined each of the variables separately because we could not control for variables for which data were not available and because of the small number of cases waived in each offense type within the state. (Tables II.3, II.6, II.9, II.12, II.15, and II.18 contain the data used in our analysis.) Age - In the six states we examined, juveniles 16 years or older were more likely to have their cases waived for all three offense types. Gender - Males were more likely than females to have their cases waived within each offense type in the six states we analyzed. The extent of the difference again varied by state. Race - Blacks were more likely than whites to have their cases waived for all three offenses in four of the six states we examined. Locality - In the four NCJJ states with data on type of court location, some small differences existed but were not consistent across offense types within the same state. Prior Referrals - In the five states we examined, waiver rates generally increased with the number of prior referrals for all five states and most offense types. Appendix II contains data on the percent of cases waived, the demographic characteristics for juveniles in the seven states, and a detailed discussion of our analysis of waiver rates. Whether a juvenile case is eligible for judicial waiver depends on the state. Forty-seven states and the District of Columbia have judicial waiver laws, and each state establishes different criteria for which cases may be waived. The criteria often include specific age and offense restrictions as well as factors that the judge must consider related to the juvenile’s case. For example, juvenile judges in Florida can waive a case to criminal court involving a juvenile age 14 or older for any offense if there is a finding that the juvenile should be transferred after considering certain factors; whereas judges in Maryland can waive a case involving a juvenile age 15 or older for any offense and a juvenile of any age charged with a crime punishable by death or life imprisonment if there is a finding that the juvenile is unfit for juvenile rehabilitative measures. In addition, the U.S. Supreme Court in an appendix to Kent v. United States, 383 U.S. 541 (1966), outlined certain factors that the juvenile court judge would consider when making waiver decisions under the specific statute. The factors from the 1966 court case included seriousness of the alleged offense to the community and whether the protection of the community requires waiver; whether the offense was committed in an aggressive, violent, premeditated, or willful manner; whether the offense was committed against persons or against property, with greater weight being given to offenses against persons, especially if personal injury resulted; prosecutive merit of the complaint; whether the juveniles’ associates in the offenses were adults; sophistication and maturity of the juvenile; juveniles’ record and previous history; protection of the public; and likelihood of reasonable rehabilitation of the juvenile by the use of procedures, services, and facilities that are available to the juvenile court. Many states have incorporated these factors into their juvenile codes either verbatim or with minor modifications. In interviews with judges in seven states and in our nationwide survey of prosecutors, we asked which factors from a list (based on factors previously listed) they were most likely to consider when making waiver decisions. The factors chosen most often by judges and prosecutors were the seriousness of the offense, the juveniles’ previous record and history, and whether the juvenile was amenable to rehabilitation. While we were unable to get an estimate of the total number of waiver petitions filed by prosecutors, information collected in our survey of prosecutors suggested that more than half of the requests for judicial waivers filed in calendar year 1993 were granted. We are not certain of the reliability of these figures because their responses may have been on the basis of impressions rather than data. See appendix II for additional data on judicial waivers in the seven states. State data and data for only some counties were available in the District of Columbia and 10 states that allow prosecutor direct filing. Table 6 shows the available data that we obtained on prosecutor direct filings, including statewide data from five states and the District of Columbia. Data on direct filing in the other five states were available only from certain counties. While the data provided by state and local court officials were inconsistent and incomplete, (e.g., lack of statewide data and time periods were different) they indicated that the frequency of using direct filing varied throughout the states that have direct filing laws. Data provided by juvenile court officials on the number of delinquency cases filed in these jurisdictions compared with data provided by criminal court officials on the number of cases directly filed by prosecutors showed that direct filing cases represented a larger percentage of juvenile cases in some states than in others. For example, in Florida and Arkansas prosecutor direct filing cases represented about 10 percent of juveniles cases, and in Colorado and Wayne County, Michigan they represented about 1 percent. Direct filing laws in 10 states and the District of Columbia generally focused on felony offenses for juveniles over an age specified in each state’s laws. However, juveniles age 16 in Nebraska and Vermont and age 17 in Wyoming can be direct filed in criminal court for any offense. In jurisdictions with direct filing laws, prosecutors had discretion to decide whether to file the case in juvenile or criminal court. The extent to which prosecutors exercise their discretion was exemplified by data provided by criminal court officials in Arkansas and Wayne County, Michigan. These data showed that many of the cases eligible for direct filing remained in juvenile court. For example, in Arkansas 2,756 cases were eligible to be filed in criminal court in 1992. However, during that period, prosecutors directly filed about 45 percent of the cases in criminal court. In addition, in Wayne County 146 juvenile cases were eligible to be filed in criminal court in 1992. However, during that period less than half the cases, 61 (or 42 percent), were filed in criminal court. Data were not available on the number of cases excluded by law from juvenile court jurisdiction. Without state data, we were unable to determine the frequency of statutory exclusion cases sent to criminal court. We were, however, able to analyze the laws to determine the conditions under which juveniles were excluded from juvenile court (see table 7 for our analysis). According to our analysis, statutory exclusion laws focused primarily on juveniles charged with serious violent offenses and/or juveniles with previous juvenile or criminal court records. In addition, 15 states also excluded one or more other serious offense (e.g., a child age 16 or older carrying a handgun without a license in Indiana). In 17 of the 37 states with statutory exclusion laws, the laws excluded juveniles charged with serious violent offenses and juveniles with prior court records (repeat offenders) from juvenile court. For example, in Pennsylvania, any juvenile charged with murder is excluded from juvenile court as well as any juvenile who has been previously found guilty in a criminal proceeding. In 13 of the 37 states, the focus of the statutory exclusion laws are to exclude juveniles charged with serious violent offenses from juvenile court. For example, in New York, any juvenile age 13 or older charged with murder in the second degree is to be prosecuted in criminal court. In addition, New York excludes juveniles age 14 or older from juvenile court for a list of serious violent crimes that include assault, rape, and manslaughter, each in the first degree. New York does not have any exclusion provisions on the basis of the juvenile’s prior record. In 7 of the 37 states and in the District of Columbia, the focus of the statutory exclusion laws is to exclude juveniles with prior criminal court records from juvenile court jurisdiction. These laws apply to all juveniles with specified prior records (i.e., adult court convictions) regardless of their offenses. For example, in Virginia, any juvenile previously convicted as an adult is excluded from juvenile court jurisdiction regardless of the offense. While statutory exclusion laws in most states focus on serious violent offenses and prior records, in 15 states one or more other serious offenses such as burglary, weapons, and drug offenses are excluded. For example, in Maryland using, wearing, carrying, or transporting a firearm during a drug trafficking offense would exclude a juvenile age 16 or older from juvenile court jurisdiction. Since 1978, 44 states and the District of Columbia have passed laws that have an effect on which juveniles may be sent to criminal court. These laws could affect the number of juveniles sent to criminal court; however, the impact may vary. In 24 of these states and the District of Columbia, the laws have tended to increase the population of juveniles potentially subject to being sent to criminal court. In three states, the population of juveniles subject to being sent to criminal court decreased. In 17 states, the laws changed the method in which certain juveniles are sent to criminal court. In 24 states and the District of Columbia the laws that identify juveniles who may be sent to criminal court increased the population of juveniles potentially subject to being sent to criminal court. For example, in 1978, California law allowed juvenile court judges to waive the case of any juvenile age 16 or older. Since then, a law was passed that allows juvenile court judges to also waive cases involving juveniles 14 or older for a list of specific offenses. This change increased the number of juveniles that are subject to being sent to criminal court. Also, in 1978, North Dakota law allowed judges to waive the case of a juvenile age 16 years or older charged with a “crime or public offense.” Since then, a new law was passed that allows juvenile court judges to also waive cases involving juveniles 14 years or older charged with committing an act that involves the infliction or threat of serious bodily harm. New Mexico, South Dakota, and Wyoming changed their laws, which had the effect of decreasing the population of juveniles potentially subject to being sent to criminal court. For example, in 1978, Wyoming law allowed judges to waive the case of a child of any age for any offense to criminal court. Currently, only cases involving children age 13 or older can be waived to criminal court. In the remaining 17 states, the new laws changed the method in which certain juvenile cases may be sent to criminal court but did not increase the size of the potential population of juveniles that may be sent to criminal court. In general, these laws have changed the process for sending juveniles to criminal court. For example, in 1988, Michigan passed a law that gives prosecutors the discretion to directly file cases in criminal court involving juveniles who are age 15 or older and are charged with a list of specific crimes. Prior to this law, these cases would be filed initially in juvenile court, and the prosecutors would have to request a waiver hearing for those cases they believed should be sent to criminal court. During the waiver hearing, the juvenile court judge would decide whether to waive the case to criminal court. Maryland also changed the process by excluding from juvenile court juveniles age 16 or older charged with certain specified violent crimes and other serious crimes. Previously, the juvenile court judge decided whether these cases should be sent to criminal court; however, state law now establishes the criteria by which certain juvenile cases are sent to criminal court. We surveyed a sample of prosecutors’ offices to obtain information on the estimated percent of all indictments filed against juveniles in criminal court that were the result of judicial waiver, direct filings, and statutory exclusions. The survey results suggested that in most prosecutorial offices, judicial waivers accounted for a higher percentage of juveniles arriving in criminal court than direct filings or statutory exclusions.Further, we estimated that in about 60 percent of the offices only judicial waivers were used. However, the results are difficult to interpret because of missing data and potentially inconsistent completion by the respondents. Our analysis of 1989 and 1990 criminal court data for seven states indicated that most juveniles prosecuted in criminal court in each state were convicted. Further, most juveniles were convicted of property offenses. When juveniles were sentenced in criminal court for serious offenses, most were incarcerated. Our analysis of conviction rates in seven states—California, Minnesota, Missouri, Nebraska, New York, Pennsylvania, and Vermont—showed that states conviction rates for juveniles prosecuted in criminal court, during 1989 and 1990 combined, varied for serious violent, serious property, and drug offenses. For example, as shown in table 8, the conviction rate for serious violent offenses in Missouri was 50 percent. Conviction rates for serious property offenses in Pennsylvania and Vermont were 63 percent and 97 percent, respectively. To provide some perspective on how juveniles were treated as compared with others prosecuted in criminal court, we compared juvenile conviction rates with the conviction rates of “other youth” age 16 or 17 and young adults ages 18 to 24 (see tables III.1 and III.2 in app. III for conviction rates for other youth and young adults). The data for other youth and young adults includes a broader range of crimes within crime types (than juveniles’ crimes) because all youth and young adults crimes are prosecuted in criminal court. Some juvenile crimes are tried in criminal court because of the severity of juveniles’ offenses or prior records. Our analysis of the two states, Missouri and New York, which included the other youth population, showed that in Missouri, juvenile conviction rates were higher than the rates of other youth (persons of age 17). For example, the conviction rate for juveniles prosecuted for serious property offenses in Missouri was 67 percent compared with 38 percent for other youth. In New York, conviction rates were lower for juveniles than they were for other youth (persons age 16 and 17). For example, the conviction rate for juveniles prosecuted in New York for serious property offenses was 26 percent compared with 64 percent for other youth. A comparison of conviction rates in the states we analyzed for juveniles and young adults (persons age 18 through 24) showed that generally, juveniles were, for some offenses, as likely as young adults to be convicted in criminal court. Finally, juvenile conviction rates for serious violent, serious property, and drug offenses were generally similar to the rates for young adults in the states we analyzed, except for New York. For example, the conviction rate for serious property offenses in Minnesota was 97 percent for juveniles compared with 89 percent for young adults. Also, the conviction rate for drug offenses in Pennsylvania was 83 percent for juveniles compared with 81 percent for young adults. Our analysis of juvenile conviction offenses showed, in five of seven states, that property offenses made up the largest proportion of juvenile convictions in criminal court, representing between 36 and 66 percent of convictions, as shown in table 9. In California and New York, violent offenses accounted for the largest proportion of juvenile convictions. Similar to juveniles, the largest percentage of other youth and young adults convicted in criminal court were property offenders. (See tables III.3 and III.4 in app. III for conviction offenses of other youth and young adults.) In California and New York, the largest proportion of young adults convicted were drug offenders. For example, 37 percent of young adults in California and 33 percent in New York were convicted of drug offenses. In four of seven states we analyzed, over half of the juveniles sentenced in criminal court for serious violent, serious property, or drug offenses were incarcerated in each state. Incarceration rates for these offenses varied among states, as shown in table 10. In Vermont, incarceration rates for these offenses were 33 percent or less. In addition, in Missouri the incarceration rate for drug offenders was 43 percent. Also, in Pennsylvania the incarceration rate for serious property offenders was 10 percent. Among the 7 states, a total of 703 juveniles was sentenced to incarceration in the 3 offense types during 1989 and 1990. To determine whether juveniles were incarcerated at rates similar to others in criminal court, we compared juvenile sentences with those of other youth and young adults. (See tables III.5 and III.6 in app. III for incarceration rates for other youth and young adults.) In the two states with an “other youth population,” Missouri and New York, juvenile incarceration rates for serious violent and serious property offenses were higher than incarceration rates for these offenses for other youth. For example, in Missouri, 80 percent of juveniles sentenced were incarcerated for serious violent offenses compared with 60 percent of other youth. The juvenile incarceration rates for drug offenses were lower than the rates for other youth in Missouri and about equal to the rates for other youth in New York. Finally, we found no consistent pattern when comparing juvenile and young adult incarceration rates (see table III.6 in app. III). For some offenses juvenile incarceration rates were higher than young adult incarceration rates, while for other offenses juvenile rates were lower. For example, in New York, the incarceration rate for drug offenses was lower for juveniles, 62 percent, compared with 80 percent for young adults. In contrast, in Nebraska, the incarceration rates for serious violent offenses were higher for juveniles, 93 percent, compared with 78 percent for young adults. In the seven states, the proportion of juveniles incarcerated for serious property offenses was the same as the proportion incarcerated for serious violent offenses but varied among the states. Drug offenders made up a smaller proportion of the total number of juveniles incarcerated (see table 11). In contrast, drug offenders made up the largest proportion of other youth and young adults incarcerated. (See tables III.7 and III.8 in app. III for the total number of other youth and young adults incarcerated.) While most juveniles sentenced in criminal court were incarcerated, some juveniles also received probation and other sentences in the seven states we analyzed. In fact, in five of the states, some juveniles convicted of serious violent offenses received probation sentences. As shown in table 12, the percentages varied from 3 percent in California to 50 percent in Vermont. Additionally, juveniles convicted of serious property or drug offenses in four states received probation at higher rates than juveniles convicted of serious violent offenses. Overall, while juveniles convicted of serious violent, serious property, and drug offenses generally did not receive fines as their sentences, in two states, a significant percentage of these juveniles were sentenced to pay fines. In Pennsylvania, 84 percent of juveniles convicted of serious property offenses were fined, and in Vermont, 33 percent of juveniles convicted of drug offenses were fined. According to the literature, criminal court judges consider the severity of the offenses and the prior offense history of the juvenile in making their sentencing decisions. However, data limitations precluded us from considering the prior offense history in our analysis. Our analysis of NCJJ data showed that probation was the most widely used disposition in the juvenile court. In 1992, in about 43 percent of approximately 744,000 formal delinquency cases, juveniles were placed on probation. In addition, probation was the most common disposition for all offense types. A probation disposition involves the court monitoring the juvenile’s behavior, helping the juvenile find a job, arranging in-home or out-of-home care, or promoting wholesome leisure time activities. Of the 57 percent of juveniles not placed on probation in 1992, about 27 percent of their cases were dismissed, 12 percent received some other disposition, and 17 percent received placement (e.g., were placed in a residential treatment program), as shown in table 13. Finally, the distribution of formal dispositions was similar during the 5-year period, 1988 through 1992. As shown in table 14, in 1992, formal cases received various dispositions at similar rates for each offense type. For example, regardless of the offense, about 40 percent of juveniles were placed on probation. While probation was the most common disposition for formal cases, 47 percent of informal juvenile cases were dismissed in 1992, as shown in table 15. Of the remaining 53 percent of the cases, about 30 percent of the juveniles were placed on probation, 23 percent received some other disposition, and 0.4 percent were placed in a residential treatment program. Finally, as with formal cases, the distribution of informal dispositions was similar during the 5-year period, 1988 through 1992, as shown in table 15. Of the approximately 730,000 informal delinquency cases disposed of in 1992, about 47 percent were dismissed. For each offense type the distribution of informal dispositions was similar. For example, regardless of the offense, in about 30 percent of informal cases, juveniles were placed on probation in 1992. A 1991 survey of inmates in state correctional facilities reported that less than 1 percent of state inmates were age 17 or younger. Few juveniles were incarcerated in the seven adult facilities we visited. Further, those juveniles were generally to be treated the same as the adult prisoners. We could not find national estimates for the number of inmates at or below the maximum age of juvenile court jurisdiction in each state. However, results of the 1991 Survey of Inmates in State Correctional Facilities indicated that less than 1 percent of the 712,000 state prison inmates were age 17 or younger. In addition, during visits to seven prisons in four states, we found that juveniles represented a small number of the inmate population, at the time of our visit. For example, as shown in table 16, 31 of the 857 inmates at the Western Youth Institution were age 17 or younger. While these data indicate that few juveniles were in the adult prison system at one time, it does not include the number of inmates who committed their offenses as juveniles and were sentenced to incarceration but are now beyond the maximum age of juvenile court jurisdiction, as defined by the state. According to prison officials at all of the locations we visited, juveniles convicted in criminal court and sentenced to prison are considered adults. Generally, they are subject to the same polices and procedures as other inmates regarding housing, health care services, education, vocation and work programs, and recreational activities. In addition, they are to be afforded the same mail, visitation, and telephone privileges. However, some prison officials pointed out that juveniles and youthful offenders received different treatment at some facilities (e.g., they were provided with a menu designed for their nutritional needs and they received more educational opportunities). See appendix V for a summary of the confinement conditions for juveniles in seven adult correctional facilities. We are sending copies of this report to the Attorney General; the Administrator, Office of Juvenile Justice and Delinquency Prevention; the Director, Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. Major contributors to this report are listed in appendix VI. If you have any questions about this report, please contact me on (202) 512-8777. The 1992 reauthorization (P.L. 102-586) of the Juvenile Justice and Delinquency Prevention Act of 1974 (P.L. 93-415) mandated that we study the processing of juveniles in criminal court. Specifically, we agreed with your Committees to provide the frequency to which juveniles have been sent to criminal court by judicial waiver, prosecutor direct filing, and statutory exclusion; analyze juvenile conviction rates and sentences of juveniles prosecuted in criminal court using the most current data; analyze the dispositions of juveniles in juvenile court; and analyze the conditions of confinement in adult correctional facilities for juveniles convicted in criminal court. We also agreed to summarize state laws governing the circumstances under which juveniles can be sent to criminal court. Further, we noted the number of states that allowed criminal court judges to transfer juvenile cases back to criminal court and the number of states that allowed criminal court judges to impose juvenile court sanctions. To address all objectives, we reviewed relevant literature. To determine the frequency to which juveniles are processed in criminal court, we obtained national, state, and local court data. Because data were not available on the frequency of statutory exclusion, we analyzed the statutory exclusion laws of 37 states and the District of Columbia to determine the types of cases being excluded from juvenile court. To determine sentences of juveniles convicted in criminal court, we analyzed conviction rates, conviction offenses, and incarceration rates and sentences for juveniles prosecuted in criminal court. To determine the dispositions of juveniles in juvenile court, we analyzed the offenses and dispositions of juveniles in juvenile court. To analyze conditions of confinement for juveniles in adult correctional facilities, we conducted site visits at seven adult prisons in four states. We classified cases as juveniles on the basis of the defendants’ age at the time of arrest because data were not available for the defendants’ age at the time of the offense. As a result, we underestimated the number of juveniles in criminal court. To provide a summary of the state laws, we reviewed the statutes for 50 states and the District of Columbia. Finally, we obtained additional perspectives on juvenile justice issues by mailing a survey to a national sample of prosecutors’ offices and interviewing 15 juvenile court judges in 7 states. The act required us to compare the sentences of juveniles tried in criminal court with those processed in juvenile court for similar offenses. On the basis of discussions with juvenile justice officials, this type of comparison should recognize the selection process by which juveniles are sent to criminal court or remain in juvenile court. The officials said that juveniles sent to criminal court are a select subset of all juveniles. The fact that they are selected for criminal court indicates they are different from juveniles processed in juvenile court. When sending juveniles to criminal court, decisionmakers (e.g., judges) generally consider that these juveniles have (1) relatively more serious criminal behaviors, (2) more extensive criminal histories, (3) less amenability to treatment, or (4) a greater likelihood of being a threat to the community than juveniles who are processed in juvenile court. Also, juveniles processed in criminal court are subject to a different sentencing process than those in juvenile court. Both factors mean that comparisons between the two groups of juveniles would be of nonequivalent groups. As a result, differences or similarities in their sentences would be difficult to interpret. However, subject to these caveats, we provided data on the sentencing outcomes for juveniles processed in these two courts. We could not determine the extent to which sentencing outcomes were due to differences in individual characteristics of juveniles in the respective courts or sentencing processes of the courts. To develop an understanding of the issues associated with processing juveniles in criminal court, we reviewed relevant literature identified in bibliographies provided by the National Center for Juvenile Justice (NCJJ) and the Department of Justice’s Office of Juvenile Justice and Delinquency Prevention (OJJDP). From our review of the literature, we determined the three principal methods for sending juveniles to criminal court and identified the states’ policies on housing juveniles in adult prisons. We used juvenile court data collected annually by NCJJ to determine the number of juvenile cases processed in criminal court due to judicial waiver. Each year, NCJJ collects juvenile court processing data and assigns weights to the data, which permits projecting the data to produce national estimates of cases disposed by all state juvenile justice systems. OJJDP publishes the weighted data in its annual Juvenile Court Statistics. Using the National Juvenile Court Data Archive (NJCDA), we developed statistics for a 5-year period from calendar year 1988 to 1992. Specifically, we developed national estimates of the number of juvenile cases waived to criminal court by juvenile court judges (judicial waiver). In addition, we developed statistics on the offense profiles and demographics of juveniles, whose cases were waived to criminal court. NCJJ’s NJCDA national data files did not contain sufficient information for analyzing judicial waivers directly. However, some of the Center’s state-specific files have a wider range of data elements (including prior offense histories) that facilitate such analyses. For example, in addition to data showing the types of offenses and whether cases were waived, some variables that we analyzed were the number of previous referrals and/or adjudications and the metropolitan status of the court. Thus, in order to conduct more detailed analyses of judicial waiver, we judgmentally selected the following 7 states from a total of 25 states that provided court data to NCJJ: Arizona, California, Florida, Missouri, Pennsylvania, South Carolina, and Utah. In addition to geographical coverage, other factors we considered in selecting these seven states were that (1) collectively, these states’ juvenile justice systems reflected a diverse range of processes for handling youthful offenders and (2) the states’ data files contained a sufficient number of variables relevant to our analyses of judicial waiver. For each of the seven states selected, we obtained a copy of NCJJ’s computerized data files for calendar years 1990 and 1991, the most recent years for which consistent data were available. Then, using the 1990 and 1991 data files, we completed analyses that compared the waiver rates in different states; the waiver rates for defendants of different genders, races, and ages; and the waiver rates of cases processed in juvenile courts with different metropolitan status. To obtain data on the frequency of juvenile cases directly filed in criminal court at the discretion of prosecutors, we contacted State Court Administrator Offices in the 10 states with direct filing laws. Statewide data on prosecutor direct filing cases were available in 5 of the 10 states that have direct filing laws. To obtain data for the other states, we contacted some of the largest counties/parishes in those states to get some measure of the frequency of prosecutor direct filing. We also contacted court officials in the District of Columbia to determine the frequency of direct filing in the District. To gain some perspective on the type of juvenile cases processed in criminal court due to state statutes that exclude them from juvenile court, we analyzed the statutes in 37 states and the District of Columbia. We categorized the states according to whether their statutory exclusion laws focused on (1) juveniles charged with serious violent offenses or other serious offenses or (2) juveniles with prior court records. In an attempt to collect data on the number of juveniles sent to criminal court by all possible methods, we developed a survey to be completed by juvenile justice specialists in all 50 states and the District of Columbia. We received responses from 19 states and the District of Columbia. Nine of the responses indicated that the data we requested were not available. Due to the low response rate and unavailability of data, we were only able to use this survey as an indicator of the relative frequency in which juveniles are sent to criminal court by the three methods. In following up with nonrespondents by telephone calls, they said that the data we requested were not available. To identify the types of sentences juveniles receive when processed in criminal court, we used the Bureau of Justice Statistics’s (BJS) Offender Based Transaction Statistics (OBTS) data sets. OBTS focuses on arrested, alleged offenders and contains information on offender characteristics, patterns of arrest, prior criminal activities, prosecution activities, court action, and sentences. At the time of our review, OBTS contained data for the years 1975 through 1990 for approximately 15 states. We analyzed data from California, Minnesota, Missouri, Nebraska, New York, Pennsylvania, and Vermont for 1989 and 1990 combined. We chose these states because they represented different maximum ages of juvenile court jurisdictions, different laws governing which juveniles may be sent to criminal court, and different geographic regions. We used these data to analyze conviction rates, offenses, and incarceration rates of juveniles prosecuted in criminal court. In addition, we compared these rates with those of “other youth” and young adults (persons age 18 through 24) to gain a perspective on how juveniles are treated relative to others prosecuted in criminal court. To gather prosecutors opinions on data related to the processsing of juveniles in criminal court, we obtained 226 completed questionnaires from a nationally representative, probability sample of district prosecutor offices that deal with juveniles in juvenile courts. Our final sample was identified by first contacting a stratified probability sample of county prosecutors in 290 of the 3,110 counties in the United States. To gather information about both large and small counties, the sample was stratified on the basis of the number of felony convictions in 1985. The 1985 felony convictions were used first to draw this sample of 290 counties in 1986 for the National Judicial Reporting Program. We developed and pretested the questionnaire items with advice from experts at NCJJ and BJS as well as selected prosecutor offices. The survey was mailed in March 1994. Two sets of follow-up telephone calls and two additional mailings were conducted between May and July. We contacted all 290 selected counties to determine whether they had juvenile prosecutors and, if so, the counties over which they had jurisdiction. We determined that 270 of the 290 counties were eligible members of our study population of prosecutor offices that dealt with juvenile offenders in juvenile court. After weighing on the basis of the probabilities of selection, we estimated that the study population consisted of approximately 2,118 such juvenile prosecutors in the United States. The number of juvenile prosecutors (2,118) is less than the number of counties (3,110) partly because some counties are consolidated under a single juvenile prosecutor and partly because some jurisdictions do not have prosecutors that appear in juvenile court. Of the 270 sampled prosecutors from the study population, 226 responded, for a response rate of 84 percent. All figures presented in this report were estimated from the returned questionnaires to the population of the estimated 2,118 juvenile prosecutor offices. All sample surveys are subject to sampling error, which refers to the extent to which the results may differ from what would have been obtained if the entire population had been surveyed. The size of sampling errors in any survey depends largely on the number of respondents and the amount of variability in the data from the returned surveys. In this report, all estimates are made at the 95-percent confidence level with a sampling error of less than 10 percent. This means that, if we had drawn repeated samples from the entire study population of prosecutor offices, 19 out of 20 samples would have produced estimates within 10 percent of the true proportion in the total population. In addition to the reported sampling errors, any survey may be subject to nonsampling errors as well. For example, differences in how a particular question is interpreted, in the sources of information that are available to respondents, or in the types of people who do not respond, can introduce unwanted variability into survey results. We included steps in the data collection and data analysis stages to minimize such nonsampling errors. We selected the sample from a complete list of all counties, and we pretested our questionnaire with experts and members of the target population. Our extensive follow-up efforts were designed to maximize the response rate, and we achieved a final response rate of 84 percent. All data were keyed twice and verified during data entry, and all computer analyses were reviewed by a second independent analyst. To develop national statistics on the types of dispositions used in juvenile court, we used the NCJJ’s NJCDA data files. We developed national estimates to compare (1) the number of juvenile cases processed informally versus formally, (2) the dispositions of cases handled formally versus informally, and (3) the types of dispositions for various crime types. To obtain descriptive information on the conditions of confinement for juveniles in adult prisons, we visited seven prisons in Florida, Michigan, North Carolina, and Ohio. In judgmentally selecting states to visit, we considered (1) the state’s maximum age of juvenile court jurisdiction in each state, (2) whether juveniles were housed with younger inmates (e.g., inmates under 25) or inmates of all ages, and (3) the number of inmates under the age of 18. In each state, we visited the prisons that housed the majority of inmates under age 18. We visited a total of seven prisons—six that housed males and one that housed females. During our visits, we interviewed prison officials, using a structured interview format. While we did not verify the information provided, we toured the facilities to observe the housing units, health services facilities, education and vocation classrooms, and recreation facilities. We conducted structured interviews with 15 juvenile court judges in 7 states to obtain information on methods for sending juveniles to criminal court. Judges were chosen randomly and interviewed on the basis of their availability. We attempted to contact two or three judges in the juvenile court jurisdictions that we visited during our site visits. 1. (a) In your jurisdiction in calendar year (CY) 1993, how many requests for judicial waiver to criminal (adult) court were filed?(Enter numbers. If none, enter zero. Estimates are acceptable.) N = 212 Mean = 8 Median = 1 request filed for judicial waiver to criminal (adult) court in CY 1993. (b) Of these requests, how many were granted? N = 162 Mean = 9 Median = 2 requests granted for judicial waiver to criminal (adult) court in CY 1993. 2. (a) Of all the criminal indictments filed in criminal (adult) court in your jurisdiction in CY 1993, approximately what percent were filed against juveniles in criminal (adult) court? (Enter percent. If none, enter zero. Estimates are acceptable.) N = 189 Mean = 2 Median = 0 percent of indictments filed against juveniles in criminal (adult) court. (b) In your jurisdiction in CY 1993, of all indictments filed against juveniles in criminal (adult) court, approximately what percent were the result of the following processes? (Enter percents. If none, enter zero. Total should add to 100%. item listed below cannot occur in your state, enter N/A.) Judicial waivers N = 166 Mean = 70% Median = 100% Direct filings N = 166 Mean = 20% Median = 0% Statutory exclusions N = 166 Mean = 3% Median = 0% Other - Please specify: _____________ N = 166 Mean = 7% Median = 0% 3. juvenile to criminal (adult) court rather than to juvenile court, what are the three most important factors that you are likely to consider? (Check three factors you consider most important.) When considering whether to send or recommend sending a a. b. c. Family background of the offender The offender’s age The offender’s age in relation to the upper age of juvenile court jurisdiction The offender’s age in relation to the extended age of juvenile court jurisdiction 7% Sophistication and maturity of the offender Seriousness of the alleged offense (e.g., involved 85% drugs, guns, destruction of property) Whether the offense was against other persons (e.g., involved victim injury) Whether adult offenders were involved in the offense Whether the offender is a repeat offender The availability of more serious punishments in criminal (adult) court The availability of a youthful offender facility The need to protect the community Whether the offender has been determined to be unamenable to rehabilitation Prosecutive merits of complaint Other factor? - Please specify: -- 21% 17% d. e. f. g. h. i. j. k. l. m. 1% 19% 44% n. o. Data - 1990 and 1991 combined. Number of formal delinquency cases - 17,320. Number of formal delinquency cases judicially waived to criminal court - 397. Percent of formal delinquency cases judicially waived to criminal court - 2.3. Data - 1990 and 1991 combined (data from 5 counties). Number of formal delinquency cases - 64,275. Number of formal delinquency cases judicially waived to criminal court - 310. Percent of formal delinquency cases judicially waived to criminal court - 0.5. Table II.4: Rate and Percent of Juvenile Cases Waived by Offense Type in California, 1990 and 1991 Table II.6: Selected Juvenile Waiver Rates in California, 1990 and 1991 Less than 0.1 percent. Data - 1990 and 1991 combined. Number of formal delinquency cases - 148,976. Number of formal delinquency cases judicially waived to criminal court - 1,389. Percent of formal delinquency cases judicially waived to criminal court - 0.9. Data - 1990 and 1991 (combined). Number of formal delinquency cases - 15,787. Number of formal delinquency cases judicially waived to criminal court - 464. Percent of formal delinquency cases judicially waived to criminal court - 2.9. Data - 1990 and 1991 (combined). Number of formal delinquency cases - 41,920. Number of formal delinquency cases judicially waived to criminal court - 857. Percent of formal delinquency cases judicially waived to criminal court - 2.0. Data - 1990 and 1991 (combined). Number of formal delinquency cases - 11,146. Number of formal delinquency cases judicially waived to criminal court - 91. Percent of formal delinquency cases judicially waived to criminal court - 0.8. Data - 1990 and 1991 (combined). Number of formal delinquency cases - 54,990. Number of formal delinquency cases judicially waived to criminal court - 19. Percent of formal delinquency cases judicially waived to criminal court - Less than 0.1 percent. We did the following analysis using the data from tables II.3, II.6, II.9, II.12, II.15, and II.18. However, our analysis was limited to the variables for which data were available in the six states. Age - In the six states we examined, juveniles age 16 or older were more likely to have their cases waived than juveniles under age 16 years for all three offense types. However, the likelihood that older juveniles would have their cases waived than younger juveniles was much larger in some states than in others. For example, in Arizona older juveniles charged with property offenses were 39 times more likely to have their cases waived than were younger juveniles charged with such offenses; while in Florida, older juveniles charged with property offenses were only 5 times more likely to have their cases waived than younger juveniles. While waiver rates were somewhat higher in four of the six states for violent offenses than for property or drug offenses, the rates varied among the states within each age category. For example, older juveniles charged with property offenses were 44 times more likely to have their cases waived in Missouri than in California, while younger juveniles charged with violent offenses were 58 times more likely to have their cases waived in Missouri than in California. Gender - Males were more likely than females to have their cases waived within each offense type in the six states we analyzed. The extent of the likelihood again varied by state. For example, in Arizona males charged with violent offenses were 42 times more likely to have their cases waived than females in Arizona, while such males were 17 times more likely to have their cases waived than females in California. In some states, the likelihood was more apparent for those charged with violent offenses than for those charged with either property or drug offenses. For males, juveniles charged with violent offenses had higher waiver rates than for males charged with drugs or property offenses in three of the six states. In the remaining three states, males charged with drug offenses had higher waiver rates. Waiver rates for each offense type also differed across states for males. For example, males charged with property offenses in Arizona or Missouri were 18 times more likely to have their cases waived than males in California. Race - In four states, blacks were more likely than whites to have their cases waived for violent, property, and drug offenses. For violent offenses, the differential rates are fairly consistent across states, with black juveniles having waiver rates from 1.8 times to 3.1 times higher than whites. The differences varied more widely for drug offenses. In California, black juveniles were half as likely as white juveniles to have their cases waived, while in Pennsylvania black juveniles were more than twice as likely to have their cases waived than whites. There were some large differences, however; for example, for juveniles charged with drug offenses, Arizona’s waiver rates for whites were twice those of California; while for blacks, Arizona’s rates were 55 times those of California. Locality - In the four NCJJ states with data on metropolitan and nonmetropolitan courts, some small differences did exist but were not consistent across offense types within the same state. For example, in Missouri, waiver rates in metropolitan areas were higher for violent and drug offenses but lower for property offenses than in nonmetropolitan areas. The waiver rate was highest for drug offenses in all four states in nonmetropolitan areas and in three of the four states in metropolitan areas. In nonmetropolitan areas in Pennsylvania, juveniles charged with violent offenses were less likely to have their cases waived than those charged with drugs or property offenses. The likelihood of cases being waived in each type of locality varied somewhat for the offense types among the four states, particularly for property offenses. For example, juveniles charged with property offenses in metropolitan areas in Pennsylvania were almost 4 times more likely to have their cases waived than were juveniles in South Carolina, while those charged with property offenses in nonmetropolitan areas of Pennsylvania were 9 times more likely to have their cases waived than those in South Carolina. Prior Referrals - In the five states with data, waiver rates generally increased with the number of prior referrals for all five states and most offense types. We categorized referrals into three groups: (1) none, (2) one or two, and (3) three or more. The larger increases usually occurred between the second and third categories. For example, in Arizona, juveniles charged with violent offenses and who had one or two prior referrals were 3 times more likely to have their cases waived than those with no referrals, while juveniles charged with violent offenses with three or more referrals were 8 times more likely to be referred than those with no referrals. The states differed in the rates at which they waived cases for these offense types in each prior referral group. The differences were strongest for juveniles charged with property offenses. For example, considering only those with three or more prior referrals, the greatest difference for juveniles charged with violent offenses was found between Arizona and Florida, where Arizona’s waiver rate for these juveniles was 5 times greater than Florida’s. However, for juveniles charged with property offenses, the greatest difference was found between Pennsylvania and South Carolina, where Pennsylvania’s waiver rate was almost 10 times greater than in South Carolina. Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child who has been convicted as an adult. —child 16 or older charged with a capital offense; a class A felony; drug trafficking; or a felony that has as an element, the use of a deadly weapon, the causing of death or serious bodily injury, or the use of a dangerous instrument against any law enforcement officer, corrections officer, parole or probation officer, prosecutor, judge, court officer, grand juror, juror, witness, or a teacher, principal or employee of a public school. —any child 14 or older. —child 16 or older charged with an unclassified or class A felony against a person, or first degree arson. —any child (there is a rebuttable presumption for waiver if child is charged with an unclassified or class A felony against a person). —child tried as an adult under statutory exclusion but convicted of a lesser-included offense may have his or her case disposed of as though he or she had been adjudicated as a juvenile if the court finds that he or she is amenable to treatment. —any child (there is a rebuttable presumption for waiver if the child is 16 or older and charged with first or second degree murder; aggravated assault involving a deadly weapon and causing serious physical injury; sexual assault involving the use of a dangerous instrument or involving the intentional infliction of physical injury; or an offense constituting a class 1, 2, 3, or 4 felony where the child has been adjudicated as a delinquent on four prior, separate occasions, at least one of which was for a serious offense). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 16 or older charged with a felony. —child 14 or older charged with capital, first, or second degree murder; kidnapping; aggravated robbery; rape; first or second degree battery; possession of a handgun on school property; aggravated assault; terroristic act; unlawful discharge of a firearm from a vehicle; any felony committed while armed with a firearm; soliciting a minor to join a criminal street gang; criminal use of prohibited weapons; felony possession of a firearm; or felony attempt, solicitation, or conspiracy to commit capital, first, or second degree murder, kidnapping, aggravated robbery, rape, or first degree battery. —above conditions when prosecutor did not charge child as adult. —when prosecutor files in criminal (circuit) court, the court may remand to juvenile court. —any child 16 or older (there is a presumption for waiver if offense charged is arson, lewd act, attempted murder, certain types of assault, any felony with certain weapons , offense against an aged or handicapped person, felony or drug offense with use of firearm, influencing testimony, preventing or dissuading victim or witness from testifying, or any offense for which a 14 year old may have his or her case waived). —child 14 or older charged with murder; robbery in which the juvenile used a firearm; rape, sodomy, or oral copulation by force, etc.; penetration by a foreign object; kidnapping; discharging a firearm from a vehicle or into an occupied or inhabited building; manufacturing or selling certain controlled substances; escape from juvenile custody where bodily harm is inflicted on employee; torture; aggravated mayhem; assault with a firearm; attempted murder; rape with a firearm; burglary with a firearm; exploding a destructive device with intent to commit murder; carjacking with a firearm (there is a presumption for waiver if offense charged is first or second degree murder). —child may be sentenced by criminal court as an adult or committed to California Youth Authority (CYA) (child under 16 must first go to CYA for amenability determination, but court can still sentence as an adult notwithstanding CYA’s amenability determination). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court 17 Prosecutorial Discretion (the criminal court judge can no longer send cases directly filed back to juvenile court) —child 14 or older charged with a class 1 or 2 felony; a crime of violence; a felony weapons offense (except possession of a handgun); or the use, possession, or threatened use of a deadly weapon during a felony against a person. —child 16 or older charged with a class 3 felony (except a certain classification of statutory rape) and who has been adjudicated within the past 2 years for a felony. —child 14 or older charged with a felony and who has been convicted as an adult in a prior case. —child 14 or older charged with a felony and determined to be a habitual juvenile offender (juvenile who has two prior adjudications for acts that constitute felonies). —child 14 or older charged with a felony (the prosecutor must then file an information within 5 days or the waiver is invalid, and the case is remanded to the juvenile court permanently). —when a child has been tried as an adult by prosecutorial direct filing, the judge may sentence the child as an adult; as a youthful offender (with some restrictions); or as a juvenile in very limited circumstances. —if the child’s case was judicially waived, the child may receive a sentence as a juvenile (or the criminal court may remand the case to juvenile court for disposition), unless the child was convicted of a class 1 felony or a crime of violence; has been previously adjudicated as a mandatory sentence offender, a violent juvenile offender, or an aggravated juvenile offender; or has been convicted as an adult or youthful offender. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court 15 Statutory Exclusions (mandatory transfer provisions) —child 14 or older charged with murder. —child 14 or older charged with a class A felony (other than those listed below), who has a previous adjudication, at any age, for a class A felony. —child 14 or older charged with a class B felony (other than those listed below) who has been adjudicated as a delinquent twice before on class A or B felonies. —child 14 or older charged with any of the following crimes committed with a firearm: first or second degree manslaughter; first or second degree assault; third degree sexual assault; first or second degree kidnapping; second or third degree burglary; second degree robbery while displaying or threatening to use a deadly weapon; first degree sexual assault with a deadly weapon; first degree burglary; or first degree robbery. —child 14 or older charged with any felony classified as a serious juvenile offense under 46b-120 while carrying a revolver or pistol without a permit. Judicial Waiver (where mandatory transfer provisions—section 46b-127—do not apply) —child 14 or older charged with a class A felony. —child 14 or older charged with a class B or C felony who previously has been adjudicated as a “serious juvenile offender” (found to have committed one or more offenses listed in section 46b-120). —any child charged with murder in the first or second degree, unlawful sexual intercourse in the first degree, or kidnapping in the first degree. —any child 16 or older. —any child 14 or older charged with a felony. —Attorney General may transfer any case from criminal court to juvenile court (whether child was transferred by juvenile court or criminal court had original jurisdiction). —where criminal court has original jurisdiction over child (i.e., statutorily excluded offenses) criminal court may transfer to juvenile court. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child previously convicted as an adult. —any child awaiting trial in criminal court when an indictment or an information is filed against him for a subsequent offense. —child 16 or older charged with murder, forcible rape, first degree burglary, armed robbery, or assault with intent to commit any of those crimes. —child 15 or older charged with a felony. (There is a rebuttable presumption for waiver if child is 15 or older and charged with murder, forcible rape, first degree burglary, robbery while armed, or assault with intent to commit any of the above; any crime with a firearm; or any violent felony if the child has three or more prior delinquency adjudications.) —child 16 or older under commitment as a delinquent child. —any child charged with illegal possession or control of a firearm within 500 feet of public school property, or school-sponsored event. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child who has been convicted and sentenced as an adult. —child 16 or older charged with a violent crime against a person and who previously has been adjudicated for murder, sexual battery, carjacking, armed or strong-armed robbery, home-invasion robbery, aggravated battery, or aggravated assault (prosecutor must file information). —any child who has previously been adjudicated on three separate occasions for felonies that resulted in residential placements. —child 14 or older charged with arson; sexual battery; robbery; kidnapping; aggravated child abuse; aggravated assault; aggravated stalking; murder; manslaughter; unlawful throwing, placing, or discharging a destructive device or bomb; armed burglary; aggravated battery; lewd or lascivious assault or act in the presence of a child; or use or possession of a weapon during a felony. —any child 16 or older charged with a felony, or charged with a misdemeanor where he or she has two prior delinquency adjudications of which at least one was a felony. —any child charged with a crime that is punishable by death or by life imprisonment. —child 14 or older. (In the case of a child 14 or older charged with a fourth felony where one of prior three felonies involved using firearm or violence against a person: the prosecutor must request a waiver or explain in writing why he or she is not requesting a waiver; then the court must waive or explain in writing why it is not granting a waiver.) —criminal court may sentence child as an adult, select from juvenile dispositions, or invoke Florida Youthful Offender statute (except that a child found to have committed an offense punishable by death or life imprisonment must be sentenced as an adult). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 13 or older charged with murder, voluntary manslaughter, rape, aggravated sodomy, aggravated child molestation, aggravated sexual battery, or armed robbery committed with a firearm (superior court has exclusive original jurisdiction, but after an investigation, the prosecutor may refuse to indict or the judge may send child to juvenile court “for extraordinary cause”). —child 14 or older who is confined to a youth development center and is charged with aggravated assault or aggravated battery (mandatory transfer). —child 15 or older charged with burglary after having been adjudicated as a delinquent on burglary charges at least three times previously (mandatory transfer). Prosecutorial Discretion (concurrent jurisdiction) —child charged with a crime punishable by death or by life imprisonment (other than those offenses that are in the exclusive jurisdiction of the Superior Court). —child 15 or older. —child 13 or older charged with a felony punishable by life imprisonment or death (other than those offenses that are in the exclusive jurisdiction of the Superior Court). —child charged with statutorily excluded offense may be transferred to juvenile court “for extraordinary cause” unless the offense is punishable by death or life imprisonment. —child charged with statutorily excluded offense but convicted of a lesser-included offense may be transferred to juvenile court for sentencing. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child who has been transferred to adult court. —child 16 or older who is charged with murder or attempted murder in the first or second degree, or a class A felony (felony punishable by 20 years imprisonment, includes sexual assault, robbery, kidnapping, some drug offenses) and who has been adjudicated for two other felonies in the prior 2 years or previously has been adjudicated as a delinquent for murder or attempted murder in the first or second degree or for another violent class A felony. —child 16 or older charged with a felony. —any child under 22 may be sentenced as a young adult (they receive shorter sentences). —child 14 or older charged with murder or attempted murder, robbery, forcible rape, forcible sexual penetration with a foreign object, infamous crimes against nature committed by force or violence, mayhem, assault and battery with the intent to commit a previously listed crime, or drug offenses within 1,000 feet of a school or school activity. —any child who has been convicted as an adult. —child 14 or older. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 15 or older charged with first degree murder; aggravated criminal sexual assault; armed robbery with a firearm; a drug offense on or within 1,000 feet of school or public housing grounds, or on a school conveyance; or unlawful use of a weapon on school grounds. —any child charged with escape or bail jumping while the child is being tried in criminal court. —child 15 or older charged with a felony and who has previously been adjudicated as a delinquent for a felony, provided that either the current or prior act was a forcible felony, and the current act stemmed from gang activity (mandatory transfer). —child 13 or older. (There is a rebuttable presumption for waiver for child 15 or older charged with a class X felony other than armed violence, aggravated discharge of a firearm, or certain “armed violence with a firearm” offenses). —If child being tried in criminal court for a statutorily excluded offense is found guilty of a lesser offense, the court may sentence the child as a juvenile or adult. —child 16 or older charged with murder; kidnapping; rape; or robbery, while armed with a deadly weapon or which results in bodily injury or serious bodily injury; carjacking; criminal gang activity; criminal gang intimidation; carrying handgun without a license; being a child in possession of a handgun or transferring a handgun to another child; or dealing in a sawed-off shotgun. —any child 16 or older whose case is waived to adult court (by judicial waiver or prosecutorial discretion) in the year preceding the current offense and who is convicted of the previous offense or a lesser included one. —child who has been convicted as an adult and is currently charged with a felony (mandatory transfer). —child 10 or older charged with murder. —child 14 or older charged with a heinous or aggravated act, or a pattern of criminal acts. —child 16 or older charged with certain felony drug charges, a class A or B felony that is not a statutory exclusion, involuntary manslaughter as a class C felony, or reckless homicide as a class C felony. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 16 or older charged with a felony and who has been convicted as an adult for a felony. —child 14 or older. —a child convicted as an adult on a nonmarijuana related drug offense is not subject to normal minimum sentencing laws, but the child would have to serve at least 30 days. —child 16 or older charged with a felony who has been previously adjudicated as a delinquent for a felony. —any child previously convicted as an adult, if he or she had come to criminal court through statutory exclusion provision, as explained above. —child 16 or older who has been adjudicated as a delinquent and confined to a juvenile facility and who is charged with committing a felony while confined in the facility or while running away or escaping from the facility; or charged with a second or subsequent escape. —child 16 or older. —child 14 or older who is charged with a level 1, 2, or 3 nondrug felony or a level 1 or 2 drug felony (classifications as of 7/1/93) or a class A or B felony (pre- 7/1/93 classifications) (if the child is convicted of a lesser-included offense then he or she is treated as a juvenile). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 14 or older charged with a felony in which a firearm was used. —child 14 or older charged with a capital offense or a class A (punishable by 20 years to life) or B (punishable by 10-20 years) felony. —child 16 or older charged with a class C or D felony (punishable by 5-10 and 1-5 years, respectively) and who has twice before been adjudicated on felony charges. —any child charged with a felony and who has previously been convicted as an adult. —any child transferred to adult court and indicted for an offense other than those listed above will be transferred back to juvenile court. —any child sentenced before becoming 18 and not released before becoming 18 must be returned to the sentencing court for a redetermination of sentence, which may result in probation or conditional discharge, 6 more months of treatment program, or incarceration in adult prison. —child 15 or older charged with first or second degree murder, aggravated rape, or aggravated kidnapping. —child 15 or older charged with attempted first or second degree murder; manslaughter; armed robbery; forcible rape; simple rape; second degree kidnapping; a second or subsequent aggravated battery, aggravated burglary, burglary of an inhabited dwelling, or felony grade violation of statute involving the manufacture, distribution, or possession with intent to distribute controlled dangerous substances. —child 14 or older charged with first or second degree murder, aggravated kidnapping, aggravated rape, aggravated battery committed by discharging a firearm, armed robbery with a firearm, or aggravated oral sexual battery (a 14 year old whose case is waived to criminal court and who is convicted cannot be confined beyond his or her 31st birthday.) (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child convicted as an adult. —child charged with murder or a class A, B, or C crime. —child 14 or older charged with a crime punishable by death or by life imprisonment. —child 16 or older charged with abduction; kidnapping; second degree murder; manslaughter (except involuntary); mayhem or maiming; robbery with a dangerous or deadly weapon; a second or third degree sexual offense; certain firearms offenses; using, wearing, carrying, or transporting a firearm during a drug trafficking offense; carjacking or armed carjacking; assault with intent to murder, rape, rob, or commit a first or second degree sexual offense. —child 15 or older. —any child charged with a crime punishable by death or by life imprisonment. —criminal court may transfer juveniles charged with statutorily excluded offenses to juvenile court (the court cannot transfer child back to juvenile court if the child has been previously reverse waived to juvenile court and was adjudicated as a delinquent, the child has been convicted in another unrelated case of a statutorily excluded offense, or the child is 16 or older and charged with 1st degree murder). —when criminal court does a reverse waiver of an excluded juvenile, juvenile court cannot judicially waive the case back to criminal court. —child 14 or older when the crime could result in imprisonment in the state prison and (1) the child has been previously committed to the department of youth services or (2) when the act involves the infliction or threat of serious bodily harm (prosecutor may appeal judge’s decision denying waiver); court must hold transfer hearing if child charged with murder in the first or second degree, manslaughter, assault with intent to rob while armed, rape, rape of child under 16, kidnapping, or burglary (being armed or making an assault). —child tried as an adult for any offense except murder and found guilty before turning 18 may be adjudicated as a delinquent and given a juvenile disposition. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 15 or older charged with murder in the first or second degree; attempted murder; assault with the intent to murder; assault with intent to rob while armed; criminal sexual conduct in the first degree; armed robbery; carjacking; manufacture, distribution, or possession of controlled substances (650 grams or more of narcotics or cocaine). —child 15 or older charged with a felony. —child tried as an adult by prosecutorial discretion may be sentenced as an adult or given a juvenile disposition. —any child charged with a felony and who has been previously certified for trial as an adult and convicted of the offense for which he or she was certified or of a lesser-included felony offense. —child 16 or older charged with first degree murder (but not attempted first degree murder). —child 14 or older charged with a felony (there is a rebuttable presumption for waiver if the child is 16 or older and charged with felony involving the use of a firearm or an offense that would result in a prison sentence under the sentencing guidelines). —if the presumption applies and the court retains jurisdiction, it must designate the proceeding an extended jurisdiction juvenile prosecution (if the presumption does not apply the court may still designate as an extended jurisdiction prosecution). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 13 or older charged with a crime punishable by life imprisonment or the death penalty or charged with felony use of a deadly weapon. —child convicted as an adult. —child 17 charged with a felony. Judicial Waiver (youth court, which was created as a division of family or county court in all jurisdictions) —child 13 or older. Judicial Waiver (family court) (Harrison county is the only jurisdiction with a family court) —child 13 or older charged with a felony. —child 13 or older charged with a misdemeanor and who was first brought before municipal or justice of the peace court (family court retains jurisdiction to set aside the sentence). —in case of statutory exclusions, the circuit court may transfer to youth court unless the child was previously convicted as an adult. —in case of judicial waiver, circuit court may upon motion of the child, review the transfer proceedings and remand the case to youth court if there is no substantial evidence supporting the transfer. —the Family Court Act makes no provision for reverse waiver. —child previously convicted as an adult. —child 14 or older charged with a felony. —child 16 or older charged with deliberate or mitigated deliberate homicide or the attempt to commit either (mandatory transfer). —child 12 or older charged with sexual intercourse without consent, mitigated deliberate homicide, deliberate homicide, or attempted deliberate or mitigated deliberate homicide. —child 16 or older charged with negligent homicide, arson, aggravated or felony assault, robbery, burglary or aggravated burglary, aggravated kidnapping, possession of explosives, criminal sale of dangerous drugs, or attempting to commit any of those acts. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 16 or older charged with misdemeanor. —any child charged with a felony. —any child charged in criminal court may move the court to waive jurisdiction to juvenile court. —child charged with murder or attempted murder. —child who has been convicted as an adult. —child 16 or older charged with a felony. —a person 18-20 who is charged with a gross misdemeanor or felony other than murder or attempted murder may request that the district court waive jurisdiction, so that the person can be tried as a juvenile. —child who is statutorily excluded because he or she has previously been convicted as an adult may request waiver to juvenile court. —any child who has been convicted as an adult. —child 15 or older charged with a felony. —child 13 or older charged with first or second degree murder, manslaughter, kidnapping, or aggravated sexual assault. —in the case of a child charged with a felony and who is not within the jurisdiction of the state, the juvenile court may, upon motion of the prosecutor, authorize use of regular criminal proceedings against the child; the criminal court then determines whether to retain jurisdiction or remand the case to juvenile court. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 14 or older charged with criminal homicide (other than death by auto) or strict-liability for drug-induced death; first degree robbery; aggravated sexual assault; sexual assault; second degree aggravated assault, kidnapping, aggravated arson or conspiracy to commit any of these crimes; any other crime committed after the juvenile was adjudicated as a delinquent or convicted for one of the above crimes or after the child had been sentenced as an adult to confinement; any other violent offense against a person; the unlawful possession of a firearm, destructive device, or other prohibited weapon, arson, or conspiracy to commit any of these crimes; death by auto if the child was under the influence of drugs or alcohol; various offenses related to being part of an organized drug ring or conspiracy; auto theft; racketeering; or distributing for pecuniary gain, any controlled substance within 1,000 feet of a public school. —child 16 or older charged with first degree murder (called a “serious youthful offender”). Juvenile Court Disposition (subject to adult or juvenile sanctions in juvenile court, called “youthful offenders”) —child 15 or older found to have committed second degree murder; assault with intent to commit a violent felony; kidnapping; aggravated battery; shooting at a dwelling, occupied building, or at or from a car, resulting in great bodily harm to another; dangerous use of explosives; criminal sexual penetration; robbery; aggravated burglary or aggravated arson; or any felony if he or she has been adjudicated on felonies twice before in the prior 2 years. —15 year old found to have committed first degree murder. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court 15 Statutory Exclusions (all juveniles tried in criminal court are considered “juvenile offenders”) —child 13 or older charged with murder in the second degree. —child 14 or older charged with kidnapping or attempted kidnapping in the first degree; arson in the first or second degree; assault in the first degree; manslaughter in the first degree; rape in the first degree; sodomy in the first degree; aggravated sexual abuse; first degree burglary; some second degree burglary; first degree robbery; some second degree robbery; attempted second degree murder. —the criminal court or superior court may send the child to juvenile court. —all juveniles in criminal court are sentenced as juvenile offenders (an adult-like sentence but with lower required minimum period of imprisonment). —child 13 or older charged with a class A felony (an offense punishable by death or life imprisonment) (mandatory transfer). —child 13 or older charged with a lesser felony. —child 14 or older charged with committing an act that involves the infliction or threat of serious bodily harm. —child 16 or older. —child charged with murder; aggravated murder; or a felony or aggravated felony of the first or second degree, if the child has been previously transferred to and convicted in criminal court. —child charged with murder or aggravated murder and who previously has been adjudicated as a delinquent for murder or aggravated murder (mandatory transfer). —child 15 or older charged with a felony. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 16 or older charged with murder; kidnapping for the purposes of extortion; robbery with a dangerous weapon; rape in the first degree; rape by instrument; use of a firearm or other offensive weapon, while committing a felony; arson in the first degree; burglary with explosives, first or second degree burglary after three or more adjudications for first or second degree burglary; shooting with intent to kill; discharging a firearm, crossbow, or other weapon from a vehicle; intimidating a witness; manufacturing, distributing, dispensing, or possessing with intent to manufacture, distribute, or dispense controlled dangerous substances; assault and battery with a deadly weapon; manslaughter in the first degree; or sodomy. —any child convicted as an adult of the offense originally charged. —any child charged with a felony. —criminal court may waive its jurisdiction over statutorily excluded offenses (it may not waive jurisdiction over a child previously convicted as an adult). —child 15 or older charged with murder, first or second degree manslaughter, first or second degree assault, first or second degree kidnapping, first or second degree rape, first or second degree sodomy, unlawful sexual penetration, first degree sexual abuse, first or second degree robbery. —child 15 or older charged with attempt to commit murder or attempt to commit an aggravated form of murder. —child 16 or older charged with a class A or B felony (except for those offenses that are statutorily excluded), escape in the second degree, assault in the third degree, coercion, arson in the second degree, or robbery in the third degree. —child found guilty of lesser “nonwaivable” offense must be returned to juvenile court for disposition. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child charged with murder. —any child who has been found guilty in a criminal proceeding. —child 14 or older charged with a felony. —child charged with murder in criminal court may be transferred to juvenile court. —child charged with murder in criminal proceeding but convicted of crime less than murder may be transferred to juvenile court for sentencing. —child transferred to criminal court under judicial waiver and convicted of a misdemeanor may be transferred back to juvenile court for sentencing. —any child who has been convicted as an adult. —child 17 or older charged with murder, first degree sexual assault, or assault with intent to commit murder (mandatory transfer). —any child charged with a crime punishable by life imprisonment. —child 16 or older charged with a felony. —any child charged with a felony may be “certified” in juvenile court (a child that is certified may be sentenced to the state training school or to a term of years to be served at the training school until the child turns 21, with the excess time being served in prison, unless the court finds before then that the child has been rehabilitated). —child 16 or older charged with a felony drug offense and has been previously adjudicated as a delinquent for a felony drug offense after the age of 16 must be waived or certified. —child 16 or older charged with a felony and who has been found as a delinquent for having committed two offenses after the age of 16 for which an adult could be indicted must be certified. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 16 charged with murder; a Class A, B, C, or D felony; a felony that has a maximum term of imprisonment of 15 years or more; criminal sexual conduct; or distribution of drugs within proximity of a school. —child younger than 16 charged with murder or criminal sexual conduct. —child 14 or 15 charged with a Class A, B, C, or D felony; a felony that provides for a maximum term of imprisonment of 15 years or more; or distribution of drugs within proximity of a school. —child 14 or older charged with assault and battery of a high and aggravated nature; carrying weapons on school property; or unlawful carrying of a pistol. —child 16 charged with a Class E or F felony; or a Class A, B, or C misdemeanor. —child statutorily excluded may be remanded to the family court for disposition of the charge at the discretion of the prosecutor. —child age 10 or older charged with a felony. (There is a rebuttable presumption for waiver for a child 16 or older charged with a class A, B, 1, or 2 felony.) —When a child under 18 is found guilty of any crime except murder, the circuit court may, instead of entering judgment, order that the child be sent to the state training school. —any child who has been convicted as an adult. —child 16 or older. —any child charged with first or second degree murder, rape, aggravated rape, aggravated robbery, especially-aggravated robbery, kidnapping, aggravated kidnapping, or especially-aggravated kidnapping. —when a nonlawyer judge presides over transfer hearing, the criminal court upon motion of juvenile must hold a de novo transfer hearing and either remand the case to juvenile court or accept jurisdiction. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child age 15 or older charged with a felony. —criminal court shall conduct examining trial if there is good cause to do so and may remand to juvenile court (if there is no good cause for an examining trial, the court refers the matter to a grand jury). —the juvenile court may reclaim jurisdiction if a grand jury refuses to indict the juvenile. —child 16 or older charged with aggravated murder. —any child who has been previously convicted as an adult. —child 16 or older charged with murder, a capital crime, first degree felony, criminal homicide or attempted criminal homicide involving the use of a dangerous weapon; or any felony involving the use of a dangerous weapon where the juvenile has a prior adjudication for a felony offense involving a dangerous weapon. Judicial Waiver (called certification) —child 14 or older charged with a felony. —child whose case has been judicially waived may request hearing in juvenile court to recall jurisdiction. (If juvenile court recalls jurisdiction, juvenile is returned to juvenile court for further proceedings, which may include certification to adult court.) —a criminal court may sentence a child as an adult or as a juvenile in a case that has been waived. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court 17 (“child” is defined as under 16 for delinquency purposes, but 16 and 17 year olds may still be treated as —child 14 or older charged with arson, causing death; assault and robbery with a dangerous weapon; assault and robbery, causing bodily injury; aggravated assault; murder; manslaughter; kidnapping; maiming; sexual assault; or aggravated sexual assault. juveniles) —child 16 or 17 charged with a nonexcluded crime. —any child age 10 to 13 charged with arson, causing death; assault and robbery with a dangerous weapon; assault and robbery, causing bodily injury; aggravated assault; murder; manslaughter; kidnapping; maiming; sexual assault; or aggravated sexual assault. —criminal court may transfer juvenile back to juvenile court in cases of statutory exclusions and prosecutorial discretion. —child 15 or younger tried as an adult and found guilty of a lesser offense (not one listed above) shall be transferred to juvenile court for disposition (this will be considered an adjudication for delinquency not a criminal conviction). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child previously convicted as an adult. —child 14 or older charged with a felony (if the child is 14 or older and charged with class 1 or 2 felony or 16 or older and charged with class 3 felony for murder, mob related felony, kidnapping or assault or any unclassified felony that carries a maximum penalty of 40 years, the court may transfer without finding that the juvenile is not a proper person to remain in juvenile court). (When the case of a child 14 or older charged with an offense punishable by death or 20 years or more imprisonment is not waived, the prosecutor may appeal to circuit court. The circuit court then holds a hearing to determine whether juvenile court substantially complied with the judicial waiver statute and either remands the case to juvenile court or accepts jurisdiction.) —child whose case has been judicially waived may appeal the waiver to circuit court. The circuit court then holds a hearing as above and either remands the case to juvenile court or accepts jurisdiction. —child convicted as an adult for the first time may be sentenced as an adult or may be subject to juvenile disposition. —child 16 or older charged with a serious violent offense or charged with a violent offense if the child has a criminal history consisting of (i) 1 or more prior serious violent offenses; (ii) 2 or more prior violent offenses; or (iii) 3 or more of any combination of any class A or B felony, vehicular assault, or manslaughter in the second degree, provided that each offense was committed after the child reached 13 and was prosecuted separately; (criminal history includes all criminal complaints where the allegations were found correct by a court or where criminal complaint was diverted on agreement of respondent after advisement that the complaint would be part of criminal history). —child who has been tried as an adult. —any child (a transfer hearing must be held where juvenile is 15 or older charged with a class A felony or an attempt, solicitation, or conspiracy to commit a class A felony; or 17 and charged with second degree assault, first degree extortion, indecent liberties, second degree child molestation, second degree kidnapping, or second degree robbery). (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —any child charged with treason, murder, robbery using firearms or other deadly weapons, kidnapping, first degree arson, or sexual assault in the first degree; or a violent felony if the child has been previously adjudicated as a delinquent for a violent felony, or any felony if the child has been twice previously adjudicated as a delinquent for a felony. —any child 16 or older charged with a violent felony or any felony if the child has a previous adjudication for a felony. —any child whose case is waived has the right to directly appeal an order of transfer to the Supreme Court of Appeals of West Virginia. —any child convicted as an adult may be sentenced as an adult or given a juvenile disposition. —any child charged with assault or battery against an employee, officer, visitor, or inmate while confined in a secured correctional facility. —any child 16 or older (there is a presumption for waiver if the child has previously been waived). —any child 14 or older charged with attempted first degree murder, first or second degree murder, manufacture or delivery of controlled substances, manslaughter, homicide by reckless conduct, first degree sexual assault, taking hostages, kidnapping, burglary while armed with a dangerous weapon, burglary using an explosive to open a depository, committing battery on a person who is lawfully in a burglarized enclosure during a burglary, or committing a felony at the request of or for the benefit of a criminal gang. —any child statutorily excluded may have his or her case waived back to juvenile court. (continued) Maximum age of original juvenile court jurisdiction Conditions under which a juvenile is or may be tried in criminal court —child 14 or older charged with violent felony or with any felony if child has been previously adjudicated as a delinquent under two separate petitions for acts that would constitute felonies. —child 17 or older. —child 13 or older. —criminal court may transfer to juvenile court any proceeding commenced in criminal court over which juvenile court has concurrent jurisdiction—juvenile court has concurrent jurisdiction by statute over all minors (except those 12 or younger charged with an offense punishable by more than 6 months incarceration over which it has exclusive jurisdiction). (Table notes on next page) When a case is waived to criminal court because of the nature of the charge, charges arising out of the same incident or which are otherwise joinable are usually also transferred. When waiver is in the juvenile court’s discretion, common prerequisites are that there must be a waiver hearing where it is found that there is probable cause that the child committed the act and that it is in the best interests of the child and community that there be waiver of jurisdiction. The category of statutory exclusion in the table includes state statutory provisions that require that the juvenile be transferred to criminal court from juvenile court (identified as “mandatory transfer” provisions). In addition, the grand jury may request removal to family court if it finds that the juvenile committed a crime, the crime is one for which the grand jury may not indict a juvenile (i.e., offenses other than those listed in the statutory exclusions), the grand jury does not indict, and there is legally sufficient evidence that the child committed a crime. The court must approve the request unless it is improper or insufficient on its face. After the juvenile is arraigned upon an indictment in Superior Court, the Superior Court may, upon motion of any party or its own motion, order removal to family court. However, if the juvenile is charged with one of the above enumerated offenses the Superior Court must obtain the prosecutor’s consent and find one of the above listed factors in order to remove to family court. The following data regarding the conditions of confinement of juveniles in seven adult correctional facilities that we visited was provided by facility officials without our verification. In Ohio, juveniles were housed within the general prison population irrespective of their age. However, in Florida, Michigan, and North Carolina, younger inmates (typically those under age 26) were usually housed in prisons designated for that age group. At six of the prisons we visited, age was not considered when making housing assignments within the prison. Housing units in the prisons we visited varied in layout from single- or double-bunk cells to dormitory style structures. Housing units typically had common-use bathroom facilities. In addition, most housing units’ common-use areas typically were equipped with televisions. At all seven prisons, health care was available on site. Generally, the health staff was composed of a physician, nurses, and a dentist. Upon entering the prison system, all inmates were to be subjected to a physical examination. Inmates were to be allowed daily visits to the health unit. When an inmate requested to see a nurse, generally the request was to be granted within 24 hours. If an emergency occurred, the inmates’ care was to be handled at the prison or at an off-site hospital. Additionally, the facilities usually were to provide mental health counseling and offer some form of drug rehabilitation. For example, in Florida, new inmates were to be screened to determine if they needed substance abuse services. Substance abuse services available in Florida prisons included treatment ranging from a 40-hour educational program to a 6- to 12-month intensive program. Education, vocation, and work programs were available at all prisons we visited. During classification, inmates were generally to be given an opportunity to indicate their preferences for participation in these programs. Factors to be considered by prison officials when assigning inmates to these programs included inmates’ length of sentence, educational level, and security classification. In six of the seven prisons, generally all inmates were to participate in an education, vocation, or work program. Education programs available at the prisons included classes dealing with the Graduate Equivalency Diploma (GED) test and adult basic education. Class sizes generally ranged from about 15 to 30 inmates. However, at the Handlon Michigan Training Unit, an adult basic education program had much smaller class sizes, which sometimes had a teacher to inmate ratio of 1 to 1 for inmates testing below the eight grade reading and math level. All of the prisons offered a variety of vocational programs. These programs included auto mechanics, masonry, electronics, horticulture, and drafting. The Florida Correctional Institution for women offered vocational programs in data entry, sewing, and cosmetology. Some factors considered when assigning inmates to vocational and education programs included their custody classification and educational level. Also, because some programs took as long as 16 months to complete, inmates with sentences shorter than the length of the program were not eligible to participate. Inmates not participating in education or vocational programs were to be required to work. Job assignments included cooks, dishwashers, or food servers in the prison kitchen, lawn maintenance on the prison grounds, or work at the prison store. In Ohio, Michigan, and North Carolina inmates were paid a nominal salary to work or attend school. For example, in Ohio, inmates could earn up to $20 per month. In addition, inmates at the Florida Correctional Institution, Southeastern Correctional Institution, and the Michigan Reformatory could participate in prison industry programs that produced products, some of which were marketed outside of the prisons. For example, at the Michigan Reformatory, the Michigan State Industries employed about 90 inmates in an on site furniture factory. All prisons provided a variety of recreational activities and equipment. During leisure time inmates generally had access to a library, television, weight-lifting equipment, table tennis, and pool tables. One prison provided cable programming on a large screen television, and another prison provided a built-in swimming pool (which inmates paid for) and a tennis court. Several of the prisons had intermural sports, including flag football, basketball, and softball. Inmates at the prisons we visited had similar daily schedules. Generally, they began the day between 6:00 a.m. and 8:00 a.m. Typically the inmates were counted about four times daily. Following the morning count, breakfast was served. After breakfast, inmates reported to their school or work assignments for about 3 hours. Lunch was usually served around 12:00 p.m. After lunch, inmates returned to their school or work assignments for another 3 hours. Dinner was served around 5:00 p.m. After dinner, inmates had time to participate in various recreational and religious programs or other activities from about 6:00 p.m. until about 9:00 p.m. Inmates were locked in their housing units with lights out at about 11:00 p.m. Henry L. Malone, Regional Management Representative Kelly M. Haggard, Evaluator-in-Charge Jacqueline M. Nell, Evaluator Edward O. Price, Computer Programmer Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the frequency with which juveniles have been sent to criminal court, focusing on: (1) juvenile conviction rates and sentences in criminal court; (2) dispositions of juvenile cases in juvenile court; and (3) conditions of confinement for juveniles incarcerated in adult correctional facilities. GAO found that: (1) less than 2 percent of the juvenile delinquency cases filed in juvenile court from 1988 through 1992 were transferred to criminal court; (2) in states that permitted prosecutor direct filing, between 1 and 13 percent of the juvenile cases were referred directly to criminal court; (3) state laws that excluded certain juveniles from juvenile court jurisdiction mainly focused on violent offenses or juveniles with previous court records; (4) new state laws have generally increased the frequency in which juveniles are sent to criminal court by either decreasing the age or increasing the types of offenses for which juveniles may be sent to criminal court; (5) juveniles in six of the seven states studied tended to be convicted when prosecuted in criminal court, most often for property offenses; (6) between 3 to 50 percent of the juveniles convicted of serious violent offenses received probation; (7) in four of the seven states, juvenile incarceration rates for violent, property, and drug offenses were between 62 and 100 percent; (8) in the 744,000 formal delinquency cases filed in 1992, 43 percent of the juveniles received probation, 27 percent of the cases were dismissed, 17 percent of the juveniles were placed in residential treatment, 12 percent received other disposition, and 1 percent were transferred to criminal court; and (9) in three of the states studied, the juveniles sentenced to adult prisons were housed in separate prisons, but health, recreation, and educational services were equivalent in all seven states' facilities. |
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, agencies’ reliance on this technology also exposes federal networks and systems to various threats. This can include threats originating from foreign nation states, domestic criminals, hackers, and disgruntled employees. Concerns about these threats are well founded because of the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and advances in the sophistication and effectiveness of attack technology, among other reasons. 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. We and federal inspectors general have reported on persistent information security weaknesses that place federal agencies at risk of disruption, fraud, or inappropriate disclosure of sensitive information. Accordingly, since 1997, we have designated information security as a government-wide high-risk area, and we continued to do so in the most recent update to our high-risk list. The Federal Information Security Management Act (FISMA) of 2002 is intended to provide a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. to develop, document, and implement an agency-wide security program to provide security for the information and systems that support the operations and assets of the agency, including information and information systems provided or managed by another agency, contractor, or other source. Additionally, FISMA assigns responsibility to the National Institute of Standards and Technology (NIST) to provide standards and guidelines to agencies on information security. NIST has issued related standards and guidelines, including Recommended Security Controls for Federal Information Systems and Organizations, NIST Special Publication (NIST SP) 800-53, and Contingency Planning Guide for Federal Information Systems, NIST SP 800-34. FISMA was enacted as Title III, E-Government Act of 2002, Pub L. No 107-347, 116 Stat. 2946 (2002). The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system performs the automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others that are required to file certain information with SEC. Its purpose is to accelerate the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the commission. EDGAR/Fee Momentum, a subsystem of EDGAR, maintains accounting information pertaining to fees received from registrants. End User Computing Spreadsheets and/or User Developed Applications are used by SEC to prepare, analyze, summarize, and report on its financial data. The Financial Reporting and Analysis Tool facilitates the compilation of monthly, quarterly, and year-end financial reports. This tool also helps perform data reconciliation and analysis of the principal financial statements. The ImageNow application is a workflow tool that tracks, reviews, and approves documents related to disgorgements, penalties, and court registry. The general support system provides (1) business application services to internal and external customers and (2) security services necessary to support these applications. Under FISMA, the SEC Chair has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of 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 further requires the CIO to designate a senior agency information security officer who will carry out the CIO’s information security responsibilities. Although SEC had implemented and made progress in strengthening information security controls, weaknesses limited their effectiveness in protecting the confidentiality, integrity, and availability of a key financial system. SEC did not consistently control access to this financial system’s network, servers, applications, and databases; manage its configuration; segregate duties; and plan for contingencies and disasters. These weaknesses existed, in part, because SEC did not effectively oversee and manage the migration of the key financial system to a new location. Consequently, SEC’s financial information and systems were exposed to increased risk of unauthorized access, disclosure, modification, and disruption. 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 border protection, identification and authentication of users, authorization restrictions, cryptography, audit and monitoring procedures, incident response procedures, and physical security. Without adequate access controls, unauthorized individuals, including intruders and former employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or for personal gain. In addition, authorized users could intentionally or unintentionally modify or delete data or execute changes that are outside of their authority. Although SEC had issued policies and implemented controls based on those policies, it did not consistently protect its network boundary from possible intrusions; identify and authenticate users; authorize access to resources; ensure that sensitive data are encrypted; audit and monitor actions taken on the commission’s systems and network; and restrict physical access to sensitive assets. Boundary protection controls logical connectivity into and out of networks and controls connectivity to and from network-connected devices. Implementing multiple layers of security to protect an information system’s internal and external boundaries provides defense in depth. By using a defense-in-depth strategy, entities can reduce the risk of a successful cyber attack. For example, multiple firewalls could be deployed to prevent both outsiders and trusted insiders from gaining unauthorized access to systems. At the system level, any connections to the Internet, or to other external and internal networks or information systems, should occur through controlled interfaces (for example, proxies, gateways, routers and switches, firewalls, and concentrators). At the host or device level, logical boundaries can be controlled through inbound and outbound filtering provided by access control lists and personal firewalls. SEC deployed multiple firewalls that were intended to prevent unauthorized access to its systems; however, it did not securely configure access control lists on firewalls inside a key financial system’s environment. For example, its network devices and firewall settings inappropriately permitted users in the production environment to access the system’s network management server. In addition, the system’s production Internet firewalls were configured to allow systems in the “demilitarized zone” to connect to each other. As a result of these configurations, SEC introduced vulnerability to unnecessary and potentially undetectable access at multiple points in the key financial system’s network environment. Information systems need to be managed to effectively control user accounts and identify and authenticate users. Users and devices should be appropriately identified and authenticated through the implementation of adequate logical access controls. Users can be authenticated using mechanisms such as a password and user ID combination. SEC policy requires strong password controls for authentication, such as passwords that are at least 8 eight alphanumeric characters in length and that expire after a predetermined period of time. However, SEC did not consistently implement strong password controls for identifying and authenticating users to certain servers, network devices, and databases in the key financial system’s environment. For example, password length on a network management device and a server contained fewer characters than required. User account passwords on another server were configured to never expire. Additionally, two databases had a user password that had the same name as the user account. As a result, SEC is at increased risk that accounts could be compromised and used by unauthorized individuals to access sensitive information. Authorization encompasses access privileges granted to a user, program, or process. It is used to allow or prevent actions by that user based on predefined rules. Authorization includes the principles of legitimate use and least privilege. Operating systems have some built-in authorization features such as user rights and privileges, groups of users, and permissions for files and folders. Network devices, such as routers, may have access control lists that can be used to authorize users who can access and perform certain actions on the device. Access rights and privileges are used to implement security policies that determine what a user can do after being allowed into the system. Maintaining access rights, permissions, and privileges is one of the most important aspects of administering system security. However, SEC did not always employ the principle of least privilege when authorizing access permissions to a key financial system. Specifically, it did not appropriately restrict access to security-related parameters and users’ rights and privileges for several network devices, databases, and servers supporting key financial applications. As a result, users had excessive levels of access that were not required to perform their jobs. This could lead to data being inappropriately modified, either inadvertently or deliberately. Cryptographic controls can be used to help protect the integrity and confidentiality of data and computer programs by rendering data unintelligible to unauthorized users and/or protecting the integrity of transmitted or stored data. Cryptography involves the use of mathematical functions called algorithms and strings of seemingly random bits called keys to (1) encrypt a message or file so that it is unintelligible to those who do not have the secret key needed to decrypt it, thus keeping the contents of the message or file confidential; (2) provide an electronic signature that can be used to determine if any changes have been made to the related file, thus ensuring the file’s integrity; or (3) link a message or document to a specific individual’s or group’s key, thus ensuring that the “signer” of the file can be identified. NIST guidance states that the use of encryption by organizations can reduce the probability of unauthorized disclosure of information. NIST also recommends that organizations employ cryptographic mechanisms to prevent unauthorized disclosure of information during transmission, encrypt passwords while being stored and transmitted, and establish a trusted communications path between users and security functions of information systems. However, SEC did not configure settings of the logging and database servers supporting key financial applications to use encryption when transmitting data. As a result, increased risk exists that transmitted data can be intercepted, viewed, and modified. Audit and monitoring involves the regular collection, review, and analysis of auditable events for indications of inappropriate or unusual activity, and the appropriate investigation and reporting of such activity. Automated mechanisms may be used to integrate audit monitoring, analysis, and reporting into an overall process for investigation of and response to suspicious activities. Audit and monitoring controls can help security professionals routinely assess computer security, perform investigations during and after an attack, and even recognize an ongoing attack. Audit and monitoring technologies include network and host-based intrusion detection systems, audit logging, security event correlation tools, and computer forensics. Network-based intrusion detection systems capture or “sniff” and analyze network traffic in various parts of a network. FISMA requires that each federal agency implement an information security program that includes procedures for detecting, reporting, and responding to security incidents. However, SEC had not consistently configured certain servers supporting a key financial system to maintain audit trails for all security-relevant events. For example, several of these network devices did not perform “failed access control lists access violation” logging. Also, while SEC had initiated deployment of tools to monitor its network infrastructure, critical systems’ local logs were not sent to a centralized syslog server that logs security events. In addition, the syslog server was offline for more than 1 month. As a result, increased risk exists that SEC will be unable to determine (1) if certain malicious incidents have occurred and (2) who or what caused them. Physical security controls restrict physical access to computer resources and protect them from intentional or unintentional loss or impairment. Adequate physical security controls over computer facilities and resources should be established that are commensurate with the risks of physical damage or access. Physical security controls over the overall facility and areas housing sensitive information technology components include, among other things, policies and practices for granting and discontinuing access authorizations; controlling badges, ID cards, smartcards, and other entry devices; controlling entry during and after normal business hours; and controlling the entry and removal of computer resources (such as equipment and storage media) from the facility. Physical controls also include environmental controls, such as smoke detectors, fire alarms, extinguishers, and uninterruptible power supplies. While SEC improved physical security controls after relocating its primary data center to a secure location, SEC did not sufficiently control physical access to a key financial system’s administrator area in headquarters. For example, system administrators’ workstations were located in an open area that was accessible by all personnel with access to the SEC headquarters building. The insufficient physical access control over the system administrators’ workstations reduces SEC’s ability to protect the system from unauthorized access. Configuration management involves the identification and management of security features for all hardware, software, and firmware components of an information system at a given point and systematically controls changes to that configuration during the system’s life cycle. FISMA requires each federal agency to have policies and procedures that ensure compliance with minimally acceptable system configuration requirements. Systems with secure configurations have less vulnerability and are better able to thwart network attacks. Effective configuration management provides reasonable assurance that systems are configured and operating securely and as intended. In addition to periodically looking for software vulnerabilities and fixing them, security software should be kept current by establishing effective programs for patch management, virus protection, and other emerging threats. Also, software releases should be adequately controlled to prevent the use of noncurrent software. Although it had configuration management related policies, plans and procedures in place, SEC did not configure a key financial system at its new data center according to SEC’s secure configuration baseline. For example, the system’s server ran multiple insecure services. In addition, while SEC had formed a patch vulnerability group to monitor vulnerabilities and evaluate the results of vulnerability scan reports, it did not routinely and consistently patch servers supporting key financial applications in a timely manner. Moreover, SEC used outdated versions of software and products that were no longer supported by their respective vendors. Consequently, increased risk exists that the system was exposed to vulnerabilities that could be exploited by attackers seeking to gain unauthorized access. To reduce the risk of error or fraud, duties and responsibilities for authorizing, processing, recording, and reviewing transactions should be separated to ensure that one individual does not control all critical stages of a process. Effective segregation of duties starts with effective entity- wide policies and procedures that are implemented at the system and application levels. Often, segregation of incompatible duties is achieved by dividing responsibilities among two or more organizational groups, which 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 the other. 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. According to NIST SP 800-53, revision 3, to prevent collusive malevolent activity, organizations should separate the duties of individuals as necessary and implement separation of duties through assigned information system access authorizations. During fiscal year 2013, SEC implemented segregation of duties controls for key information technology processes. For example, SEC had implemented segregation of duties for the administrative accounts tested. In addition, based on our inquiries, SEC employees from the Office of Information Technology Security, Office of Financial Management, and system operations understood their duties and responsibilities. However, production servers for the key financial system had active development user accounts. As a result, increased risk exists that unauthorized individuals from the development environment could pose a threat to the system’s processes in the production environment. Losing the capability to process, retrieve, and protect electronically maintained information can significantly affect an agency’s ability to accomplish its mission. If contingency and disaster recovery plans are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete information. Given these severe implications, it is important that an entity have in place (1) up-to- date procedures for protecting information resources and minimizing the risk of unplanned interruptions, (2) a tested plan to recover critical operations should interruptions occur, and (3) redundancy in critical systems. Although SEC had developed contingency and disaster recovery plans and implemented controls for this planning, it did not (1) update its contingency and disaster recovery plans to reflect its computing environment, (2) test disaster recovery procedures to ascertain recovery after the move to its newly built data center, and (3) ensure redundancy of a critical server for the key financial system. Consequently, SEC had limited assurance that financial information could be recovered and made available to meet agency priorities and requirements in the event of a failure at its primary data center. The information security weaknesses existed in the key financial system, in part, because SEC did not effectively oversee and manage the implementation of information security controls during the migration of the system to a new production environment. Specifically, SEC did not consistently provide adequate contractor oversight and implement an effective risk management process during the migration to the new production environment at its data center in June 2013. SEC relied on a contractor to migrate the key financial system to a new production environment, which included the completion of critical security- related tasks. The Office of Federal Procurement Policy’s Guide to Best Practices for Contract Administration states that a good contract administration program is essential to improving contractor performance under federal contracts. It also states that those entrusted with the duty to ensure that the government gets all that it has bargained for must be competent in the practices of contract administration. In addition, NIST guidance states that the head of an agency should establish appropriate accountability for information security and provide active support and oversight of monitoring and improvement for the information security program. Moreover, SEC policy states that the agency is to monitor project development throughout the life cycle to ensure that security controls are incorporated and security project milestones are met. However, SEC did not adequately oversee the contractor’s efforts related to the migration of the system from SEC’s operation center to its data center in a different location. Specifically, SEC did not assign information security personnel to monitor and evaluate the contractor’s performance in completing required security tasks. In addition, while the project plan included security-related tasks and milestones, SEC officials did not review the system’s security and project migration plans to verify that security-related roles, resources, and responsibilities were identified. Further, SEC did not confirm that the contractor completed the security- related project tasks prior to the decision to go live, including (1) implementing the baseline security configuration on the system’s servers, (2) testing the security of its servers, (3) building a monitoring capability inside its network environment, and (4) identifying and committing resources to perform security configuration and testing after the server build-out. SEC officials attributed this lack of rigorous oversight to their reliance on the ability of the contractor to adequately complete the effort. As a result, senior management officials were unaware that security- related project tasks had not been completed when the agency approved the system to go live. According to NIST SP 800-37,risks and, prior to placing information systems into operation, ensure that (1) information system-related security risks are being adequately addressed on an ongoing basis and (2) the authorizing official explicitly understands and accepts the risk to organizational operations and assets. In addition, the key financial system’s security plan states that SEC is to monitor changes to the system and conduct security impact analyses to determine the effects of the changes. Prior to change implementation, and as part of the change approval process, the organization is to analyze changes to the system for potential security impacts. After the system is changed (including upgrades and modifications), the agencies are to identify and mitigate organization should check the security features to verify that the features are still functioning properly. To improve its information security risk management process, in February 2013 SEC established the Operational Risk Management Office to proactively identify operational risks in all division offices. As part of the agency’s risk management process, the heads of business lines are responsible for identifying risks and controls. SEC also established a Risk Committee with the purpose of formalizing the risk framing process and creating an SEC-wide information security risk management strategy, based on decisions and priorities set by the Risk Committee. The risk decisions and risk priorities are to be used as guiding principles by management officials in implementing daily and operational IT tasks. However, SEC did not effectively manage risk associated with the migration of a key financial system to a new location. Specifically, (1) SEC’s Information Security Risk Committee did not identify and convey risks related to the data center move (and to the system) to the agency’s Operational Risk Management Program Office, which is responsible for developing and overseeing SEC’s operational risk management and internal control program and evaluating the results of internal control reviews and information technology system reviews performed by the internal control divisions and offices; (2) SEC did not perform a security impact analysis after the system servers were rebuilt and major changes were made to the systems; and (3) SEC did not act to mitigate security- related risks identified and communicated in the system’s weekly status reports by the contractor prior to the go-live date. Consequently, SEC did not have timely awareness of potential security vulnerabilities, which resulted in pervasive control weaknesses in the system when the new production environment went live. SEC resolved two of the seven previously reported information system control deficiencies in the areas of access controls and audit and For example, SEC disabled inactive administrator accounts monitoring.and enabled audit and monitoring capability on a server. However, five of the seven previously reported weaknesses still exist. These five remaining weaknesses encompassed SEC’s financial and general support systems. For example, SEC did not always configure its remote host and network infrastructure devices to require the use of strong passwords; effectively enforce logical access controls, including controls in the user separation process across its IT systems at the network levels; and consistently apply patches or perform necessary system updates. SEC continues to make progress in improving information security controls over its key financial systems. However, information security control weaknesses in a key financial system’s production environment may jeopardize the confidentiality, integrity, and availability of information residing in and processed by the system. These included deficiencies in SEC’s controls over access control, configuration management, segregation of duties, and contingency and disaster recovery planning. In addition, SEC did not consistently provide adequate contractor oversight and implement an effective risk management process during the migration of an important financial system to its new location. Cumulatively, these weaknesses decreased assurance regarding the reliability of the data processed by the key financial system and increased the risk that unauthorized individuals could gain access to critical hardware or software and intentionally or inadvertently access, alter, or delete sensitive data or computer programs. Consequently, the combination of the continuing and new information security weaknesses existing as of September 30, 2013, considered collectively, represented a significant deficiency in SEC’s internal control over financial reporting. Until SEC mitigates its control deficiencies and strengthens oversight of contractors performing security-related tasks as part of its information security program, it will continue to be at risk of ongoing deficiencies in the security controls over its financial and support systems and the information they contain. As part of fully implementing a comprehensive information security program, we recommend that the Chair direct the Chief Information Officer to take the following two actions: 1. Assign information security personnel to monitor and evaluate contractor performance in implementing information security controls in SEC’s information technology projects. 2. Implement a risk management process to ensure that similar contract oversight weakness are not widespread that includes (1) identifying and conveying risks, (2) performing security impact analyses, and (3) mitigating identified risks as appropriate. In a separate report with limited distribution, we are also making 49 detailed recommendations consisting of actions to be taken to correct specific information security weaknesses related to access control, configuration management, segregation of duties, and contingency and disaster recovery plans. We provided a draft of this report to SEC for its review and comment. In its written comments (reproduced in app. II), SEC generally agreed with our recommendations. SEC acknowledged that the appropriate level of attention was not applied to contractor oversight during the migration of the financial system and stated that contractual, procedural, and corrective measures are taking place to prevent similar occurrences. In addition, SEC agreed with the specific points we made about the risk management process and stated that this process continues to be improved. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. § 720 to submit a written statement on the actions taken on the recommendations by the head of the agency. The statement must be submitted to the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform not later than 60 days from the date of this report. A written statement must also be sent to the House and Senate Committees on Appropriations with your agency’s first request for appropriations made more than 60 days after the date of this report. We are also sending copies of this report to interested congressional parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. We acknowledge and appreciate the cooperation and assistance provided by SEC management and staff during our audit. If you have any questions about this report or need assistance in addressing these issues, please contact Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov or Nabajyoti Barkakati at (202) 512-4499 or barkakatin@gao.gov. GAO staff who made significant contributions to this report are listed in appendix III. As part of our audit of the Securities and Exchange Commission’s (SEC) fiscal years 2012 and 2013 financial statements, we assessed the commission’s information security controls. The objective was to determine the effectiveness of SEC’s information security controls for ensuring the confidentiality, integrity, and availability of its key financial systems and information. To do this, we identified and reviewed SEC information systems control policies and procedures, conducted tests of controls, and held interviews with key security representatives and management officials concerning whether information security controls were in place, adequately designed, and operating effectively. We evaluated controls based on our Federal Information System Controls Audit Manual (FISCAM), which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information; National Institute of Standards and Technology standards and special publications; SEC’s plans, policies, and standards; and the National Security Agency’s 60 Minute Network Security Guide. We assessed the effectiveness of both general and application controls by performing information system controls walkthroughs surrounding the observing technical controls implemented on selected systems; initiation, authorization, processing, recording, and reporting of financial data (via interviews, inquiries, observations, and inspections); reviewing systems security assessment and authorization documents; reviewing SEC policies and procedures; testing specific controls; and scanning and manually assessing SEC systems including general support systems and financial applications. We also evaluated the Statement on Standards for Attestation Engagements report and performed testing on key information technology controls on the following applications and systems: Delphi- Prism, FedInvest, and Federal Personnel and Payroll System/Quicktime. We selected which systems to evaluate based on a consideration of financial systems and service providers integral to SEC’s financial statements. The evaluation and testing of SEC information system controls, including the evaluation of the status of SEC’s corrective actions during fiscal year 2013 to address open recommendations from our prior years’ reports, was performed jointly with the independent firm of Williams, Adley, & Company-DC, LLP. We agreed on the scope of the audit work, monitored the firm’s progress, and reviewed the related audit documentation to determine that the firm’s findings were adequately supported. 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 appropriate documents, including SEC-documented corrective actions, and interviewing the appropriate staffs, including system administrators. To assess the reliability of the data we analyzed, such as information system control settings, security assessment and authorization documents, and security policies and procedures, we corroborated them by interviewing SEC officials, programmatic personnel, and system administrators to determine whether the data obtained were consistent with system configurations in place at the time of our review. Based on this assessment, we determined the data were reliable for the purposes of this report. We performed our work in accordance with U.S. generally accepted government auditing standards. We believe that our audit provided a reasonable basis for our conclusions in this report. In addition to the contacts named above, GAO staff who made major contributions to this report are Michael W. Gilmore and Duc Ngo (Assistant Directors), Angela Bell, Lee McCracken, and Henry Sutanto. | SEC is responsible for enforcing securities laws, issuing rules and regulations that protect investors, and helping to ensure that securities markets are fair and honest. In carrying out its mission, the commission relies extensively on computerized systems that collect and process financial and sensitive information. Accordingly, it is essential that SEC have effective information security controls in place to protect this information from misuse, fraudulent use, improper disclosure, manipulation, or destruction. As part of its audit of SEC's fiscal years 2013 and 2012 financial statements, GAO assessed the commission's information security controls. The objective was to determine the effectiveness of information security controls for protecting the confidentiality, integrity, and availability of SEC's key financial systems and information. To do this, GAO assessed security controls in key areas by reviewing SEC documents, testing selected systems, and interviewing relevant officials. Although the Securities and Exchange Commission (SEC) had implemented and made progress in strengthening information security controls, weaknesses limited their effectiveness in protecting the confidentiality, integrity, and availability of a key financial system. For this system's network, servers, applications, and databases, weaknesses in several controls were found, as the following examples illustrate: Access controls: SEC did not consistently protect its system boundary from possible intrusions; identify and authenticate users; authorize access to resources; encrypt sensitive data; audit and monitor actions taken on the commission's networks, systems, and databases; and restrict physical access to sensitive assets. Configuration and patch management: SEC did not securely configure the system at its new data center according to its configuration baseline requirements. In addition, it did not consistently apply software patches intended to fix vulnerabilities to servers and databases in a timely manner. Segregation of duties: SEC did not adequately segregate its development and production computing environments. For example, development user accounts were active on the system's production servers. Contingency and disaster recovery planning: Although SEC had developed contingency and disaster recovery plans, it did not ensure redundancy of a critical server. The information security weaknesses existed, in part, because SEC did not effectively oversee and manage the implementation of information security controls during the migration of this key financial system to a new location. Specifically, during the migration, SEC did not (1) consistently oversee the information security-related work performed by the contractor and (2) effectively manage risk. Until SEC mitigates control deficiencies and strengthens the implementation of its security program, its financial information and systems may be exposed to unauthorized disclosure, modification, use, and disruption. These weaknesses, considered collectively, contributed to GAO's determination that SEC had a significant deficiency in internal control over financial reporting for fiscal year 2013. GAO is recommending that SEC take two actions to (1) more effectively oversee contractors performing security-related tasks and (2) improve risk management. In a separate report for limited distribution, GAO is recommending that SEC take 49 specific actions to address weaknesses in security controls. In commenting on a draft of this report, SEC generally agreed with GAO's recommendations and described steps it is taking to address them. |
An unexplained increase in patient deaths occurred in one ward at the Harry S Truman Memorial Veterans Hospital (hereinafter referred to as Hospital) in Columbia, Missouri, during the spring and summer of 1992. In October 1992, based on information provided by a Missouri state legislator, the Federal Bureau of Investigation (FBI) and the VA OIG initiated a joint criminal investigation into the suspicious deaths. In February 1993, the OIG received specific allegations that the Hospital Director and the VA Central Region Chief of Staff had attempted to cover up the unexplained increase in patient deaths, including by not referring the matter to law enforcement authorities. In January 1995, the OIG initiated an administrative investigation (known as a Special Inquiry), which focused on management’s response to the patient deaths. Subsequent to the start of the Special Inquiry, the VA OIG received a series of additional letters from the complainant alleging that the cover-up (1) involved not only Hospital and VA management but the VA OIG as well and (2) had continued even after the October 1992 start of the joint FBI and VA OIG investigation. The OIG issued the Special Inquiry report in September 1995. In its report, the OIG analyzed and criticized Hospital and VA management’s response to the increase in deaths and noted that it had “found a dysfunctional top management team . . . in place.” The OIG reported that while the evidence might indicate to some individuals that at least the appearance of a cover-up existed, management’s actions could be attributed instead to bad judgment. The OIG further reported that it had found no conclusive proof of an intentional cover-up by Hospital and Central Region officials and no evidence of criminal conduct by top managers. As to its own role, the OIG stated that it had made mistakes but avowed that it had not participated in a cover-up. (A more extensive background is provided in app. I.) The title and text of the Special Inquiry report suggest that allegations of a cover-up had been investigated. We determined that the OIG did not plan or conduct its review or analysis in a way that could determine if a cover-up had occurred. Had the OIG conducted such a review, its documentation would have included an effort to link individual pieces of evidence that together suggest additional lines of inquiry—including elements of a cover-up. Further, both the Assistant IG and the analyst responsible for the Special Inquiry told us that the OIG did not review or investigate the allegations of cover-up. The Assistant IG told us that the Special Inquiry report overstates its conclusion regarding no evidence of a cover-up. Therefore, the Special Inquiry’s conclusion was not supported by work done or evidence collected and is misleading. In the Special Inquiry report, the OIG represents that its review included the allegation of a cover-up on the part of the Hospital Director and the Central Region Chief of Staff. However, according to the lead analyst who conducted the review and the Assistant IG who wrote the final report, the issue of cover-up was “off the table” because, in their view, their “charge” from OIG management did not include looking at cover-up allegations. They defined cover-up as being related to criminal issues and added that neither of them was a criminal investigator. Prior to his retirement, the lead analyst responsible for the Special Inquiry completed the interviews and field work and wrote a draft report entitled Special Inquiry: Management Response to Unexplained Patient Deaths, Harry S. Truman VA Medical Center, Columbia, Missouri. The body of that draft report made no reference to allegations of a cover-up by the Hospital Director and Central Region Chief of Staff. In the draft report, only one issue was addressed—whether management officials complied with VA policy when responding to the revelation of the unexplained deaths. According to the Assistant IG who prepared the final report, he did not review the underlying evidence while preparing the final report, nor did he reconcile the stated facts in the report with the underlying evidence prior to issuing the report. He stated that in writing the final Special Inquiry report, he changed the original title and edited the report in an attempt to tie the text to the complainant’s allegations. He characterized this as wordsmithing and added that he had no intent to mislead. He concluded that in hindsight he probably should not have changed the title and that the report probably overstated its case concerning no evidence of a cover-up, as the OIG did not investigate the cover-up allegations. Although the Assistant IG stated that there was no intent to mislead, the report title—Special Inquiry: Alleged Cover-up of an Unexplained Increase in Deaths, Harry S. Truman Memorial VA Medical Center, Columbia, Missouri—and two of the report’s three major sections—“Alleged Cover-up by Medical Center and Central Region Officials Subsequent to the Criminal Investigation” and “Alleged Cover-up by the Office of Inspector General”—specifically refer to the cover-up allegations. Further, the OIG reported that it had found “no conclusive proof of an intentional cover-up by Medical Center and Central Region officials” and “no evidence of criminal conduct by top management.” This language is misleading, because the OIG did not conduct its Special Inquiry so as to support its conclusion concerning an intentional cover-up. Instead, it addressed whether management had complied with VA and Hospital policy and procedures in its response to the increase in deaths. The then IG told us that he had intended for the Special Inquiry to investigate allegations of a cover-up and that, based on his reading of the report, it appeared that it had. He added that if the review did not include an investigation of the cover-up allegations, he believes that the report, as written, is misleading. We determined that the OIG did not plan or conduct its Special Inquiry in a manner to determine if improper acts pertaining to a cover-up had occurred. According to the Assistant IG, in preparing the report, he examined components of the complainant’s allegation separately, rather than linking or relating the information gathered. He added that had the inquiry included investigation of a crime, it would have been appropriate to show whether a pattern of conduct existed. One method of establishing such a pattern, as is required by the OIG’s Investigative Policy and Procedure Guide for special inquiries, is to create a chronology of events and actions. The OIG did not do this. Frequently a single act, taken by itself, is not sufficient to establish that the act was done willfully and intentionally with improper purpose. However, a series of acts considered collectively may suggest a pattern of conduct indicative of intentional impropriety rather than accident or error. For example, the following actions or alleged actions concerning the Hospital Director were not linked or followed up on by the OIG. If the OIG had done so, the linkage would have suggested a pattern of conduct requiring additional investigation and lines of inquiry by the OIG. The Hospital Director did not notify law enforcement authorities of the unexplained deaths despite the District Counsel’s recommendation that he do so. The Hospital Director did not notify law enforcement authorities of a statistical relationship between a nurse and the unexplained deaths despite telling the staff physician who had developed the analysis that he would do so. The Hospital Director, after learning that a staff physician had accused the nurse in question of killing his patients, did not refer the matter to the OIG. The Hospital Director demoted the Hospital’s Chief of Police reportedly because of the Chief’s efforts to obtain information about the Hospital’s response to the unexplained deaths. The Hospital Director did not provide the Peer Review Board examining the unexplained deaths with the statistical analysis that established a relationship between a nurse and the deaths. The Hospital Director’s initial reaction to the FBI investigation was to attempt to obtain confidential information provided to the FBI, potentially to identify the source of that information. The Hospital Director, in an apparent attempt to impede an investigation, instructed the staff physician who prepared the statistical analysis to have no further contact with the FBI. The Hospital Director’s son—the Chief of Human Resources at the Hospital—instructed the TQI Coordinator to determine from the FBI and the OIG whether they had had recent contact with the complainant. Our review of the OIG case files, interviews with individuals involved with the Special Inquiry, and statements from knowledgeable Hospital employees reflected that potential lines of inquiry were not pursued. For example, in the incident of a conference call between the VA Central Region Chief of Staff, the Hospital Director, the Hospital pathologist, and the TQI Coordinator, it was alleged that the Central Region Chief of Staff, in response to the issue of notifying law enforcement, stated that the last time law enforcement authorities had been called in, both the Chief of Staff and the Hospital Director were fired. The Special Inquiry analysts interviewed the pathologist and the TQI Coordinator. One individual recalled the statement being made; the other did not. However, the analysts never interviewed the Hospital Director or the Central Region Chief of Staff about this issue. Because of this, it was never verified that the conversation had taken place as alleged; and the OIG never attempted to resolve the conflicting testimony by questioning the person who had allegedly made the statement or the person to whom the statement had allegedly been made. Based on our review of relevant memorandums and tape recordings of interviews, we determined that the analysts questioned the Hospital Director and the Central Region Chief of Staff about compliance with VA policies. The analysts told us they accepted “I don’t know” answers instead of asking follow-up questions. For example, the analysts accepted, without probing further, the Hospital Director’s response that he did not recall the District Counsel’s advice in August 1992 that he notify the FBI or OIG about the unexplained deaths. In another instance, the Hospital Director responded to the analysts that he could not recall the actions he had taken to monitor Hospital management’s investigation of the deaths. At a minimum, the analysts should have provided the Hospital Director available information to refresh his recollection. In conducting the Special Inquiry, the OIG failed to follow its own policies concerning completeness and accuracy of its reports. As a result, the OIG’s Special Inquiry report contained statements that were either inconsistent with or unsupported by the evidence contained in the OIG’s files. We noted inaccuracies in the way the OIG (1) reported the Hospital Director’s failure to notify law enforcement of the possible association of a particular nurse to an unexplained increase in deaths, (2) attributed remarks to the Hospital Director and the Central Region Chief of Staff about withholding statistical analysis information from a Peer Review Board, and (3) assessed the Hospital Director’s instructions to the complainant that he refrain from making further contacts with the FBI and the OIG about the case. The Special Inquiry report stated that the Hospital Director had asked the Central Region Chief of Staff for his opinion on whether to report to authorities the unexplained deaths and the possible relationship of a particular nurse to the deaths. According to the report, the Central Region Chief of Staff responded that he “thought the situation warranted far more review before either relieved of patient care duties or notified law enforcement authorities advised the Hospital Director not to notify law enforcement authorities until the reviews were completed.” The OIG report concluded that “[the Hospital Director] followed the advice of the Central Region Chief of Staff and did not report the issue to law enforcement.” As written, the report leads one to believe that the Hospital Director followed the advice of the Central Region Chief of Staff not to report the situation to law enforcement authorities. However, we found insufficient documentation to support the OIG report’s conclusion that the Central Region Chief of Staff had told the Hospital Director not to report the issue to law enforcement authorities. Our review of memorandums of interview and transcripts of recorded interviews found inconclusive evidence that the Central Region Chief of Staff and the Hospital Director discussed whether to report the issue. Further, when asked to do so, the OIG was unable to cite the evidence supporting its conclusion. On September 3, 1992, a Hospital Peer Review Board was convened to evaluate five August deaths on Ward 4 East at the Hospital; but the Board was not provided with a staff physician’s statistical analysis that had reported a statistical relationship between the increase in deaths and a particular nurse. The Special Inquiry report concludes that “The Peer Review Board was not a ’sham’ as alleged by the complainant, but was limited in scope and did not consider the statistics developed by [the staff physician].” According to the report, the Central Region Chief of Staff and the Hospital Director stated that they had withheld the statistical analysis from the Board members to allow them to take an objective look at the cases. However, documentation shows that the Central Region Chief of Staff told the OIG that he had never issued instructions to deny the Peer Review Board access to the data. According to the memorandum of interview prepared by the OIG, the Hospital Director told the OIG that he recalled no one asking him whether the Peer Review Board could look at the statistical data and that it did not occur to him to let the Board members have the data. “By making such a requirement, management is in effect stifling an employee’s ability to discuss matters openly and freely with the investigators. The Director’s action can be viewed as an effort to impede an official investigation by intimidating employees, and is clearly improper. However, from a practical standpoint, action to the best of our knowledge did not limit the OIG or the FBI in obtaining appropriate information from or other employees.” (Emphasis added.) We found no documentation to support the Special Inquiry report’s conclusion that the Hospital Director’s action did not limit the OIG or the FBI in obtaining information from the complainant or other Hospital employees. Except for an OIG memorandum of interview with the Hospital Director, we found no evidence of an investigative effort in support of the report’s conclusion. At a minimum, one would expect to find documentation that the OIG had talked to the complainant and the cognizant FBI and OIG criminal investigators before arriving at such a conclusion. The OIG received the complainant’s allegations of a cover-up of patient deaths in February 1993, immediately acknowledged its receipt, provided a copy of the letter to the FBI in March 1993, and filed the complainant’s letter without investigating the allegations. The OIG did not begin its inquiry until after the complainant discussed the allegations with the media in January 1995. The OIG’s Special Inquiry report issued in September 1995, attributed the delay to administrative error. In February 1993, when the OIG received the complainant’s allegations of a cover-up of patient deaths, it referred the allegations to its Office of Investigations. The OIG investigator told us that he had contacted the complainant to acknowledge receipt of the allegations and had advised him that all his assets were being expended on other matters. Further, he told us that in addition to a murder investigation, he was investigating a death threat and a sexual assault. Although the OIG criminal investigator and the Assistant IG for Investigations did not recall if they had sent a copy of the allegation letter to the FBI, we learned that a copy of the letter containing the allegations had been provided to the FBI in March 1993. The original letter was filed in the OIG’s field office in Kansas City, Missouri; and no follow-up action was initiated. The Assistant IG for Investigations told us that when his office received the complainant’s letter in February 1993, the criminal investigation with the FBI was ongoing and all resources were being devoted to that investigation. He said that it was a “collective decision” on the part of the Office of Investigations that no further investigation was necessary. Further, according to the Assistant IG, the FBI and OIG criminal investigation had not disclosed any evidence that VA officials were involved in a cover-up, and the complainant’s letter contained no new information. He stated that the OIG’s failure to follow up on the allegations was a failure of its process. The former IG told us that he was upset in January 1995 when he became aware, as a result of media inquiries, that the complainant’s allegations had not yet been investigated. He further stated that when the OIG received the allegations in February 1993, the most important thing in his mind was the unexplained deaths. In response to our inquiries, the FBI told us that because the complainant’s February 1993 letter primarily concerned “the issue of the administrative response” of VA managers, the allegations were not within the investigative jurisdiction of the FBI. Also, because the FBI found no evidence of criminal activity in connection with the unexplained deaths, the FBI criminal investigation did not inquire into the allegations of a cover-up on the part of VA management. Further, according to the FBI, had the FBI investigation developed evidence of criminal activity at the VA, it would have explored the potential culpability of any person—whether management, employee, or staff—before, during, and after the deaths, to include deliberate attempts to cover up. The Special Inquiry report stated that, due to administrative error, the OIG had waited too long to initiate the Special Inquiry. During the interval (February 1993 to January 1995), the Hospital Director retired and the Central Region Chief of Staff resigned from the VA. When the complainant sent his February 1993 letter to the OIG alleging cover-up by the Hospital Director and the Central Region Chief of Staff, he requested confidentiality. The Special Inquiry review looked at whether the OIG protected the complainant’s right to confidentiality. In the Special Inquiry report, two instances were discussed in which the OIG had disclosed its contacts with the complainant to the Central Region and, ultimately, to the Hospital Director. The OIG report concluded that the OIG should have been more careful in protecting the complainant’s confidentiality, and it attributed one of the confidentiality disclosures to an “error” and the other to an “honest mistake.” We found a third instance in which the complainant’s contact with the OIG was provided to Hospital management. All three disclosures were related to the March 1994 Hospital Director’s letter to the complainant advising him not to have contact with the FBI or OIG. In March 1994, the OIG Office of Investigations received documents from the FBI that had been prepared by the complainant. In turn, the Office of Investigations passed the information to the District Counsel, who forwarded it to the Central Region and the Hospital Director. The complainant alleged that the ultimate disclosure to the Central Region indicates that the OIG was participating with the Central Region to suppress an inquiry of a cover-up. The Special Inquiry report, however, characterized what happened as an error, stating that the OIG had provided the documents to the Office of the District Counsel, which represents both the Hospital and the Central Region, without any restrictions on their dissemination. The complainant alleged that in March 1994, the Assistant IG for Healthcare Inspections gave Central Region officials a report of contact with the complainant as part of an OIG effort to suppress information about actions by Hospital and Central Region officials. The Special Inquiry report stated that (1) in this instance the OIG had an obligation not to release the complainant’s identity to other VA officials without the complainant’s consent and (2) controls to prevent such release were not properly applied. The Hospital Total Quality Improvement (TQI) Coordinator told us that on January 11, 1995, prior to the Special Inquiry, the Assistant IG for Healthcare Inspections telephoned her and requested information concerning the Hospital’s original response to the unexplained deaths on Ward 4 East. During the conversation, the TQI Coordinator asked about OIG plans to investigate the complainant’s obstruction-of-justice allegation. The Assistant IG acknowledged recent contact with the complainant and stated that the OIG had no plans to investigate the allegations unless it was forced to do so. The Special Inquiry did not identify this incident, which involved the same Assistant IG who had released the complainant’s name once before to the Central Region. On the same day of this incident, the TQI Coordinator, at the request of the Hospital Chief of Human Resources and the Associate Director, contacted the FBI and the Kansas City OIG to determine if they had recently been in contact with the complainant. The FBI referred her to the Kansas City OIG. In contrast with the Assistant IG’s previously discussed answer acknowledging contact with the complainant, the Kansas City OIG advised that it would have to consult with OIG Counsel prior to any discussions concerning the complainant. The Kansas City OIG later contacted the TQI Coordinator and stated that OIG Counsel had advised that it could not respond to the Hospital’s inquiry. The Hospital Chief of Human Resources told us he was not sure why he and the Associate Director had the TQI Coordinator make the inquiries concerning contact with the complainant but thought it concerned a March 9, 1994, letter from the Hospital Director advising the complainant not to have any contact with the FBI or the OIG. Our review of the August 1995 revision of the OIG Policy and Procedure Guide, Part I, Chapter 12 - Hotline, indicates that the OIG’s policies and procedures concerning Protection of Complainants (Section 5) mirror accepted standard hotline policies and procedures in federal agencies. Consistent adherence to and ongoing awareness of these policies by OIG personnel should result in effective protection of complainants. The Department of Veterans Affairs’ Office of Inspector General provided written comments on a draft of this report. The IG disagreed with our report, stating that the OIG had found a number of errors in the findings and conclusions presented in the report and in the analyses offered to support the conclusions. The IG is of the opinion that there is no evidence to support our overall conclusion that the OIG Special Inquiry report was misleading. Mainly, the IG disagrees with (1) our statement that the OIG did not investigate the cover-up allegation, (2) one of the three statements in the Special Inquiry report—an OIG conclusion—that we cite in our report as being inaccurate and unsupported by evidence, and (3) the inclusion in our report of a finding—based on an alleged violation of confidentiality—that “lacks credibility.” Concerning the first point, regardless of how the OIG characterizes its work, its review was not planned or executed in a manner that would support its conclusions. Neither did the OIG link or follow up on information it had available during its review. Concerning the second point, as we have shown, no underlying documentation supports the OIG’s conclusion that the complainant’s communication with law enforcement entities had not been limited. With regard to the third point, our discussion of an alleged breach of confidentiality is based on substantive documentation and testimonial evidence that the improper disclosure occurred. The fact that the media had disclosed the complainant’s name did not relieve the OIG from its responsibility to maintain confidentiality. The OIG had an obligation not to release the complainant’s identity without his authorization. An underlying theme of the IG’s comments is that we took individuals’ comments out of context or misrepresented facts. Also, according to his comments, some of the individuals that we interviewed either denied or did not recall discussing a particular matter with us. It is important to note that our findings and conclusions are based on in-depth analyses of documentation we obtained and interviews of witnesses that are documented in our reports of interview. We have included additional information in our report supporting our findings. The IG objected to a proposed recommendation regarding the adequacy of the OIG policies and procedures for protecting the privacy of complainants. He stated that the issue is compliance and training, not formulating or rewriting existing policy. We concur with the IG and have withdrawn the proposed recommendation. The IG’s complete written comments, and our evaluation, are presented in appendix II. We conducted our review from April 1997 to March 1998 at the VA OIG headquarters in Washington, D.C., and the Harry S Truman Memorial Veterans Hospital in Columbia, Missouri. Initially, we reviewed the draft and final OIG Special Inquiry reports and related files and workpapers. We interviewed both current and former OIG officials and Hospital personnel involved with the review of the suspicious deaths. We also reviewed (1) all congressional testimony and related documents, (2) the OIG Investigative Policy and Procedure Guide, and (3) all transcripts and tapes of the recorded interviews conducted during the Special Inquiry. We transcribed all tapes that had not been transcribed by the OIG. We reviewed available files at the Hospital and documentation provided by individuals interviewed. In conducting our review, we also assessed the OIG’s policies and procedures concerning confidentiality. As agreed with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of the report to interested congressional committees; the Secretary of Veterans Affairs; and the Inspector General, Department of Veterans Affairs. We will also make copies available to others on request. If you have any questions concerning this report, please contact me at (202) 512-6722 or Assistant Director Robert E. Lippencott at (312) 220-7600. Major contributors to this report are listed in appendix III. From March 8, 1992, through August 23, 1992, when a certain registered nurse worked the night shift alone on Ward 4 East at the Harry S Truman Memorial Veterans Hospital, the number of deaths on the ward increased, with dramatic spikes in May, June, and July. The death rate returned to normal when the nurse was assigned to another unit. A statistical analysis conducted by a Hospital staff physician in September 1992 confirmed that a statistically significant relationship existed between increased deaths on Ward 4 East and the duty times of the nurse. The staff physician concluded in his original statistical analysis that the probability that no relationship existed between the deaths and the duty times of the nurse was less than 1 in 1,000 (in 1994, it was determined to be less than 1 in 1 million). The VA Central Region Chief of Staff requested in October 1992 that the OIG Office of Healthcare Inspections help resolve questions involved with the Hospital staff physician’s study. The OIG Office of Healthcare Inspections issued a report in September 1994, confirming the results of the initial statistical study. In October 1992, based on information provided by a Missouri state legislator, the FBI and the OIG initiated a joint civil rights criminal investigation concerning the suspicious deaths at the Hospital. On February 2, 1998, the FBI issued a report to the Congress concluding that it had conducted an extensive investigation and that the federal statute of limitations had expired in August 1997 without any determination that a crime had, in fact, been committed. In a February 1993 letter, the staff physician who conducted the statistical study at the Hospital alleged to the OIG that both the Hospital and VA Central Region management had covered up the increase in patient deaths on Ward 4 East. In the letter, the staff physician requested confidentiality. The Inspector General referred the allegations of a cover-up to the OIG’s Office of Investigations for investigation. The Office of Investigations determined that due to the priority of the investigation of the suspicious deaths, no immediate action would be taken on these allegations. The letter was placed in the investigative file, and a copy was provided to the FBI in March 1993. In January 1995, after the complainant went to the media, the IG instructed the Assistant IG for Departmental Reviews and Management Support to conduct an administrative review (known as a Special Inquiry) of the allegations that included a cover-up. In a series of letters that followed the start of the Special Inquiry, the complainant reiterated his allegations of a cover-up, not only by Hospital and VA management but by VA OIG as well. He also alleged that the cover-up had continued even after the start of the joint FBI/VA OIG investigation. In the Special Inquiry report issued in September 1995, the OIG concluded that the evidence pointed to bad management rather than to a deliberate plan to cover up or suppress information. A congressional hearing was held in October 1995, and VA healthcare and OIG officials testified about the Special Inquiry and other matters. In their testimony, VA and OIG officials agreed with the findings of VA OIG Special Inquiry report and stated that no evidence of a cover-up by management had been found. OIG officials admitted, however, that the OIG had taken too long in dealing with the complainant’s allegations and attributed the 2-year delay to other priorities and administrative error. OIG officials concluded that even though no evidence of criminal misconduct had been found, they did find “a dysfunctional management team . . . in place” that had made significant judgmental errors in responding to the unexpected deaths. In its prepared statement, the OIG expressed concerns about its shortcomings in protecting the complainant’s identity and stated that it had issued a written apology to the complainant. The following are GAO’s comments on the Department of Veterans Affairs Office of Inspector General’s letter dated April 24, 1998. 1.Despite how the OIG may characterize its work, we determined that its review was not planned or executed in a manner that would support the conclusion that it had found “no conclusive proof of an intentional cover-up” by Hospital and Central Region officials and “no evidence of criminal misconduct by top management.” The work done, as described by those who did it and as reflected in the workpapers, did not include collecting and analyzing evidence to identify intentional cover-up efforts. 2.In addition to in-depth analyses of pertinent documentation, our findings and conclusions are based on extensive interviews of witnesses, including the Assistant IG and lead analyst. Further, these interviews were conducted without the presence of OIG management and the influence that may result from such presence. Information contained in our report was taken from documentation we examined and witnesses we interviewed. To help refresh their recollections and focus them on the issues, we provided the witnesses with copies of relevant sections of the OIG manual and supporting documentation for the Special Inquiry. We have also included additional information in our report to support our findings. 3.According to the VA OIG criminal investigator who conducted the criminal investigation with the FBI, he never read the Special Inquiry report that was issued in 1995. Further, he said he has no idea as to whether statements in the report were true or accurate. 4.Section A of the Special Inquiry report is the Hospital and Central Region management’s response to the unexplained deaths. That section concludes that the OIG found “no conclusive proof of an intentional cover-up by Medical Center and Region officials” and “no evidence of criminal conduct by top management.” No attempt was made to formally reconcile the final Special Inquiry report to the underlying evidence until we asked whether such a reconciliation had been done. Further, following our request in 1997, the analyst who was responsible for referencing the report told us that she was unable to reconcile some of the stated facts. 5. We have added to our report a discussion of the types of issues we believe the OIG should have probed further and examples of instances in which further probing could have elicited additional information. 6.We disagree that a conclusion needs no supporting evidence. Since conclusions represent review and analysis of evidence, it is essential to include documentation and its analysis in the workpapers. But the OIG had no evidence or analysis to support its conclusion. Further, contrary to the OIG’s conclusion, documentation in the OIG file suggested that the Hospital Director’s actions limited access. For example, according to a memorandum for the record prepared by the lead analyst, the criminal investigator told the analyst that he suspected that the Hospital Director had told Hospital staff not to talk to investigators. 7.We have added a reference to our report about the OIG’s receipt of an additional allegation from the complainant. 8.We have clarified our report to show the source of our statement about the reason for the OIG’s delaying action on the complainant’s allegations. 9.While we did not interview the Assistant IG for Healthcare Inspections, the IG is incorrect in his assumption that the facts as stated in our report are based solely on the statements made to us by the TQI Coordinator. Rather, the reason that we interviewed the TQI Coordinator was to corroborate statements contained in a January 1995 contact memorandum that she had prepared—immediately following the contact—to document her telephone conversation with the Assistant IG. 10.We have revised our report to reflect that the TQI Coordinator contacted the FBI at the request of the Associate Director and the Chief of Human Resources. 11.The referenced footnote has nothing to do with the Hospital management’s investigation of alleged nepotism concerning the appointment of the Director’s son as Chief of Human Resources. Rather, the purpose of the footnote is to inform the reader that the person who requested the TQI Coordinator to make calls concerning the complainant is the son of the individual on whom the complainant focused his allegations. 12.The IG’s characterization of its June 1993 Hotline policies as the most recent is incorrect. The current policy was issued in August 1995 as reflected in our report. The OIG’s May 1, 1998, acknowledgement of this fact appears in the appended addendum. 13.We have withdrawn our proposed recommendation for revising the OIG’s August 1995 policies and procedures for protecting the privacy of complainants. We concur with the IG that any corrective action would require training and compliance with policy, not formulating or rewriting policy. Accordingly, we have made the appropriate changes to our report. 14.We have considered these comments and made changes to the report where appropriate. Aldo A. Benejam, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs (VA) Office of Inspector General's (OIG) Special Inquiry into the alleged cover-up of an unexplained increase in deaths at the Harry S Truman Memorial Veterans Medical Center, Columbia, Missouri, focusing on: (1) whether the Special Inquiry report represents the results of OIG's review; (2) whether OIG complied with its policies in conducting the Special Inquiry; (3) why a delay occurred between receipt of the cover-up allegations in February 1993 and the beginning of the Special Inquiry in January 1995; (4) whether OIG protected the confidentiality of the staff physician who made the allegations of a cover-up; and (5) if OIG processes and procedures are adequate for ensuring confidentiality. GAO noted that: (1) the VA OIG conducted the Special Inquiry as a management review to determine how hospital and VA Central Region management had responded to an out-of-norm situation regarding unexplained deaths at the Hospital; (2) GAO determined that OIG did not collect or analyze evidence in a manner that would identify intentional cover-up efforts; (3) thus, the Special Inquiry's conclusion that no evidence of an intentional cover-up had been found was not consistent with the inquiry conducted and was misleading; (4) OIG failed to comply with its own reporting policies concerning completeness and accuracy by presenting statements that were not supported by the evidence contained in OIG files, including reference to a discussion that the Special Inquiry never verified; (5) OIG attributed the delay in acting upon the cover-up allegations received in February 1993 to administrative error; (6) the confidentiality of the staff physician who had made the allegations of a cover-up was breached on at least three occasions; and (7) OIG's current policies and procedures on confidentiality are adequate. |
Studies published by the Institute of Medicine and others have indicated that fragmented, disorganized, and inaccessible clinical information adversely affects the quality of health care and compromises patient safety. In addition, long-standing problems with medical errors and inefficiencies increase costs for health care delivery in the United States. With health care spending in 2006 reaching almost $2.1 trillion, or 16 percent of the gross domestic product, concerns about the costs of health care continue, and many policy makers, industry experts, and medical practitioners contend that the U.S. health care system is in a crisis. Health IT offers promise for improving patient safety and reducing inefficiencies. The expanded use of health IT has great potential to improve the quality of care, bolster the preparedness of our public health infrastructure, and save money on administrative costs. For example, as we reported in 2003, a 1,951-bed teaching hospital reported that it had realized about $8.6 million in annual savings by replacing outpatient paper medical charts with electronic medical records. This hospital also reported saving more than $2.8 million annually by replacing its manual process for managing medical records with an electronic process to provide access to laboratory results and reports. Technologies such as electronic health records and bar coding of certain human drug and biological product labels have been shown to save money and reduce medical errors. Health care organizations also reported that IT contributed other benefits, such as shorter hospital stays, faster communication of test results, improved management of chronic diseases, and improved accuracy in capturing charges associated with diagnostic and procedure codes. However, according to HHS, only a small number of U.S. health care providers have fully adopted health IT due to significant financial, technical, cultural, and legal barriers, such as a lack of access to capital, a lack of data standards, and resistance from health care providers. According to the Institute of Medicine, the federal government, as a regulator, purchaser, health care provider, and sponsor of research, education, and training, has a central role in shaping nearly all aspects of the health care industry. According to the Centers for Medicare and Medicaid Services, several federal health care programs, such as Medicare and Medicaid, spent almost $450 billion on health services in 2006, accounting for 23 percent of the nation’s health care expenditures that year. Given the level of the federal government’s participation in providing health care, it has been urged to take a leadership role in driving change to improve the quality and effectiveness of medical care in the United States, including an expanded adoption of IT. In an effort to leverage the federal government’s role in health care, the President called for the Secretary of Health and Human Services to appoint a National Coordinator for Health Information Technology. The Secretary appointed the first National Coordinator in May 2004. Two months later, HHS released a framework document as the first step toward the development of a national strategy; the framework described goals for achieving nationwide interoperability of health IT and actions to be taken by both the public and private sectors to implement a strategy for reaching these goals. In 2005, the Secretary formed the American Health Information Community, a federally chartered commission, to advise the department on achieving its goals in this area: in particular, developing interoperable health information exchange through a future Nationwide Health Information Network and providing most Americans with access to secure electronic health records by 2014. The community is made up of representatives from both the public and private health care sectors. In 2005, it identified components of health care that could potentially achieve measurable results in two to three years, including electronic health records. The community makes recommendations to the Secretary for advancing interoperability in these areas, along with recommendations directed toward the identification of health IT standards, the advancement of nationwide health information exchange, the protection of personal health information, and other related issues. Additionally, in furtherance of the federal government’s initiative to achieve expanded health IT adoption, in August 2006 President Bush issued an executive order calling for federal health care programs and their providers, plans, and insurers to use IT interoperability standards recognized by HHS. From its establishment in 2004 through 2008, the Office of the National Coordinator has received about $200 million in funding to support new efforts to ensure the adoption of health IT nationwide through the development of data standards and the implementation of projects on priority areas identified by the American Health Information Community. For the first 2 years of its operation (fiscal years 2004 and 2005), funding was provided from departmental discretionary funds allocated by the Secretary of Health and Human Services, and in fiscal year 2005 the office received $20 million. In fiscal year 2006, the department began submitting budget requests for the office. Table 1 shows the department’s requested and actual budget for the office for fiscal years 2006 through 2008 and the amount requested for fiscal year 2009. HHS’s overall departmental budget request for health IT for fiscal year 2009 is almost $115 million for various new and continuing initiatives within multiple HHS divisions. Besides the $66 million for the initiatives of the Office of the National Coordinator, this amount includes ● $3.8 million to fund the second year of a project at the Centers for Medicare and Medicaid Services that provides financial incentives to physician practices to adopt certified electronic health record systems, and ● $45 million for the Agency for Healthcare Research and Quality to fund health IT investments aimed at enhancing patient safety. The budget request also supports the continuation of an electronic health record system for all direct health care sites of the Indian Health Service. Since the Office of the National Coordinator has been funded, congressional interest in the expansion of health IT has increased. According to the Healthcare Information Management Systems Society, 41 pieces of legislation related to health IT were introduced by the 109th Congress, and, so far, the 110th Congress has introduced about 12 bills, reports, and resolutions; subjects addressed include grants and financial assistance to help support the implementation of health IT, provisions for incentives to health care providers for IT implementation, standards for exchanging health information, and protection of privacy and security of electronic health information. Additionally, in his 2008 State of the Union address, President Bush called for the 110th Congress to expand the use of health IT. Since 2005, we have reported and testified on HHS’s efforts to define a national strategy for achieving widespread implementation of health IT, including an approach for ensuring the protection of electronic personal health information. We reported that through the Office of the National Coordinator for Health IT, HHS has taken a number of actions to promote the acceleration of the use of IT in the health care industry. For example, in late 2005 the National Coordinator’s Office awarded several contracts to address a range of activities important for expanding the implementation of health IT; these activities include ● defining criteria and a process for certifying the interoperability of electronic health records to help increase the number of health care providers adopting electronic health records, ● defining health information standards needed to ensure the interoperability of electronic health records and health IT systems, ● defining requirements for exchanging health information throughout a nationwide health information network, and ● defining privacy and security policies to ensure the protection of electronic personal health information. In our previous work, we reported that although HHS had made progress in these areas, it still lacked an overall implementation strategy, including the detailed plans, milestones, and performance measures needed to ensure that the outcomes of its efforts are integrated and that the President’s goals for the implementation of nationwide health IT are met. In May 2005, we recommended that HHS establish detailed plans and milestones for the development of a national health IT strategy and take steps to ensure that its plans are followed and milestones are met. We reiterated this recommendation in March 2006 and again in September 2006. We have also reported on HHS’s efforts to ensure the privacy of personal health information exchanged within health information exchange networks. According to our work, although HHS had initiated several activities to help ensure the protection of health information, it had not defined an overall approach for health information privacy or an implementation strategy that included key elements such as timelines and milestones for completing its privacy-related initiatives. We recommended that HHS define and implement an overall privacy approach that identifies milestones for integrating the outcomes of its initiatives, ensures that key privacy principles are fully addressed, and addresses challenges associated with the nationwide exchange of health information. HHS and the Office of the National Coordinator have been pursuing various efforts to implement health IT solutions. Among other activities, the department has been relying on recommendations of the American Health Information Community to assist the office’s health IT initiatives in several key areas aimed at the expansion of electronic health records, identification of health IT standards, advancement of nationwide health information exchange, protection of personal health information, and other related issues. In this regard, HHS and the Office of the National Coordinator have taken actions in the areas of electronic health records, standardization, networking and information exchange, and health information privacy and security: Electronic health records. To help expand the implementation of electronic health records, among other actions, HHS issued a contract for the Compliance Certification Process for Health IT. This contract, awarded to the Certification Commission for Health IT, is to define criteria and a certification process to ensure that various electronic health records products can be exchanged among different systems in health information exchange networks. In May 2006, HHS finalized a process and criteria for certifying the interoperability of outpatient electronic health records and described criteria for future certification requirements. Certification criteria for inpatient electronic health records were finalized in June 2007. To date, the Certification Commission has certified about 100 products offering electronic health records. The results of this effort are intended to help encourage health care providers to implement electronic health records by providing assurance that they will be able to use electronic records effectively and exchange them with other health IT systems. Standardization. Through a contract for the Standards Harmonization Process for Health IT, HHS is promoting the implementation of standards required to enable the exchange of electronic health information in federal health care programs, as well as ensure the interoperability of electronic health records and IT systems. Such standards are essential for the development of a nationwide health information network. The contractor, in collaboration with the National Institute for Standards and Technology, selected initial standards to address specific areas identified by the American Health Information Community. These standards address, among other things, requirements for message and document formats, along with technical network requirements. According to the contractor, the Secretary announced the recognition of these standards in January 2008 after a year-long period of review and testing by healthcare providers, government agencies, consumers and other stakeholders. Federal agencies that administer or sponsor federal health programs are now required to implement these standards, in accordance with President Bush’s August 2006 Executive Order. Networking and information exchange. The Office of the National Coordinator has taken steps to enable health care entities—such as providers, hospitals, and clinical labs—to exchange electronic health information on a nationwide basis. HHS has awarded Nationwide Health Information Network contracts that were designed to provide prototypes of national networks of health information exchanges. These exchanges are intended to connect providers and patients from different regions of the country and enable the sharing of electronic health information, such as health records and laboratory results. Together, these connections are intended to form the “network of networks” that is envisioned to be the Nationwide Health Information Network. According to HHS, in early 2007 its contractors delivered final prototypes that could form the foundation of a nationwide network for health information exchange. In October 2007, the Secretary of Health and Human Services announced the award of contracts totaling $22.3 million to nine regional and state health information exchanges to begin trial implementations of the Nationwide Health Information Network. At the end of the first contract year— September 2008—HHS intends for the nine organizations and the federal agencies that provide health care services to test their ability to work together and to demonstrate real-time information exchange based upon nationwide health information exchange specifications that they define. HHS plans to place these specifications and related testing materials in the public domain, so that they can be used by other health information exchange organizations to guide their efforts to adopt interoperable health IT. Health information privacy and security. HHS has taken steps to further address privacy and security issues associated with the nationwide exchange of personal health information. In June 2007, HHS reported the outcomes of its privacy and security solutions contract based on the work of 34 states and territories that participated in the contract. A final summary report described variations among organization-level business practices, policies, and laws for protecting health information that could affect organizations’ abilities to exchange data. As a result of this work, HHS developed and made available to the public a toolkit to guide health information exchange organizations in conducting assessments of business practices, policies, and state laws that govern the privacy and security of health information exchange. Additionally, in discussions with us in June 2007, the National Coordinator for Health IT agreed with the need for an overall approach to protect health information and stated that the department was initiating steps to address our recommendation that HHS define and implement an overall privacy approach. Such an approach should be part of a comprehensive national strategy for health IT and should include milestones for integrating the outcomes of HHS’s various privacy-related initiatives, ensure that key privacy principles are fully addressed, and address challenges associated with the nationwide exchange of health information. However, our recommendation for protecting health information has not yet been implemented. Further, although HHS has initiated specific activities intended to meet the goals of its framework for strategic action, and it is continuing efforts to expand the nationwide implementation of health IT, it is undertaking these activities without a comprehensive national strategy that includes the detailed plans, milestones, and performance measures needed to ensure that the outcomes of its various initiatives are integrated and its goals are met. Given the many activities to be coordinated, such a national strategy is essential. The National Coordinator acknowledged in March 2006 that more detailed plans were needed for the office’s various initiatives and told us that HHS intended to release a strategic plan with detailed plans and milestones in late 2006. Nonetheless, today the office still lacks the detailed plans, milestones, and performance measures that are needed. According to its fiscal year 2009 performance plans, the Office of the National Coordinator has prepared a draft health IT strategic plan, which it intends to release in the second quarter of 2008. If properly developed and implemented, this strategy should help ensure that HHS’s various health IT initiatives are integrated and effectively support the goal of widespread adoption of interoperable electronic health records. In summary, Mr. Chairman, our work shows that the Office of the National Coordinator for Health Information Technology has been undertaking important work on specific activities supporting the goals of its framework for strategic action. However, HHS has not yet defined detailed plans and milestones for integrating the various initiatives, nor has it developed performance measures for tracking progress toward the President’s goal for widespread adoption of interoperable electronic health records by 2014. To its credit, the office has taken steps to advance electronic health record adoption, identify interoperability standards, enable nationwide health information exchange, and protect personal health information. However, given the amount of work yet to be done and the complex task of integrating the outcomes of HHS’s various initiatives, it is essential that a national strategy for health IT be defined that includes plans, milestones, and performance measures for ensuring progress toward the President’s goals. Without such a strategy, it is difficult to gauge the amount of progress being made by HHS toward achieving widespread adoption of interoperable electronic health records by 2014. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other Members of the Committee may have. If you should have any questions about this statement, please contact me at (202) 512-6304 or by e-mail at melvinv@gao.gov. Other individuals who made key contributions to this statement are Barbara S. Collier, Amanda C. Gill, Nancy E. Glover, M. Saad Khan, and Teresa F. Tucker. 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. | Health information technology (IT) offers promise for improving patient safety and reducing inefficiencies. Given its role in providing health care in the United States, the federal government has been urged to take a leadership role to improve the quality and effectiveness of health care, including the adoption of IT. In April 2004, President Bush called for widespread adoption of interoperable electronic health records within 10 years and issued an executive order that established the position of the National Coordinator for Health Information Technology within the Department of Health and Human Services (HHS). The National Coordinator, appointed in May 2004, released a framework for strategic action two months later. In late 2005, HHS also awarded several contracts to address key areas of health IT. GAO has been reporting on the department's efforts toward nationwide implementation of health IT since 2005. In prior work, GAO recommended that HHS establish detailed plans and milestones for the development of a national health IT strategy and take steps to ensure that its plans are followed and milestones met. For this testimony, GAO was asked to describe HHS's efforts to advance the use of health IT. To do this, GAO reviewed prior reports and agency documents on the current status of relevant HHS activities. HHS and the Office of the National Coordinator have been pursuing various activities in key areas associated with the President's goal for nationwide implementation of health IT. In 2005, the department established the American Health Information Community, a federal advisory committee, to help define the future direction of a national strategy for health IT and to make recommendations to the Secretary of Health and Human Services for implementing interoperable health IT. The community has made recommendations directed toward key areas of health IT, including the expansion of electronic health records, the identification of standards, the advancement of nationwide health information exchange, the protection of personal health information, and other related issues. Even though HHS is undertaking these various activities, it has not yet developed a national strategy that defines plans, milestones, and performance measures for reaching the President's goal of interoperable electronic health records by 2014. In 2006, the National Coordinator for Health Information Technology agreed with GAO's recommendation that HHS define such a strategy; however, the department has not yet done so. Without an integrated national strategy, HHS will be challenged to ensure that the outcomes of its various health IT initiatives effectively support the President's goal for widespread adoption of interoperable electronic health records. |
The National Response Plan (NRP) was issued in December 2004 to establish a single, comprehensive framework for the management of domestic incidents, including natural disasters. The NRP is the federal government’s plan to coordinate its resources and capabilities across agencies and integrate them with other levels of government, as well as private sector organizations, for prevention of, preparedness for, response to, and recovery from natural disasters, terrorism, or other emergencies. According to the plan, the NRP serves as the foundation for the development of detailed supplemental plans and procedures to effectively and efficiently implement federal assistance for specific types of incidents. The heart of the NRP is its base plan, which outlines planning assumptions, roles and responsibilities, and incident management actions. The NRP also contains 15 emergency support function annexes, which describe the mission, policies, structure, and responsibilities of federal agencies in an incident. Appendix II contains a table that shows organizational responsibilities for the 15 emergency response functions. It shows that DOD does not have sole primary responsibility for any emergency function, and its role is primarily that of a supporting agency. While multiple agencies support each emergency support function, DOD is the only agency with supporting responsibilities for all 15 emergency support functions. The NRP also contains seven incident annexes describing responsibilities, processes, and procedures for specific types of incidents. One of these annexes addresses catastrophic incidents. The catastrophic incident annex establishes the strategy for implementing an accelerated, proactive response when a catastrophic incident occurs. The NRP defines a catastrophic incident as any natural or manmade incident that results in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, or government functions. In terms of its combined casualties, damage, and disruption to the population, environment, and economy, Hurricane Katrina was clearly a catastrophe and it was arguably the most devastating natural disaster in United States’ history. More than 1,300 people lost their lives; damage stretched over a 90,000 square mile area; more than a million people were driven from their homes; buildings, bridges, roads, and power and communications infrastructure were destroyed or severely damaged; and millions of gallons of oil were spilled into the environment. We may never fully know the financial cost of Hurricane Katrina but one projection has put it at more than $200 billion. During disasters and catastrophes, the military may provide support at two different levels. First, the military may provide support at the state level through its National Guard personnel and units. The governor of a state may call the National Guard forces within that state to active duty in response to a local or statewide emergency. In these cases, the state pays the salaries of the National Guard members. Under an existing Emergency Management Assistance Compact that establishes a framework for mutual assistance, governors may also call their National Guard forces to active duty in a state status and then send them to another state that is facing a disaster. The governor of the affected state, through the state’s adjutant general, commands both the National Guard forces from the affected state and the out-of-state National Guard forces that may flow into the affected state under emergency management assistance compacts. National Guard troops also respond to disasters under Title 32 of the United States Code. Under Title 32, National Guard troops continue to report to the governor of the affected state but they receive federal pay and benefits. In response to Hurricane Katrina, National Guard forces were generally activated in a state active-duty status and then eventually placed in Title 32 status. The military can also respond to disasters at the federal level. The federal military response can consist of active component or Reserve or National Guard personnel. Active component troops that deploy to disaster areas remain under the control of the President and the Secretary of Defense, but they usually deploy in response to a request from an affected state. The President can also send Reserve and National Guard troops to a disaster area in a federal status under Title 10 of the United States Code. However, federal laws place certain limitations on the use of federal troops. For Hurricane Katrina, the federal military response consisted of active component troops and Reserve volunteers. The use of the military for disaster relief is authorized by the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Under procedures to implement the Stafford Act, the military provides support to civil authorities through a specific request process. However, under its immediate response authority, which is outlined in DOD directives, a local military commander can assist civil authorities or the public without prior approval if the action is necessary to save lives, prevent human suffering, or mitigate great property damage under imminently serious conditions. On March 25, 2003, DOD established the office of the Assistant Secretary of Defense for Homeland Defense to oversee homeland defense activities for DOD, under the authority of the Under Secretary of Defense for Policy, and as appropriate, in coordination with the Chairman of the Joint Chiefs of Staff. This office develops policies, conducts analysis, provides advice, and makes recommendations on homeland defense, support to civil authorities, emergency preparedness and domestic crisis management matters within the department. Specifically, the assistant secretary assists the Secretary of Defense in providing policy direction to the United States Northern Command and other applicable commands to guide the development and execution of homeland defense plans and activities. This direction is provided through the Chairman of the Joint Chiefs of Staff. The Assistant Secretary of Defense for Homeland Defense also serves as the DOD Domestic Crisis Manager. In this capacity, he represents the department on all homeland-defense-related matters with all levels of government, ranging from state and local officials to the Department of Homeland Security and the Executive Office of the President. In 2002, following the September 11, 2001, terrorist attacks against the United States, DOD established the United States Northern Command with a dual mission of homeland defense and civil support. Northern Command receives policy direction on both missions from the Assistant Secretary of Defense for Homeland Defense. Northern Command’s civil support activities are triggered by the President or the Secretary of Defense, generally in response to requests for federal assistance. Following a catastrophic incident, DOD may provide extensive lifesaving and sustaining support to civil authorities. However, DOD may also provide smaller scale support for other incidents such as wild fires, floods, tornados, blizzards, or other disasters. The United States Joint Forces Command generally provides Northern Command the military resources and forces it needs to assist civil authorities. The National Guard Bureau is the federal military coordination, administrative, policy, and logistical center for the Army and Air National Guard and serves as the channel of communication between the United States Army, the United States Air Force, and the National Guard in 54 states and territories. The Bureau is responsible for formulating, developing, and coordinating policies, programs, and plans affecting Army and Air National Guard personnel. However, the Bureau does not have operational control over National Guard forces that are operating in either a state or federal status. The governor is the commander in chief of all National Guard units within the state’s jurisdiction that are not in active federal service. Command is normally exercised through the state’s adjutant general. During military support to civil authority operations, the National Guard Bureau provides policy guidance and facilitates assistance, when needed, by locating and coordinating out-of-state National Guard assistance. However, the actual execution of mutual assistance agreements between the states does not involve the National Guard Bureau. Over the years, we have completed a number of reviews related to disaster preparedness and response, and a list of our related reports and testimonies is included at the end of this report. Two reports that we issued in 1993 following Hurricane Andrew are of particular note. In the first, we identified problems related to inadequate damage assessments and coordination. In the second, we also addressed coordination issues. In both, we suggested that to improve DOD’s ability to respond to catastrophic events, the Congress might wish to consider amending Title 10 of the United States Code to allow reserve component units to be involuntarily activated to provide military assistance during catastrophes. Prior to Hurricane Katrina, disaster plans and training exercises involving the military were insufficient, and did not incorporate lessons learned from past catastrophes to fully delineate the military capabilities that could be needed to respond to a catastrophic natural disaster. The military had responded to numerous natural disasters and catastrophes in the past but these prior experiences were not reflected in key planning documents or in the disaster exercises that had been conducted prior to Hurricane Katrina. For example, the NRP contained few details about the specific military capabilities that would likely be needed in a natural disaster, even if the natural disaster were catastrophic. DOD’s emergency response plan also did not fully address the military capabilities that could be needed to respond to a catastrophic natural disaster. DOD’s primary planning document, Functional Plan 2501, was inadequate because it did not address the functions DOD could be asked to perform as a supporting agency for all 15 NRP emergency support functions. National Guard state plans, which had been sufficient for past smaller disasters, were also insufficient for large-scale catastrophes and did not adequately account for the outside assistance that could be needed during a catastrophe. Moreover, disaster plans had not been tested and refined with a robust exercise program. As a result of the inadequate plans—and the lack of realistic exercises to test those plans—a lack of understanding existed within the military and among federal, state, and local responders as to the types of assistance and capabilities that the military might provide, the timing of this assistance, and the respective contributions of the active- duty and National Guard components. Disaster plans in place prior to Hurricane Katrina did not adequately delineate military capabilities that could be needed to respond to a catastrophic event. Over the years, the military has been frequently called upon to provide assistance in the aftermath of hurricanes and other disasters. Prior to Hurricane Katrina, the largest disaster-relief deployment of military forces was in 1992 when Hurricane Andrew swept across south Florida. The military also provided extensive support to civil authorities following other catastrophes, such as the 1989 earthquake in the San Francisco area and the terrorist attacks of September 11, 2001. The National Guard has even more experience, albeit typically with smaller- scale disasters. In fiscal year 2001, the National Guard responded to 365 requests for disaster assistance following hurricanes, floods, fires, ice storms, tornadoes, and the terrorist attacks on the World Trade Center and Pentagon. None of these prior disasters compared to the devastation wrought by Katrina, and the military was not prepared for what would be needed in her wake. Overall, plans proved to be insufficient because they did not identify the military capabilities that could be needed to respond to a catastrophic natural disaster of this magnitude. The NRP, which guides planning of supporting federal agencies, lacks specificity as to how DOD should be used and what resources it should provide in the event of a domestic natural disaster. For example, the NRP makes little distinction between the military response to smaller, regional disasters and the military response to large-scale, catastrophic natural disasters, even though past disasters have shown that the military tends to play a much larger role in catastrophes. The NRP states that DOD has significant resources that may be available to support the federal response to an incident of national significance, but it lists very few specific DOD resources that should be called upon even in the event of a catastrophic natural disaster. Given the substantial role the military is actually expected to play in a catastrophe—no other federal agency brings as many resources to bear—this lack of detailed planning represents a critical oversight. The NRP contains a catastrophic incident annex that addresses the need for accelerated, proactive federal responses during catastrophic incidents. The annex contains principles and guidelines but few details about the anticipated proactive federal response. The details were to be contained in the NRP’s catastrophic incident supplement and in detailed supplemental plans and procedures. A draft version of the NRP catastrophic incident supplement was released in September 2005, but it still has not been finalized. It contained a 12-page execution schedule with many details about the tasks that many agencies are expected to accomplish in response to a catastrophic event. However, despite extensive deployments of military capabilities for past catastrophes like Hurricane Andrew, the draft supplement lists very few specific tasks that DOD should perform during a catastrophe. The only specific DOD actions it addresses are deploying a coordinating officer and team to the affected region, making bases available as operational staging areas, and preparing for medical evacuation missions. The additional detailed planning was left for DOD to develop. The NRP represents a planning framework, not the detailed planning that would be necessary to support the plan. In addition to designating primary agencies for each of its 15 emergency support functions, the NRP designates an emergency function coordinator. The coordinator, which is also a primary agency, is responsible for coordinating all activities related to catastrophic incident planning. Since the NRP generally places DOD in a supporting role rather than in a coordinator role, DOD relied on other agencies to take the lead in coordinating the overall response within each functional area. However, according to DOD officials, coordinated emergency support function plans were generally not completed when Katrina struck. Lacking coordinated plans to clearly identify the capabilities that other agencies would provide during a catastrophe, DOD was forced to anticipate which capabilities the primary agencies and other supporting agencies would provide as it developed the details in its supporting plan. After evaluating the use of military capabilities during Hurricane Katrina, the White House report recommended, among other things, that DOD plan and prepare to have a significant role during catastrophes, and develop plans to lead the federal response for events of extraordinary scope and nature. While the military’s approach to planning is well defined, prior to Hurricane Katrina, DOD did not develop a detailed plan to account for the full range of tasks and missions the military could need to provide in the event of a catastrophe. DOD planners typically use one of three different types of plans for its missions. From most to least detailed, they are operations plans, contingency plans, and functional plans. Combatant commanders, like Northern Command, have some discretion to determine what type of planning is necessary for their assigned missions. For its emergency response plan to provide defense assistance to civil authorities during disasters or catastrophes, DOD opted to use its least detailed type of plan, the functional plan. Functional plans are generally used to address peacetime operations in permissive environments. DOD’s plan is called Functional Plan 2501. Even though functional plans are less detailed than the two other types of plans, according to DOD’s joint planning guidance, a functional plan must be adequate and feasible. Adequate means that the scope and concept of the plan satisfy the specified task and accomplish the intended mission, and feasible means the plan accomplishes the assigned tasks with resources that are available within the time frames contemplated. While Functional Plan 2501 was adequate for most disasters, it was not adequate or feasible for a catastrophe. The existing plan was nearly 9 years old, and was undergoing revision when Katrina struck. It had not been updated since the Northern Command was established in 2002, nor was it aligned with the recently published NRP. Just as the NRP did not differentiate between military tasks in a disaster and a catastrophe, Northern Command’s Functional Plan 2501 lacked the details necessary to address issues that emerge in a catastrophe but not in smaller-scale disasters. The plan did not account for the full range of tasks and missions the military could need to provide in the event of a catastrophe, despite the NRP requirement that agencies incorporate the accelerated response requirements of the NRP’s catastrophic incident annex into their emergency response plans. It did not anticipate that DOD, as a supporting agency for the 15 emergency support functions outlined in the NRP, could be called upon by the primary agencies to assume significant responsibilities for those functions—from search and rescue to communications to transportation and logistics. In addition, DOD’s plan had little provision for integrating active and reserve component forces. In general, a feasible plan would anticipate the personnel and resources that might be required in response to a catastrophic event. This would include the emergency support function tasks to which DOD was committed in a supporting role. Resources likely to be employed in a catastrophic event include reserve component forces– the National Guard and Reserves—and yet the plan did not fully address the division of tasks between National Guard resources under the governors’ control and federal resources under Presidential control. The 2005 DOD Strategy for Homeland Defense and Civil Support called for focused reliance on reserve component capabilities for civil support missions, but Functional Plan 2501 did not envision the large-scale employment of National Guard and Reserve assets and did not outline a concept of operations using National Guard/Reserve capabilities. It did not address key questions of integration, command and control, and the division of tasks between National Guard resources under state control and federal resources under U.S. Northern Command’s control. Moreover, the functional plan did not establish time frames for the response. Functional Plan 2501, created in 1997, was written without the benefit of numerous strategies, directives, and publications that directly bear upon military support to civil authorities. For example, the 2005 DOD Strategy for Homeland Defense and Civil Support identified the need for improved communications capabilities in domestic incidents, but Functional Plan 2501 does not specifically address this issue. Furthermore, the strategy envisions effective surveillance and reconnaissance capabilities in support of homeland defense operations and again, the functional plan does not sufficiently address this capability. In contrast, the Northern Command has more detailed and operationally specific plans for other homeland defense missions, like its response missions following a terrorist attack. Understandably, development of these plans was given priority after the terrorist attacks of September 11, 2001. While specifics about these plans are classified for national security reasons, DOD officials told us that many of the capabilities and procedures used in these plans could be adopted for civil support operations conducted after natural disasters. Two related problems were evident with respect to the National Guard’s planning prior to Katrina. First, the National Guard Bureau and Northern Command had not planned a coordinated response. Second, at the state level, the plans of the National Guard in Louisiana and Mississippi were inadequate for a catastrophic natural disaster. The National Guard civil support plans were not integrated with DOD’s Functional Plan 2501. While the Chief of the National Guard Bureau does not have operational control of National Guard personnel in the states and territories, he does have overall responsibility for military support to civil authorities programs in the National Guard. However, the bureau had not coordinated in advance with the governors and adjutants general in the states and territories to develop plans to provide assistance for catastrophic disasters across the country. Specifically, the bureau had not identified the types of units that were likely to be needed during a catastrophe or worked with the state governors and adjutants general to develop and maintain a list of National Guard units from each state that would likely be available to meet these requirements during catastrophic natural disasters. In addition, the Northern Command and the National Guard Bureau had not planned which disaster response missions would be handled by National Guard members and which would be handled by reservists and active component members. Prior to Katrina, the Mississippi and Louisiana National Guard plans were not synchronized with DOD’s plans, and they were also inadequate for a catastrophe of Katrina’s magnitude. Like DOD’s Functional Plan 2501, the Mississippi and Louisiana National Guard plans were adequate for smaller disasters but insufficient for a catastrophe, and did not adequately account for the outside assistance that could be needed during a catastrophe. For example, Joint Forces Headquarters Louisiana modified its plan and reassigned disaster responsibilities when thousands of Louisiana National Guard personnel were mobilized for federal missions prior to Hurricane Katrina. However, the Louisiana plan did not address the need to bring in thousands of military troops from outside the state during a catastrophe. Similarly, Mississippi National Guard officials told us that even their 1969 experience with Hurricane Camille, a category 5 storm that hit the same general area, had not adequately prepared them for a catastrophic natural disaster of Katrina’s magnitude. For example, the Mississippi National Guard disaster plan envisioned the establishment of commodity distribution centers but it did not anticipate the number of centers that could be required in a catastrophic event or following a nearly complete loss of infrastructure. Disaster plans had not been tested and refined with a robust exercise program. The Homeland Security Council has issued 15 national planning scenarios—including a major hurricane scenario—that provide the basis for disaster exercises throughout the nation. While DOD sponsors or participates in no less than two major interagency field exercises per year, few exercises led by the Department of Homeland Security or DOD focused on catastrophic natural disasters and none of the exercises called for a major deployment of DOD capabilities in response to a catastrophic hurricane. According to DOD officials, DOD has been involved in only one catastrophic hurricane exercise since 2003—Unified Defense 2004. This exercise, which simulated a nuclear detonation along with a category 4 hurricane, revealed problems with situational awareness and operational control of forces that still had not been resolved when Katrina made landfall in August 2005. In addition, although DOD has periodically held modest military support to civil authorities exercises, the exercises used underlying assumptions that were unrealistic in preparing for a catastrophe. For example, DOD assumed that first responders and communications would be available and that the transportation infrastructure would be navigable in a major hurricane scenario. Finally, the First U.S. Army conducted planning and exercises in response to six hurricanes in 2005. These exercises led to actions, such as the early deployment of Defense Coordinating Officers, which enhanced disaster response efforts. However, DOD’s exercise program was not adequate for a catastrophe of Hurricane Katrina’s magnitude. As a result of the inadequate plans and exercises, when Hurricane Katrina struck, a lack of understanding existed within the military and among federal, state, and local responders as to the types of assistance and capabilities that the military might provide, the timing of this assistance, and the respective contributions of the National Guard and federal military forces. Even though there was a lack of detailed planning, the military mounted a massive response to Hurricane Katrina that saved many lives and greatly assisted recovery efforts, but several factors affected this response. During the response to Katrina, a number of interrelated factors affected the military’s ability to leverage its resources to gain situational awareness and effectively organize and execute its response efforts. Some factors that affected the military response were: a lack of timely damage assessments, communications difficulties, problems integrating the use and capabilities of active-duty and National Guard forces, uncoordinated search and rescue efforts, and challenges with the significant logistics functions that FEMA unexpectedly turned over to DOD. The military response to Hurricane Katrina reached more than twice the size of the military response to the catastrophic Hurricane Andrew in 1992. Military officials began tracking Hurricane Katrina when it was an unnamed tropical depression and took steps to proactively respond as the storm strengthened to a category 5 hurricane in the Gulf of Mexico. Prior to landfall, anticipating the disruption and damage that Hurricane Katrina could cause, the governors of Louisiana and Mississippi activated their National Guard units. In addition, National Guard officials in Louisiana and Mississippi began to contact National Guard officials in other states to request assistance. By the time Katrina made landfall on August 29, 2005, the military was positioned to respond with both National Guard and federal forces. For example, commands had published warning and planning orders and DOD had already deployed Defense Coordinating Officers to all the potentially affected states. After landfall, the governors and National Guard officials in Louisiana and Mississippi requested additional support from other states. The governor of Louisiana also requested federal military assistance to help with response and recovery efforts. Figure 1 shows the buildup of forces as the military supported response and recovery operations with engineering, communication, and military police units as well as helicopter search-and-rescue and ship crews, and personnel with many other critically needed capabilities. Active-duty forces were alerted prior to landfall and the initial buildup of active-duty forces shown in figure 1 reflects the deployment of key active-duty capabilities such as aviation, medical, and engineering forces. Growing concerns about the magnitude of the disaster prompted DOD to deploy large active-duty ground units beginning on September 3, 2005, 5 days after Katrina’s landfall. Figure 1 also indicates that the military response, which began prior to Katrina’s landfall on August 29, 2005, peaked at more than 70,000 troops— over 50,000 National Guard and over 20,000 active federal personnel. This reliance on the National Guard was based on DOD’s Strategy for Homeland Defense and Civil Support, which was issued in June 2005. The strategy called for a focused reliance on the National Guard and Reserves for civil support missions because, among other things, they have key civil support capabilities and are located in 3,200 communities throughout the nation. The reliance on the National Guard and Reserves represents a departure from past catastrophes when active-duty forces played a larger role in the response. For example, during the military response to Hurricane Andrew, the National Guard provided less than 20 percent of the more than 30,000 military responders. Most of the National Guard response to Hurricane Katrina came from outside Louisiana and Mississippi, with the National Guard Bureau acting as a conduit to communicate requirements for assistance in Louisiana and Mississippi to the adjutants general in the rest of the country. The adjutants general of other states, with the authorization of their state governors, then sent their National Guard troops to Louisiana and Mississippi under emergency assistance agreements between the states. Requirements for out-of-state National Guard or federal assistance were increased because thousands of National Guard personnel from Mississippi and Louisiana were already mobilized for other missions and thus unavailable when Hurricane Katrina struck their states. The National Guard troops that had been mobilized from within the affected states were able to quickly deploy to where they were needed because they had trained and planned for disaster mobilizations within their states. The deployment of out-of-state forces, though quick when compared to past catastrophes, took longer because mobilization plans were developed and units were identified for deployment in the midst of the crisis. By Monday, September 5, 2005 (a week after Katrina made landfall), over 13,800 out-of- state National Guard troops were in Louisiana assisting with response and recovery efforts. However, when the Superdome bus evacuations began on Thursday, September 1, 2005, only about 1,600 out-of-state National Guard troops were in Louisiana, fewer than the number of Louisiana National Guard members who were mobilized for other missions and unavailable when Katrina made landfall. At the peak of the military’s response, nearly 40,000 National Guard members from other states were supporting operations in Louisiana and Mississippi—an unprecedented domestic mobilization. In the days after the hurricane passed, considerable confusion surrounded the employment of military support and many questioned why more federal ground troops were not sent sooner. According to senior DOD officials involved in executing DOD’s response to Katrina, DOD was aware that the situation warranted significant military support and they noted that the department took steps to proactively deploy federal military capabilities from all the services to the region. For example, DOD deployed a joint task force, medical personnel, helicopters, ships from Texas, Virginia, and Maryland, and construction battalion engineers. Many of these capabilities were providing assistance or deploying to the area within hours of Katrina’s landfall. Given the current DOD homeland defense strategy, which calls for “focused reliance” on the reserve components for civil support missions, DOD officials told us that they also began working with the National Guard Bureau to ensure the mobilization of National Guard forces from across the country. As the situation unfolded during the week, concerns about the magnitude of the disaster led to discussions about the need to deploy additional active-duty forces to supplement the National Guard forces. After visiting the region and meeting with the Louisiana Governor on Friday, September 2, 2005, the President, on the next day, ordered the deployment of over 7,000 active- duty ground troops to the region. Data concerning the military response were not always fully documented in the midst of the Hurricane Katrina crisis, but it is clear that the military had a huge impact on response and recovery operations. Data from the active-duty military task force that headed the federal response indicate that the military flew thousands of helicopter sorties, rescuing tens of thousands of people and carrying thousands of tons of cargo, including sandbags to repair breeches in the levees around New Orleans; delivered millions of meals ready to eat, gallons of water, and pounds searched hundreds of thousands of houses in the affected regions; provided medical treatment to tens of thousands of civilians; and conducted mosquito spraying missions over more than 1 million acres. Despite the significant contribution of its massive response, a number of interrelated factors affected the military’s ability to leverage its resources to gain situational awareness and effectively organize and execute its response efforts. Without detailed plans to address each of the following factors, the military risks being unprepared for the next catastrophe that strikes the United States. Hurricane Katrina response efforts were hampered by the federal government’s failure to fully use its available assets to conduct timely, comprehensive damage assessments in Louisiana and Mississippi. The failure to quickly assess damage and gain situational awareness had also been a problem during Hurricane Andrew in 1992. The NRP notes that following a disaster, state and local governments are responsible for conducting initial damage assessments, but it also notes that state and local officials could be overwhelmed in a catastrophe. The NRP addresses this incongruous situation, where state and local officials who may be overwhelmed have critical functions to perform during the initial stages of disaster recovery efforts, by stating that the federal government should provide a proactive response when state and local officials are overwhelmed during a catastrophe. However, the NRP does not specify the proactive means or capabilities the federal government should use to conduct damage assessments and gain situational awareness when the responsible state and local officials are overwhelmed. The military has significant capabilities to conduct damage assessments using reconnaissance aircraft and satellite imagery, but our analysis shows that neither the NRP nor DOD’s Functional Plan 2501 specifically called for the proactive use of these assets to meet the NRP catastrophic incident annex’s requirement for a proactive response to catastrophic incidents. In addition, DOD did not initially receive significant requests for these capabilities. At FEMA’s request, DOD initially provided three helicopters to assist in damage assessments. About 4 days after Katrina’s landfall, the military began providing imagery data from some of its reconnaissance assets to its forces and civilian agencies. However, the process for sharing information proved difficult for several reasons. Some information was classified due to its source and could not be shared directly with civilian agencies. In addition, some agencies were not able to access some of the available information because the data files were too large to download to the agency computers. A National Guard Hurricane Katrina after-action review reported that the adjutants general (in Mississippi and Louisiana) required real time imagery that the military community should have been able to provide, but did not. Because state and local officials were overwhelmed and the military’s extensive reconnaissance capabilities were not effectively leveraged as part of a proactive federal effort to conduct timely, comprehensive damage assessments, the military began organizing and deploying its response without fully understanding the extent of the damage or the required assistance. According to military officials, available reconnaissance assets could have provided additional situational awareness. In contrast, DOD officials told us that almost immediately after Hurricane Rita struck Louisiana and Texas in September 2005, considerable surveillance assets were made available to assess damage, primarily because of lessons learned from Katrina. Hurricane Katrina caused significant damage to the communication infrastructure in Louisiana and Mississippi, which further contributed to a lack of situational awareness for military and civilian officials. Katrina destroyed or severely degraded many commercial landline and cellular telephone systems, and emergency radio systems were oversubscribed, making it difficult to establish necessary connections between officials and responders at the local, state, and federal levels. As a result, it was difficult for officials to gain situational awareness. Even when local officials were able to conduct damage assessments, the lack of communications assets caused delays in the transmitting of the results of the assessments. Communications problems, like damage assessment problems, have been long-standing problems that were also highlighted following Hurricane Andrew in 1992. The military, other agencies, and public companies all have extensive communications assets and capabilities, but the Department of Homeland Security has responsibility for coordinating the communications portion of disaster response operations under the NRP. However, neither the NRP, the Department of Homeland Security, nor DOD fully identified the extensive military communication capabilities that could be leveraged as part of a proactive federal response to a catastrophe. In addition, DOD’s emergency response plan, Functional Plan 2501, addressed internal military communications requirements, but it did not address the communication requirements of communities affected by a catastrophic natural disaster. It also did not address coordination with civilian responders. Typically, military equipment cannot communicate with civilian police, fire, and emergency medical systems unless it is augmented with specialized equipment. While the military and civilian agencies deployed mobile communication vans that were able to connect different communications systems that are normally incompatible, the placement of these vans was not coordinated and some areas had multiple systems while other areas had no systems at all. Because state and local officials were overwhelmed and the Department of Homeland Security and DOD waited for requests for assistance rather than deploying a proactive response, some of the military’s available communication assets were never requested or deployed. In addition to the coordination challenges, communications challenges arose within the military response. Some deployed National Guard assets were underutilized because the states that sent the assets placed restrictions on their use. The equipment was sent solely to support the sending states’ units and thus was unavailable for priority use. As a result, a number of mobile communications vans were collocated at a single site while other areas remained without communications. In addition, some National Guard responders were short of equipment. For example, one National Guard unit deployed to the area of operations with only 5 percent of its communications personnel and 50 percent of its communication equipment. As a result of these problems, military forces lacked good communication between headquarters units and troops on the ground. While subordinate military commanders are trained to complete their missions even when they do not have communications with their headquarters, this lack of communication made it difficult for senior military leaders to determine which missions had been completed, which were still ongoing, and what new missions may have surfaced. The integration of the military response to Hurricane Katrina was affected by inadequate planning and by a key mobilization statute that limited DOD’s reserve component members from being involuntarily ordered to active duty for disaster response. The military did not adequately plan for the integration of large numbers of deployed troops from different commands during disaster response operations. For example, a Louisiana plan to integrate military responders from outside the state called for the reception of not more than 300 troops per day. However, in the days following Hurricane Katrina, more than 20,000 National Guard members from other states arrived in Louisiana to join the response effort, and on one single day—September 5, 2005—more than 8,500 National Guard members from other states arrived in Louisiana to join the Katrina response effort. One critical issue that needs to be resolved in any large, integrated operation is the decision concerning command and control of the forces. This issue had not been resolved prior to Hurricane Katrina and was a subject of discussion during the critical first days after Katrina made landfall. Ultimately, the military took a pragmatic approach to deconflict the operation with separate active-duty and National Guard chains of command. The federal forces—the active component and mobilized Reserve volunteers—were under the command and control of Northern Command’s Joint Task Force-Katrina, while the National Guard forces, including those from other states, were under the command and control of the governors in Mississippi and Louisiana. While response operations were coordinated across the several chains of command, they were not integrated, which led to some inefficiencies and duplication of effort. For example, many responding military units from outside the states were assigned missions within established geographic boundaries, but the Louisiana and Mississippi National Guard units had functional missions that cut across these geographic boundaries. Furthermore, in New Orleans, the geographic boundaries were not the same as the city district boundaries. This made coordination with local responders more difficult. Despite the lack of prior planning to address integration issues, many efforts were made to integrate the response. For example, active military representatives were assigned to state emergency operations centers and the commander of the active forces traveled daily throughout the affected region coordinating and collaborating with National Guard, and federal, state, and local civilian officials. Because the military had not specifically planned nor decided which parts of the military response would be handled by the National Guard and which parts would be handled by the active component and mobilized reservists, many of the force flow decisions and integration efforts were ad hoc in the midst of the crisis. Because military plans and exercises had not provided a means for integrating the response, no one had the total picture of the forces on the ground, the forces that were on the way, the missions for which forces had been allocated, and the missions that still needed to be done. For example, National Guard commanders in Mississippi and Louisiana were not prepared to receive the division headquarter elements that were sent from Indiana and Kansas to command the out-of-state National Guard forces that were arriving in the two states from around the country. A key mobilization statute also affected the integration of the military response. Title 10 of the United States Code currently limits a unit or member of a reserve component from being involuntarily ordered to federal active duty for disaster response. While this restriction applies to both National Guard and Reserve forces, National Guard forces were mobilized under both state active duty and Title 32 for Hurricane Katrina. No similar provisions exist to specifically mobilize Reserve forces for disaster response, although it is conceivable that if the President declares a national emergency, reserve component forces could become available for involuntary activation. As a result, all the Reservists who responded to Hurricane Katrina were volunteers, and Reservists constituted a relatively small portion of the response when compared to the National Guard and active component portions of the response. If the military continues to rely on Reserve volunteers it will have difficulty fully executing DOD’s 2005 civil support strategy that calls for a focused reliance on both the National Guard and the Reserves. The strategy notes that the National Guard is particularly well suited for civil support missions because it is routinely exercised with local law enforcement and first responders, experienced in supporting neighboring communities in times of crisis, and accessible in state active duty and Title 32 status. However, the strategy also emphasizes the use of the Reserves for domestic missions. The strategy specifically states that “the nation needs to focus particular attention on better using the competencies of National Guard and Reserve” organizations, and notes that Reserve forces currently provide many key capabilities. The process of lining up volunteers can be time-consuming and is more appropriate for mobilizing individuals than it is for mobilizing entire units or capabilities that may be needed during a catastrophe. In 1993, after Hurricane Andrew, the military was facing a drawdown in force size and increasing mission requirements, and we issued two reports related to disaster assistance that addressed the Title 10 limitation. One of the reports said that, to improve DOD’s response to catastrophic events, the Congress may want to consider amending Title 10 of the United States Code to allow reserve component units to be involuntarily activated to provide disaster assistance. Such a change would have provided DOD with more flexibility in the use of its total force. However, the limitation has remained in place. While the mobilization restriction did not limit the military’s ability to respond to Hurricane Katrina, it could limit DOD’s ability to respond to future catastrophes if large portions of the active-duty and National Guard forces are unavailable due to other mission requirements. While tens of thousands of people were rescued after Katrina through the efforts of military, civil government, and private rescuers, the lack of clarity in search and rescue plans led to operations that, according to aviation officials, were not as efficient as they could have been. The NRP addressed only part of the search and rescue mission, and the National Search and Rescue Plan had not been updated to reflect the NRP. Under the United States National Search and Rescue Plan, which was issued in 1999, the Coast Guard ordinarily has responsibility for providing or arranging maritime search and rescue services, and the Air Force ordinarily has responsibility for providing or arranging nonmaritime search and rescue services in the continental United States. The plan also calls on DOD to support civil search and rescue efforts when the efforts do not interfere with DOD’s primary military duties, and it states that DOD and Coast Guard commands should provide their facilities for civil search and rescue to the fullest extent practicable. While the NRP acknowledges the existence of the National Search and Rescue Plan, the NRP does not specifically address how the Coast Guard and the Air Force organizational responsibilities in the National Search and Rescue Plan coincide with the NRP’s urban search and rescue annex. That annex lays out organizational responsibilities for search and rescue during a disaster, but it focuses on ground rescues. While the NRP includes DOD and the Coast Guard among the many supporting agencies, it lists the Department of Homeland Security’s Emergency Preparedness and Response and FEMA as the primary and coordinating agencies for urban search and rescue. As a result of the lack of clear search and rescue guidance, the aviation portion of military search and rescue operations was not fully integrated with the helicopter search and rescue operations of the Coast Guard and other rescuers. At least two different locations were assigning search and rescue tasks to military helicopter pilots operating over New Orleans and no one had the total picture of the missions that had been resourced and the missions that still needed to be performed. In accordance with the National Search and Rescue Plan, the Air Force established a Joint Search and Rescue Center at Tyndall Air Force Base, Florida, to manage Hurricane Katrina search and rescue missions; however, this center was not set up until September 4, 2005, 6 days after Katrina’s landfall. Furthermore, the center did not have radar coverage over New Orleans. After Katrina made landfall, search and rescue helicopters operating in the New Orleans area were receiving their tasks from either the Coast Guard, which was based at Belle Chase, Louisiana, or from a task force led by the Louisiana National Guard, which was operating at the Superdome. According to Louisiana National Guard officials, they worked with the Coast Guard to deconflict the aviation operations, but the search and rescue efforts that were being directed from the two sites were not integrated. For example, some military aircraft received their direction from the task for at the Superdome, while others received their direction from the Coast Guard or the Joint Task Force that was in command of the active troops on the ground. Neither the Coast Guard nor the Louisiana National Guard had visibility of all the aircraft operating over the city of New Orleans in the initial days after Katrina made landfall. According to military officials, better integration of search and rescue efforts could reduce duplications of effort for search and rescue aircraft. Another factor that affected the military response was the large and unanticipated logistics role it was asked to assume when FEMA became overwhelmed. Under the NRP, FEMA is responsible for coordinating logistics during disaster response efforts but during Hurricane Katrina, FEMA quickly became overwhelmed. Supplies that had been positioned prior to Katrina’s landfall were quickly exhausted. As a result, FEMA placed orders for more than 9 million meals-ready-to-eat and then, 4 days after landfall, asked DOD to assume a significant portion of its logistics responsibilities. Specifically, FEMA gave DOD responsibility for procurement, transportation, and distribution of ice, water, food, fuel, and medical supplies and it authorized DOD to spend up to $1 billion to accomplish this mission. According to DOD officials, all of the 9 million meals that FEMA had ordered were shipped to the region by September 4, 2005. However, because FEMA lacked the capability to maintain visibility—from order through final delivery—of the supplies and commodities it had ordered, DOD had difficulty gaining visibility over the supplies and commodities when it assumed FEMA’s logistics responsibilities. As a result of its lack of visibility over the meals that were in transit, DOD had to airlift 1.7 million meals to Mississippi to respond to a request from the Adjutant General of Mississippi, who was concerned that food supplies were nearly exhausted. We recently issued a report that examined how the food provided by foreign nations was managed, and we have additional work planned to look at the entire logistics process to best determine how the federal government can provide support in the future. DOD is aware of disaster response problems described in this report and is beginning to take actions to address the lessons learned from Hurricane Katrina and to prepare for the next catastrophic event. The department has been conducting its own lessons-learned reviews and is also examining the lessons and recommendations in reports from a White House review panel, congressional oversight committees, and other sources. As a result, DOD is taking some actions to address catastrophic disaster response problems. While it is too early to fully evaluate the effectiveness of these ongoing and planned actions, many appear to hold promise for improving future responses. However, the issues identified during the aftermath of Katrina are often complex, cross agency boundaries, and are, in some cases, long-standing. Substantial improvement to the military’s disaster and catastrophe response will require sustained attention from management at the highest levels of DOD and from key officials across the government. DOD has collected lessons learned following Hurricane Katrina from a variety of sources. Within the department, DOD has a formal set of procedures to identify, capture, and share information collected as a result of operations in order to enhance performance in future operations. Even in the midst of the Hurricane Katrina response operation, officials from various military organizations were collecting information on lessons learned and this continued well after most operations had ceased. For example, communications issues that had surfaced were studied by both active and National Guard commands that had responded to Hurricane Katrina. DOD also formed a task force to study the response and is compiling and analyzing various military and other lesson learned reports to help design an improved response to future natural catastrophic events. In addition, the DOD Inspector General’s Office and the service audit agencies are reviewing aspects of the Hurricane Katrina response. Other organizations have also been gathering lessons learned. According to DOD officials, they have reviewed White House and congressional reports identifying lessons to be applied or challenges to be addressed in future response operations. While the assessments were different, many common themes emerged and are similar to the issues we describe in this report. For example, a February 2006 White House report also recognized the significant role that the military plays in catastrophes, and it even recommended that DOD work with the Department of Homeland Security to identify those extraordinary circumstances when it is appropriate for DOD to temporarily lead the federal response. That report also noted the lack of a unified command structure for active and National Guard forces and suggested that DOD work on ensuring integration of those forces in future responses. It further recommended that DOD seek ways to leverage Reserve members’ civilian skills in disaster relief efforts. In addition, an over 500-page congressional report found numerous issues with the Katrina response, including the lack of integration of National Guard and active-duty forces, which hampered the military response. To address the challenges highlighted in these lessons learned reports, DOD is currently planning numerous actions to improve its ability to respond to a catastrophic event. For example, DOD officials stated that the department is currently updating its emergency response plan and intends to use a contingency plan rather than a less detailed functional plan to guide its military support to civil authority missions. Recognizing the urgency of preparing for catastrophic events, the department hopes to complete many of its initial steps by June 1, 2006, the start of the next hurricane season. Since details about many of the department’s actions were still emerging as we completed our review we were unable to fully assess the effectiveness of DOD’s actions. However, many actions appear to offer promise for improving future responses. Several additional examples of DOD’s planned efforts follow. To improve situational awareness and assist in damage assessment after a catastrophe, DOD is working on a plan to coordinate and synchronize surveillance and reconnaissance requests and assets. To improve integration of responders, DOD is planning several steps, including (1) expanding its training programs to accommodate planners from other agencies and (2) conducting new homeland defense and civil support exercises. To improve coordination between National Guard and active forces, and, specifically, avoid duplication of effort by military forces during an incident, NGB officials will work with the states to build a database of current and planned state-to-state agreements for sharing National Guard forces. DOD also has an organizational realignment underway that military officials believe should improve the response to future disasters and catastrophes. This realignment gives a single Army organization, the Fifth United States Army, responsibility for domestic disaster response. When Katrina made landfall in August 2005, disaster responsibilities within the Army were split between two organizations. Under the change, the Fifth Army becomes a subordinate (U.S. Army, North) to the Northern Command and will focus on homeland defense and disaster response. According to military officials, Army, North, is establishing two command posts that will be capable of deploying within 18 hours as joint task forces for catastrophes anywhere in the United States. The command posts will be available when Army, North, reaches its full operating capability in October, 2006. Furthermore, to improve interagency coordination, specially trained defense coordinating elements are being established and co-located within each of FEMA’s 10 regional offices. Army, North, also has a number of training and planning efforts underway to improve its support to civil authorities. While DOD’s efforts to address the Katrina lessons learned appear to be steps in the right direction, some of the issues DOD is facing are complex and long-standing and cut across agency boundaries. As a result, substantial improvement will occur only if the actions receive sustained management attention at the highest levels, both within DOD and within the other responsible agencies. Many of the problems encountered during the Katrina response were also reported after Hurricane Andrew in 1992. For example, in a 1993 report, we found that the practice of assigning responsibility for conducting damage assessments to state and local officials under the Federal Response Plan was not suitable for catastrophic situations and it contributed to the lack of timely damage assessments during Hurricane Andrew. Our report also found supply distribution delays caused by a lack of visibility over FEMA-ordered supplies, and found confusion over the command and control relationships, which had not been fully resolved prior to Andrew’s landfall. Due to the complexity and long-standing nature of these problems, DOD’s planned and ongoing actions must receive sustained top-management attention in order to effect needed improvements in the military’s ability to support civil authorities. Part of DOD’s challenge in moving forward is the complexity of the problems, especially given the uncertainty of potential events and the sheer number of organizations at all levels of government that are involved. Coordinating improvements across the various parts of the military, alone, will be a challenge. The National Guard and active-duty forces have complicated chains-of-command, especially in peacetime when the National Guard typically serves the state governors. Other issues require close coordination with state and local governments. For example, conducting damage assessments, a critical early step in developing an appropriate response to an event, can involve many different agencies at all levels of government. Damage assessments are normally to be conducted by local or state officials during a disaster. However, local and state officials who are overwhelmed in a catastrophe are unlikely to be able to conduct timely and comprehensive damage assessments. Paradoxically, without timely, comprehensive damage assessments federal responders may not realize the extent to which local and state official are overwhelmed. While the issues are complex, they are also urgent, and experience has illustrated that the military has critical and substantial capabilities that are needed in the wake of catastrophic events. Clearly, Hurricane Katrina was one of the most devastating natural disasters in our nation’s history, and because of its size and strength, it will have long-standing effects for years to come. By their nature, major catastrophic events involve extraordinary levels of casualties, damage, or disruption that will likely immediately overwhelm state and local responders—circumstances that make sound planning for catastrophic events all the more crucial. Prior disasters and the actual experience of Hurricane Katrina show that the military is likely to contribute substantial support to state and local authorities. More detailed planning would improve officials’ understanding of the support the military could be expected to provide following a catastrophic incident, including the types of capabilities that might be provided, the actions that might be taken proactively and in response to specific requests, and the integrating of the National Guard and active-duty response. Further, while the limited participation of Reserve members after Katrina did not affect response efforts, under current law, DOD’s ability to respond to future catastrophes may be limited if it cannot involuntarily mobilize reserve component members—particularly if large portions of the active and National Guard forces are unavailable due to other mission requirements. The devastation of Katrina and the issues it revealed serve as a warning that actions are needed to clearly identify the military capabilities that will be required from the National Guard, Reserve, and active forces as part of a proactive federal response following a catastrophic natural disaster. Without urgent and detailed attention to improve planning, the military and federal government risk being unprepared for the next catastrophe. We recommend that DOD take the following four actions: First, given the expected heavy reliance on the military during catastrophes, we recommend that the Secretary of Defense provide the Secretary of the Department of Homeland Security with proposed revisions to the NRP that will fully address the proactive functions the military will be expected to perform during a catastrophic incident, for inclusion in the next NRP update. Second, in view of the fast approaching 2006 hurricane season and other natural and man-made threats that could result in a catastrophe at any instant, we recommend that the Secretary of Defense establish milestones and expedite the development of detailed plans and exercises to fully account for the unique capabilities and support that the military is likely to provide to civil authorities in response to the full range of domestic disasters, including catastrophes. The plans and exercises should specifically address the use of reconnaissance capabilities to assess damage, use of communications capabilities to facilitate support to civil authorities, integration of active component and National Guard and Reserve forces, use of search and rescue capabilities and the military’s role in search and rescue, and role the military might be expected to play in logistics. Third, since National Guard troops can join response efforts as part of the federal response or as part of the state response under mutual assistance agreements, we recommend that the Secretary of Defense direct the Chief of the National Guard Bureau to work with the state governors and adjutants general to develop and maintain a list of the types of capabilities the National Guard will likely provide in response to domestic natural disasters under state-to-state mutual assistance agreements along with the associated units that could provide these capabilities. In addition, we recommend that the Secretary of Defense direct the Chief of the National Guard Bureau to make this information available to the Northern Command, U.S. Joint Forces Command, and other organizations with federal military support to civil authority planning responsibilities. Finally, based on the above action by the National Guard Bureau to identify the National Guard units that are likely to respond to domestic disasters under state-to-state mutual assistance agreements, we also recommend that the Secretary of Defense establish milestones and identify the types of scalable federal military capabilities and the units that could provide those capabilities in response to the full range of domestic disasters and catastrophes covered by DOD’s defense support to civil authorities plans. In a 1993 report we suggested that the Congress may want to consider removing the statutory restriction on DOD’s authority to involuntarily activate Reserve units for catastrophic disaster relief. In view of the significant military downsizing that has occurred since we first raised this matter and the need to actively engage the total force in order to meet missions at home and abroad, we continue to believe that the Congress should consider lifting or modifying the mobilization restriction—10 U.S.C. §12304 (c)(1)—that limits reserve component participation in catastrophic natural disasters. In commenting on a draft of this report, DOD stated the report was thorough and made a significant contribution to DOD’s plans to improve the department’s support to civil authorities during domestic disaster incidents. In addition to partially concurring with our recommendations, DOD’s made several comments about the report that fell into two broad categories, DOD’s role during domestic disaster response and its pre- Katrina planning and exercise schedule. First, DOD believed the report called for a greater DOD role during domestic disaster response but noted that it must strike a balance between its warfighting role overseas and the need to support civil authorities at home. While DOD said it would continue to work as part of a unified interagency effort, it said that the goal is to enhance the domestic disaster response capacities of other agencies. Until that goal is achieved, DOD will be prepared to respond even more rapidly with more resources to another catastrophe in the United States. We recognize the need to balance DOD’s overseas warfighting mission and its domestic response missions. In the report, we note DOD’s role is primarily that of a supporting agency under the NRP, and that the nature of the military response will vary depending on the nature of the emergency. However, given the military’s capabilities, its response and level of support to civil authorities is likely to be more significant during large disasters and catastrophes. Second, DOD said that the title of the report is misleading because it does not recognize DOD’s extensive planning and exercise schedule prior to August 29, 2005, such as specific preparations in response to six 2005 hurricanes. We added additional information about these efforts. However, we continue to believe that the title accurately reflects the report’s findings and recommendations. As stated in the report, DOD had periodically held modest military support to civil authorities exercises but the exercises used underlying assumptions that were unrealistic in preparing for a catastrophe. We also note that DOD’s comments acknowledge the need to improve its plans and exercises. In fact, DOD’s comments acknowledged the need to conduct at least one fully integrated major exercise with the Department of Homeland Security each year rather than the separate exercises that have been conducted in the past. DOD also commented on our four recommendations, partially concurring with each of them. With respect to our first recommendation—to revise the NRP to fully address the proactive functions that the military will be expected to perform during a catastrophic incident—DOD said that proactive military functions can be identified in all 15 major disaster scenarios and said it is working with the Department of Homeland Security to revise the NRP. While DOD stated that the long-term focus of the U.S. government should be to develop more robust domestic disaster capabilities within the Department of Homeland Security, it acknowledged that DOD will need to assume a more robust response role in the interim period, and when other responders lack the resources and expertise to handle a particular disaster. With respect to our second recommendation that concerned the development of detailed plans and exercises, DOD listed a number of steps it is taking to improve its disaster response planning and exercises and said that consistent with its Strategy for Homeland Defense and Civil Support the active component should complement, but not duplicate, the National Guard’s likely role as an early responder. The DOD comments also said that planning and exercises should include local, state, and federal representatives and should stress the responders with the highest degree of realism possible—to the breaking point if possible. However, the comments said that logistics planning and execution is the clear responsibility of FEMA and individual states, and DOD would remain ready in a supporting role. We agree with DOD that effective disaster plans and exercises require stressing scenarios with the active participation of representatives from all levels of government. We also agree that FEMA and states have logistics responsibilities. However, we continue to believe that DOD should plan and prepare to assume additional emergency support function responsibilities during catastrophes when other responders may be overwhelmed. DOD also partially concurred with our third recommendation—that the Chief of the National Guard Bureau work with the state governors and adjutants general to develop and maintain a list of the types of capabilities the National Guard will likely provide in response to domestic natural disasters under state-to-state mutual assistance agreements, along with the associated units that will provide these capabilities. DOD said that it was not feasible to identify the specific units that would provide these capabilities and requested that we modify our recommendation to say units that “could” provide these capabilities rather than units that “will” provide those capabilities. We agree and have adjusted our recommendation. In addition, DOD listed steps the U.S. Northern Command is taking to better understand the capabilities of National Guard units and it stated that the National Guard is creating a database to facilitate planning its employment in support of the homeland. As part of the database implementation, the National Guard Bureau has identified a need to place a contractor in each of its Joint Force Headquarters-State locations. Finally, DOD partially concurred with our recommendation that it identify the types of scaleable federal military capabilities and units that will provide those capabilities in response to the full range of domestic disasters and catastrophes covered by DOD’s defense support to civil authorities plans. DOD noted that it has developed scalable capability packages in conjunction with pre-scripted requests for assistance and Northern Command’s Contingency Plan 2501, which is scheduled to be signed in the spring of 2006. However, because DOD’s forces can be used to meet many different types of missions, DOD requested that we modify our recommendation to say identify the types of scaleable federal military capabilities and units that “could” (rather than “will”) provide those capabilities. We agree and have adjusted our recommendation. DOD also provided technical comments, which we incorporated as appropriate. DOD’s written comments are reprinted in their entirety in appendix III. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commandant of the Marine Corps; the Chairman of the Joint Chiefs of Staff; the Commander, U.S. Northern Command; the Chief of the National Guard Bureau; the Director of the Defense Logistics Agency; the Director, Office of Management and Budget; and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-9619 or pickups@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributors to this report are listed in appendix IV. To address our objectives, we interviewed officials from DOD, the National Guard, the military services, and defense agencies that participated in the response to Hurricane Katrina. In addition, we reviewed military time lines, after-action reports, lessons learned studies, briefings, congressional testimonies, and other documents. During our review, we met with and obtained information from officials in the following organizations. Office of the Under Secretary of Defense Comptroller, Arlington, Va. Office of the Under Secretary of Defense for Policy, Arlington, Va. Office of the Secretary of Defense, Office of the General Counsel, Arlington, Va. Office of the Deputy Under Secretary of Defense for Industrial Policy, Arlington, Va. Office of the Deputy Under Secretary of Defense for Logistics & Material Readiness, Arlington, Va. Office of the Assistant Secretary of Defense for Health Affairs, Arlington, Va. McHale-Mauldin Hurricane Katrina Task Force, Arlington, Va. Joint Staff Director of Military Support, National Military Command Center, Arlington, Va. Defense Logistics Agency, Ft. Belvoir, Va. Office of the Inspector General, Logistics Management Division, Arlington, Va. Defense Intelligence Agency, Washington, D.C. U.S. Strategic Command, Joint Functional Component Command for Intelligence Surveillance and Reconnaissance, Bolling Air Force Base, Washington, D.C. U.S. Northern Command, Peterson Air Force Base, Colorado Springs, Colo. U.S. Joint Forces Command, Atlantic Fleet Compound, Norfolk, Va. U.S. Transportation Command, Scott Air Force Base, Ill. U.S. Army Forces Command, Headquarters, Fort McPherson, Ga. First U.S. Army, Fort Gillem, Ga. Fifth U.S. Army/ Army North, Fort Sam Houston, San Antonio, Tex. U.S. Army Reserve Command, Fort McPherson, Ga. Surface Distribution and Deployment Command, Alexandria, Va. 2nd Brigade Combat Team, 1st Cavalry Division, Fort Hood, Tex. 13th Corps Support Command Fort Hood, Tex. 82nd Airborne Division, Fort Bragg, N.C. Fleet Forces Command, Naval Station Norfolk , Norfolk, Va. Joint Force Maritime Component Command, Naval Station Norfolk, Norfolk, Va. 2nd Fleet, Naval Station Norfolk, Norfolk, Va. USS Iwo Jima USS Truman USS Bataan Military Sealift Command, Washington, D.C. First Naval Construction Division, Little Creek Amphibious Base, Norfolk, Va. Naval Facilities Engineering Command, Norfolk, Va. Headquarters Marine Corps Plans, Policies, and Operations Department, Arlington, Va. Marine Corps Forces Command, Naval Station Norfolk, Norfolk, Va. 2nd Marine Expeditionary Force, Camp Lejeune, N.C. 24th Marine Expeditionary Unit, Camp Lejeune, N.C. Operations Group, Arlington, Va. National Security Emergency Preparedness, Arlington, Va. Joint Force Air Component Command, 1st Air Force, Tyndall Air Force Base, Panama City, Fla. Air Mobility Command, Scott Air Force Base, Ill. Air Combat Command, Langley Air Force Base, Va. Joint Task Force Katrina, New Orleans, La. Task Forces Pelican and Eagle, Louisiana National Guard, Camp Beauregard, La. National Guard Bureau, Arlington, Va. Louisiana National Guard, Baton Rouge, La. Louisiana National Guard, Carville, La. Assistant Adjutant General, Mississippi Army National Guard, Gulfport, Miss. 186th Air Refueling Wing, Mississippi Air National Guard, Meridian, Miss. 172nd Airlift Wing, Mississippi Air National Guard, Jackson, Miss. Joint Forces Headquarters, Indiana National Guard, Indianapolis, In. 38th Infantry Division (Mechanized), Indianapolis, In. Joint Forces Headquarters, Kansas National Guard, Topeka, Ks. 35th Infantry Division (Mechanized) Ft. Leavenworth, Ks. Joint Force Headquarters, Jackson, Ms. To assess the extent to which pre-Katrina plans and training exercises reflected the military assistance that might be required during a catastrophic, domestic, natural disaster, we analyzed planning and directive documents related to military support to civil authority, such as the Strategy for Homeland Defense and Civil Support, and the Military Support and Assistance to Civil Authorities directives, and state plans. In analyzing these documents and others, we determined the extent to which they addressed a mechanism for the integration of forces and established a process to identify and communicate the military capabilities available to civil authorities or those that could be sent by DOD following a disaster or catastrophic event. We also reviewed after-action reports from training exercises to determine whether assumptions for the exercises were realistic in light of recent catastrophic disasters, to establish the level of military involvement in recent disaster planning exercises, and to determine whether the training scenarios exercised available military capabilities. We discussed our analysis with officials from the Office of the Assistant Secretary of Defense for Homeland Defense, Northern Command, the National Guard Bureau, and others to determine the extent to which the directives, plans, and lessons from exercises adequately supported the military’s response to civil authority after Hurricane Katrina. To examine the support that the military provided in responding to Katrina and factors that affected that response, we obtained briefings and reports describing the military’s response to Hurricane Katrina in Louisiana and Mississippi. We compared and contrasted data collected and resolved discrepancies through interviews with officials from DOD, state National Guard forces, Joint Task Force Katrina, and service, and state officials. We specifically examined the time line of the military’s response, the size and nature of the forces that responded, and the challenges faced in supporting civil authorities. To compare this response to prior military responses, accounting for differences in storms, we analyzed testimony and reports about the military’s response to other natural disasters. We analyzed relevant documents and lessons learned reports from the military to specifically examine the damage assessment, logistics, communication, search and rescue, and security/law enforcement response to determine if previously identified concerns had been addressed prior to Hurricane Katrina. Additionally, to determine what actions, if any, the military is taking to address lessons learned from Katrina, we collected and analyzed briefings and lessons learned reports from organizations participating in the response. We discussed recommended actions from lessons learned reports and how the military plans to improve its response to future disasters with officials from DOD and the National Guard Bureau. We conducted our work from September 2005 through April 2006 in accordance with generally accepted government auditing standards. Department of Housing and Urban Development DHS = Department of Homeland Security. FEMA = Federal Emergency Management Agency. The following are GAO’s comments on the Department of Defense letter dated May 5, 2006, and its attachments. 1. See the “Agency Comments and Our Evaluation” section, which begins on page 36. 2. Many of the actions DOD cites were not completed when we ended our review, and several are still not completed, so we cannot evaluate their effectiveness. We continue to believe that “DOD is beginning to take action” is accurate. 3. Our report distinguishes between disasters and catastrophes and emphasizes the need to plan for extensive use of DOD capabilities during catastrophes, when other responders are overwhelmed. Our report does not call for expanded use of DOD capabilities during disasters. 4. See the comments on our first recommendation in the “Agency Comments and Our Evaluation” section. 5. See the comments on our second recommendation in the “Agency Comments and Our Evaluation” section. 6. See the comments on our third recommendation in the “Agency Comments and Our Evaluation” section. 7. USTRANSCOM is one of the agencies that would be included in our recommendation that the National Guard Bureau make the information available to “other organizations with federal military support to civil agency planning responsibilities.” 8. See the comments on our fourth recommendation in the “Agency Comments and Our Evaluation” section. 9. We have addressed this comment in the report. 10. Our report makes reference to DOD’s use of reconnaissance assets during Hurricane Rita. 11. While we have added additional information about DOD’s integration efforts, these additional efforts do not diminish our finding that integration problems led to inefficiencies and duplication of effort. 12. Although aviation officials expressed safety concerns to us, we agree that the fact that military search and rescue efforts were conducted under extreme conditions without any aviation accidents constitutes a considerable accomplishment, so we have revised our search and rescue section. 13. We evaluated these technical comments and incorporated them as appropriate. 14. Our report recognizes that the military forces, which responded to Hurricane Katrina, were operating within existing regulatory and policy guidelines, such as the NRP, DOD’s Strategy for Homeland Defense and Civil Support, and the current mobilization authorities, and the report recommends adjustments to some of these guidelines. 15. The focus of this report was the preparation for and response to Hurricane Katrina, not Hurricanes Rita and Wilma. However, where appropriate, we have incorporated information about lessons learned from Katrina, such as the use of reconnaissance assets to assess damage from Hurricane Rita. 16. We modified the report to show that commands had issued planning and warning orders prior to Katrina’s landfall. However, our report emphasizes the need for deliberative, advanced planning in addition to crisis action planning. 17. We continue to believe that the solution to long-standing damage assessment problems requires military involvement. 18. The First Army comments provide additional information about the aviation picture over New Orleans, but as stated in the report, search and rescue tasks were being assigned from two sites that were not integrated. This led to some duplication of effort. 19. Military officials told us that many of their troops worked directly with local officials and performed whatever tasks were most needed. They said that many of these tasks were not captured in official statistics or mission assignments. 20. We agree that some operational overlap was inevitable, but limitations in planning led to inefficiencies and some duplication of effort. In addition to the contact named above, the following individuals also made contributions to this report: John Pendleton, Assistant Director; Krislin Bolling; Ann Borseth; Alissa Czyz; Amy Dingler; Michael Ferren; Richard Geiger; Kenya Jones; Tina Kirschbaum; Patricia Lentini; Brian Mateja; Thomas Mills; Elizabeth Morris; Robert Poetta; Gina Saylor; Natalie Schneider; Frank Smith; Leo Sullivan; and Steve Woods. Reserve Forces: Actions Needed to Better Prepare the National Guard for Future Overseas and Domestic Missions. GAO-05-21. Washington D.C.: November 10, 2004. Reserve forces: Observations on Recent National Guard Use in Overseas and Homeland Missions and Future Challenges. GAO-04-670T. Washington D.C.: April 29, 2004. Homeland Defense: DOD Needs to Assess the Structure of U.S. Forces for Domestic Military Missions. GAO-03-670. Washington D.C.: July 11, 2003. Chemical Weapons: FEMA and Army Must Be Proactive in Preparing States for Emergencies. GAO-01-850. Washington D.C.: August 13, 2001. Military Personnel: Full Extent of Support to Civil Authorities Unknown but Unlikely to Adversely Impact Retention. GAO-01-9. Washington D.C.: January 26, 2001. Military Operations: DOD’s Disaster Relief Assistance in Response to Hurricane Mitch. GAO/NSIAD-99-122R. Washington D.C.: March 29, 1999. Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington D.C.: March 8, 2006. Disaster Management: Improving the Nation’s Response to Catastrophic Disasters. GAO/RCED-93-186. Washington D.C.: July 23, 1993. Disaster Management: Recent Disasters Demonstrate the Need to Improve the Nation’s Response Strategy. GAO/T-RCED-93-46. Washington D.C.: January 27, 1993. Disaster Assistance: DOD’s Support for Hurricane Andrew and Iniki and Typhoon Omar. GAO/NSIAD-93-180. Washington D.C.: January 18, 1993. Interagency Contracting: Problems with DOD’s and Interior’s Orders to Support Military Operations. GAO/T-RCED-93-46. Washington D.C.: January 27, 1993. | Hurricane Katrina was one of the largest natural disasters in U.S. history. Despite a large deployment of resources at all levels, many have regarded the federal response as inadequate. GAO has a body of ongoing work that covers the federal government's preparedness and response to hurricanes Katrina and Rita. Due to widespread congressional interest, this review was performed under the Comptroller General's authority. It examined (1) the extent to which pre-Katrina plans and training exercises reflected the military assistance that might be required during a catastrophic, domestic, natural disaster, (2) the military support provided in response to Katrina and factors that affected that response, and (3) the actions the military is taking to address lessons learned from Katrina and to prepare for the next catastrophe. The military mounted a massive response to Hurricane Katrina that saved many lives and greatly assisted recovery efforts but many lessons are emerging. Prior to Hurricane Katrina, disaster plans and exercises did not incorporate lessons learned from past catastrophes to fully delineate the military capabilities needed to respond to a catastrophe. For example, the government's National Response Plan made little distinction between the military response to a smaller regional disaster and its response to a catastrophic natural disaster. In addition, DOD's emergency response plan for providing military assistance to civil authorities during disasters lacked adequate detail. The plan did not: account for the full range of assistance that might be provided by DOD, divide tasks between the National Guard and the federal responders, or establish response time frames. National Guard state plans were also inadequate and did not account for the level of outside assistance that would be needed during a catastrophe, and they were not synchronized with federal plans. Moreover, plans had not been tested with a robust exercise program. None of the exercises that were conducted prior to Katrina called for a major deployment of DOD capabilities in response to a catastrophic hurricane. As a result, a lack of understanding exists within the military and among federal, state, and local responders as to the types of assistance and capabilities that DOD might provide in the event of a catastrophe, the timing of this assistance, and the respective contributions of the active-duty and National Guard forces. Despite the lack of planning, the military took proactive steps and responded with about 50,000 National Guard and 20,000 active federal personnel. Based on its June 2005 civil support strategy, DOD relied heavily on the Guard during the initial response. Active duty forces were alerted prior to landfall and key capabilities such as aviation, medical, and engineering forces were initially deployed. Growing concerns about the magnitude of the disaster prompted DOD to deploy large, active ground units to supplement the Guard beginning about 5 days after landfall. Several factors affected the military's ability to gain situational awareness and organize and execute its response, including a lack of timely damage assessments, communications difficulties, force integration problems, uncoordinated search and rescue efforts, and unexpected logistics responsibilities. Without detailed plans to address these factors, DOD and the federal government risk being unprepared for the next catastrophe. DOD is examining the lessons learned from its own reviews and those of the White House and the Congress, and it is beginning to take actions to address the lessons and prepare for the next catastrophe. It is too early to evaluate DOD's actions, but many appear to hold promise. However, some issues identified after Katrina such as damage assessments are long-standing problems that were identified by GAO after Hurricane Andrew in 1992. They will be difficult to address because they are complex and cut across agency boundaries. Thus, substantial improvement will require sustained attention from the highest management levels in DOD, and across the government. |
Since 2000, we have identified problems ranging from significant cost and schedule overruns on major projects to ineffective oversight of safety and security at NNSA and EM sites, indicating that DOE and NNSA continue to face challenges in ensuring the effectiveness of their oversight efforts. Examples, in chronological order, of the problems on which we have reported and where ineffective oversight was identified as a cause include the following: 2004: a suspension—or stand-down—of operations at one NNSA laboratory to address systemic safety and security concerns identified after an undergraduate student was partially blinded in a laser accident and two classified computer disks were reported missing; 2006: the discovery of a large number of classified documents and electronic files that had been unlawfully removed from an NNSA laboratory as a result of a drug raid on a private residence; 2007: nearly 60 serious accidents or near misses including worker exposure to radiation, inhalation of toxic vapors, and electrical shocks at three nuclear weapons laboratories from 2000 through 2007; 2008: the identification of significant protective force weaknesses (i.e., 13 specific deficiencies) during an independent physical security evaluation of an NNSA laboratory that included a force-on-force exercise to simulate an attack on a sensitive facility; 2012: 11 public hearings held since 2002 to address concerns about DOE’s safety practices by the Defense Nuclear Facilities Safety Board—an independent executive branch agency created by Congress to independently assess safety conditions and operations at defense nuclear facilities at DOE’s sites, including NNSA and EM; 2012: a serious security breach at an NNSA production plant—the Y- 12 National Security Complex (Y-12) near Oak Ridge, Tennessee—in which three trespassers gained access to the protected area directly adjacent to one of the nation’s most critically important nuclear weapon-related facilities before being interrupted by the security measures in place, resulting in the identification of multiple and unprecedented security system failures; and 2014: operations were shut down at WIPP following an underground fire involving a vehicle and, 9 days later, an unrelated radiological event occurred when a nuclear waste container breached underground at WIPP, contaminating a portion of the WIPP facility and releasing a small amount of contamination into the environment. DOE and NNSA policies and orders concerning oversight of M&O contractors have evolved over time and now require that each DOE M&O contractor—including those overseen by NNSA and EM—have a CAS. In April 2002, in an internal memorandum, DOE outlined an approach for improving contract performance and promoting greater contractor accountability by, among other things, moving from an oversight approach focused on compliance with requirements contained in DOE orders and directives to relying on contractor management information provided through CAS to establish accountability and drive improvement. In 2005, DOE issued DOE Policy 226.1, Department of Energy Oversight Policy, and followed it with an associated implementing order requiring that assurance systems be implemented by DOE M&O contractors, among others, to encompass all aspects of the activities designed to identify deficiencies and opportunities for improvement. The focus of this DOE policy and order was to drive continuous improvement through contractor self-assurance and effective federal oversight. In March 2010, the Deputy Secretary of Energy announced a reform effort to revise DOE’s safety and security directives and modify the department’s oversight approach to “provide contractors with the flexibility to tailor and implement safety without excessive federal oversight or overly prescriptive departmental requirements.” In the memorandum announcing this effort, the Deputy Secretary noted that oversight of contractors’ activities at DOE and NNSA sites had become excessive and that burdensome safety requirements were affecting the productivity of work at DOE’s sites. The memorandum stated that reducing this burden on contractors would lead to measurable productivity improvement. In February 2011, NNSA issued a policy (NAP-21) with the purpose of providing further direction to NNSA officials and M&O contractors about the framework for the oversight model. Later in 2011, DOE issued Policy and Order 226.1B, which updated DOE’s oversight policy. While the previous DOE oversight policy and order were focused on driving continuous improvement, the 2011 versions—which are still in use—focus on improving the efficiency and effectiveness of DOE oversight programs by leveraging the processes and outcomes of CAS to reduce direct, hands-on oversight, when appropriate. Under the oversight framework, federal overseers are to continue to give additional oversight emphasis to high-hazard and high-risk operations, but where it can be determined that risk is lower and contractor-generated information in CAS is reliable, federal oversight can rely more on information from CAS. NAP-21, which similarly focuses on the oversight efficiencies that can be gained by appropriately leveraging information from CAS, specifically applies to NNSA and its M&O contractors and elaborates on the more general DOE oversight policy and order by (1) developing an approach for federal officials to use in determining the appropriate mix of oversight activities for different contractor-performed functions and (2) by establishing a process by which NNSA would affirm the effectiveness of both CAS implementation by the contractor and the federal oversight approach at each site in the nuclear security enterprise. First, NAP-21 describes a spectrum of approaches that can be employed by NNSA officials to oversee M&O contractors. On one side of the spectrum is “transaction-based oversight,” or direct, hands-on oversight activities to test or observe contractors’ performance through such mechanisms as on-site reviews, facility inspections, and other actions that involve direct evaluation of contractor activities. On the other side of the spectrum is “systems-based oversight,” where federal overseers rely on contractors’ processes and information from their CAS. NAP-21 calls for NNSA to use a mix of systems-based and transaction-based oversight approaches in overseeing contractors’ performance and provides a framework for determining the appropriate mix of these approaches based on the results of a three-pronged evaluation: (1) a risk assessment that analyzes the likelihood that an event will occur that adversely affects the achievement of mission or program objectives or harms human health or the environment; (2) a CAS maturity assessment that establishes the level of confidence NNSA officials have in the adequacy of performance information developed by the contractor and the ability of the contractor to effectively identify and address performance weaknesses; and (3) an assessment that considers the contractors’ prior performance for a specific activity. NNSA’s oversight framework allows for the oversight for any particular activity to range from primarily transaction-based oversight to primarily systems-based, or anywhere in between based on the outcome of these three assessments. Figure 1 shows the factors—as described in NAP-21—that should be considered by NNSA officials in determining an appropriate oversight approach. NAP-21 anticipates that, over time, as contractors’ CAS mature, NNSA officials will use transaction-based oversight primarily for areas of highest risk and hazard, and systems-based oversight for lower risk and hazard activities where they can rely more heavily on a contractor’s CAS. Second, NAP-21 includes a process, known as “affirmation,” designed for a federal assessment review team—composed of staff from NNSA program offices and field offices—to review each field office’s mix of oversight approaches and practices, as well as implementation of each M&O contractor’s CAS. The goal of the review is to affirm that each contractor has a fully implemented and reliable CAS and that each field office’s approach to oversight is appropriate. According to senior agency officials, these affirmation reviews were envisioned as a crucial element in ensuring the effectiveness of NNSA’s overall approach to contractor oversight across the nuclear security enterprise. In addition, as the nation’s only permanent disposal site for certain types of defense nuclear waste, key nuclear weapons missions depend on the availability of DOE’s WIPP in order to continue their own operations. WIPP’s operations were suspended in February 2014 following the underground vehicle fire and unrelated radiological event. In April 2015, DOE formally determined that the nuclear waste container that breached resulting in the radiological event at WIPP was packaged at NNSA’s Los Alamos National Laboratory (LANL). At the time of the 2014 incident at WIPP, waste packaging operations at LANL, were overseen by NNSA’s Los Alamos Field Office in coordination with EM’s CBFO, which provided additional verification by certifying packaged radioactive waste containers to ensure they met criteria set by CBFO for disposal in WIPP. At WIPP itself, oversight of the M&O contractor is led by EM through the CBFO. In our May 2015 report, we found that NNSA has not fully established policy or guidance to support determining appropriate approaches to overseeing its M&O contractors, including for using information from CAS. Specifically, we found that NNSA does not have complete policy or guidance to support the assessments NAP-21 requires for determining an effective approach to overseeing M&O contractors at each site. NAP-21 outlines the three-pronged evaluation framework NNSA officials are responsible to carry out in determining an appropriate mix of oversight approaches based on assessments of risk, CAS maturity, and past performance. However, NAP-21 does not provide detailed or comprehensive guidance to NNSA officials on how to conduct these assessments, and NNSA headquarters has not issued any additional guidance for this purpose. We found that DOE and NNSA have some policies and guidance that are relevant to conducting risk assessments for security and safety and, in some cases, for large construction projects. We did not, however, identify any headquarters-level policy or guidance for assessing CAS maturity, for assessing contractors’ past performance to inform an oversight approach, or for assessing risk in other areas. Without such policy or guidance, NNSA officials responsible for conducting assessments may do so inconsistently, and thus treat similar risks differently. Further, we found that NNSA did not complete a chapter of NAP-21, which appears in the policy’s table of contents with the title Requirements Analysis Process, but the corresponding page in the document simply notes that the details of the chapter would be developed at a later date. NNSA officials told us the content of this chapter was intended to establish a process for NNSA to identify requirements in DOE and NNSA orders and directives essential to support safe and effective mission accomplishment and that this identification could assist M&O contractors in identifying key performance measures that could be tracked in CAS to help contractors ensure their compliance with requirements. As a result of our findings, we recommended that NNSA establish comprehensive oversight polices including for using information from CAS to conduct oversight of M&O contractors and describing how to conduct assessment of risk, CAS maturity, and the level of the contractor’s past performance in determining an appropriate oversight approach. NNSA concurred with our recommendation and stated that it will cancel NAP-21 and instead issue a new corporate policy that will form a comprehensive framework for CAS in the context of ensuring safe, secure, and high- quality mission delivery. NNSA estimated it will complete this policy by September 30, 2015. In the absence of sufficiently detailed and comprehensive guidance from NNSA headquarters for determining an appropriate mix of oversight approaches, NNSA field offices responsible for day-to-day oversight of M&O contractors reported developing their own procedures for this purpose. As described in our May 2015 report, these officials reported that their field office procedures for assessing risk were complete, but that their procedures for assessing CAS maturity and past performance in determining an appropriate oversight approach were not always complete. In addition, we found substantial differences among the procedures field offices had that may affect NNSA’s ability to ensure consistent oversight of its contractors. For example, the five field offices that reported having complete procedures for assessing CAS maturity used different processes and scales for rating maturity. While each of these procedures may be effective for each field office’s purposes, these differences could affect the consistency with which NNSA’s field offices are determining an appropriate mix of oversight approaches across the nuclear security enterprise. We recommended that NNSA work with field office managers to establish field office procedures consistent with headquarters policy and guidance to support assessment practices for determining appropriate oversight approaches. NNSA concurred with our recommendation and stated that field offices will develop new or modify existing procedures, as appropriate, to support the new requirements and estimated the completion date for these activities is September 2016. Furthermore, field office officials have raised concerns that staffing levels and the mix of staff skills may not be adequate to conduct appropriate oversight in the near future and that this may result in overreliance on information from CAS without the ability to ensure that this information is sufficiently reliable. For example, in response to our survey of field offices conducted for our May 2015 report, six of NNSA’s seven field offices responded that having fewer staff to implement NAP-21’s approach to oversight is a challenge. Furthermore, five of seven field offices noted that not having certain subject matter experts is a challenge for oversight that could be exacerbated in the future as senior field office staff are expected to become retirement eligible. In a January 2013 report to DOE’s Federal Technical Capability Panel, one field office reported that its staffing levels were less than the number required to perform the oversight identified as necessary. This field office noted that staffing shortages were offset through support from other offices and increased reliance on contractor- generated information from CAS. The 2013 report did not indicate if the field office’s increased reliance on information from CAS for oversight was supported by the field office’s analysis of the risk of the activity, the maturity level of the contractor’s CAS, and contractor performance in the area. We found that NNSA has not assessed whether it has sufficient, qualified personnel to implement the oversight framework described in NAP-21. We recommended that NNSA assess staffing needs to determine whether it has sufficient qualified personnel to conduct oversight activities consistent with comprehensive polices and guidance, including use of information for CAS. NNSA concurred with our recommendation and stated that it will assess staffing needs by December 2016, to allow for field level policies and procedures to be considered in the development of the staffing strategy. We also found that NNSA headquarters discontinued affirmation reviews (the process established by NAP-21 for reviewing the effectiveness of contractors’ CAS implementation and field offices’ oversight approaches) effectively eliminating the primary internal control activity that NAP-21 included for the agency to evaluate oversight effectiveness across the nuclear security enterprise. Prior to discontinuing this process, NNSA conducted affirmation reviews at three sites—Sandia National Laboratories, the Nevada National Security Site, and the Y-12 National Security Complex—and all three reviews resulted in affirmations of the effective implementation of the contractor’s CAS and of the federal oversight approach. However, following the 2012 security incident at Y- 12—which occurred after NNSA affirmed the implementation and reliability of the contractor’s CAS and the effectiveness of the Y-12 field office’s mix of oversight approaches—NNSA discontinued its affirmation review process. According to NNSA officials, after investigating the root causes for the security lapse at Y-12, NNSA determined that its affirmation reviews focused too heavily on affirming that a CAS existed and covered the five required attributes of a CAS as outlined in NAP-21. According to NNSA officials, the affirmation reviews did not focus enough on evaluating the effectiveness of either the contractor’s CAS or the field office’s approach to determining the appropriate mix of systems- and transaction-based oversight. After discontinuing the affirmation reviews, NNSA initiated an Oversight Improvement Project to focus on evaluating the effectiveness of contractors’ CAS and field offices’ oversight approaches. However, a senior NNSA official told us the project was never completed, and NNSA has not developed another process in lieu of affirmation reviews. Discontinuing affirmation reviews without replacing them with another form of validation eliminates the internal control activity in NAP-21 to provide NNSA with assurance of oversight effectiveness across the nuclear security enterprise. Further, continuing a process to review the effectiveness of oversight approaches would have provided information allowing for oversight practices to be compared across field offices and for differences among them to be evaluated. According to NNSA headquarters and field officials, there is no current mechanism for this to occur. We recommended that NNSA reestablish a process for reviewing the effectiveness of field offices’ oversight approaches, including their determinations for how and when to use information from CAS. NNSA concurred with our recommendation and stated that its new corporate policy and guidance will outline such an approach for validating the effectiveness of the field office oversight activities and estimated the completion for the effort to be March 2016. Our preliminary observations on NNSA’s oversight of waste packaging activities at LANL parallel two of the findings from our recently released May 2015 report. Our preliminary observations are based on our review of specific sections of DOE’s Phase II accident investigation board report on the radiological release. First, with regard to our finding that NNSA has not fully established policies or guidance for using information from CAS to conduct oversight of M&O contractors, the accident investigation board report on WIPP found that NNSA’s Los Alamos Field Office was overreliant on CAS for environmental compliance oversight. The accident investigation board report also found that the field office did not adequately conduct transactional assessments of the contractor in areas such as environmental compliance and operations of the LANL facility where the TRU waste container that breached was processed and packaged. According to the accident investigation board report, the NNSA field office’s overreliance on the contractor-generated information in CAS was not consistent with a 2011 NNSA review that observed CAS was still maturing and that a strong NNSA field office oversight presence should continue. Moreover, the accident investigation board identified specific deficiencies in CAS such as inadequate contractor self-assessments regarding waste processing and packaging and concluded that CAS was not effective in identifying weaknesses that contributed to the incident. Under the oversight framework, determining that a CAS is not fully mature would result in a heavier reliance on transactions-based approaches to overseeing LANL’s waste packaging operations. Second, with respect to our finding that NNSA field office officials have raised concerns that staffing levels and the mix of staff skills may not be adequate to conduct appropriate oversight—which may result in overreliance on information from CAS—according to the accident investigation board report on WIPP Los Alamos Field Office officials attributed their overreliance on the information in CAS for environmental compliance oversight to a lack of resources to directly perform this oversight. The report also found that the field office did not have senior technical expertise, such as organic chemistry expertise, necessary for conducting adequate technical reviews related to the contractor’s processing of the TRU wastes, which were the source of the radiological release at WIPP. Our preliminary observations on DOE’s processes for overseeing the contractor responsible for managing and operating WIPP indicate that EM has not outlined an EM-specific policy framework for its field office officials to use in establishing and implementing effective oversight programs beyond the 2011 DOE oversight policy and order. However incomplete, NNSA developed NAP-21 in an effort to elaborate on DOE’s policy and order by providing an NNSA-specific oversight policy framework that included a three-pronged evaluation framework for determining an appropriate oversight approach. EM headquarters officials told us that EM does not provide its field offices supplemental EM-specific policy or other formal direction on how to use the broad DOE oversight order but encourages them to use DOE’s oversight guide focused on nuclear safety that provides suggested, not mandatory, approaches to designing and implementing field office oversight programs. For example, this guide describes site-specific conditions that field offices should consider in establishing oversight priorities and allocating oversight resources, including consideration of the types of nuclear facilities and their hazards and the status and effectiveness of the contractor’s CAS. At this point in our ongoing review, we are not aware of examples of direction provided to EM field offices to oversee M&O contractors’ performance in areas other than nuclear safety, such as business operations or safeguards and security. EM headquarters officials told us that EM provides field offices with evaluation guides that they can use to develop their evaluations of specific elements of a contractor’s nuclear facility safety program, such as the WIPP’s M&O contractor’s CAS. We have not yet evaluated the DOE oversight guide, EM’s reliance on it, or the evaluation guides EM has developed for its field offices, but we will do so as we complete our work. In conclusion, GAO has reported for years on the management challenges DOE faces, as well as specific safety and security incident such as the recent accident at WIPP. DOE’s management and oversight reform efforts have sought to address the conditions underlying safety and security failures, but recent events at WIPP show that more work is needed. Our recently released report concludes that NNSA does not have complete standards against which to measure whether oversight approaches are effective, including how information from CAS is being used for oversight. This is because NNSA does not have complete policy or guidance to implement the oversight framework and has discontinued its reviews intended to evaluate the effectiveness of field offices’ oversight approaches; also, in the absence of headquarters policy or guidance, its field offices have developed procedures that are not fully complete and differ. As a result, NNSA runs the risk of not using its oversight resources effectively, either by underutilizing information from CAS and missing opportunities for efficiency, or by overrelying on information from CAS and possibly missing contractor performance issues that put safety, security, or mission accomplishment at risk. With respect to the recent events at WIPP, these issues concern DOE as well. Chairman Murphy, Ranking Member DeGette, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact me at (202) 512-3841 or bawdena@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include David Trimble, Director; Daniel Feehan, Assistant Director; David Bennett; Richard Burkard; John Delicath; Brian M. Friedman; Carly Gerbig; Christopher Pacheco; Eli Lewine; Rebecca Shea; Rajneesh Verma; and Kiki Theodoropoulos. 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. | A 2005 DOE policy required the department's M&O contractors to implement assurance systems to drive continuous improvement through contractor self-assessment and effective federal oversight. A policy change in 2011 sought to improve the efficiency and effectiveness of DOE oversight programs by leveraging the contractor-generated information from CAS to reduce hands-on oversight, when appropriate. Also, in 2011, NNSA developed a framework for overseeing its M&O contractors, including a three-pronged evaluation for determining how and when to use information from CAS by evaluating the risk of contractors' activities, contractor's past performance, and the maturity of their CAS. Recent security and safety incidents at DOE and NNSA sites, including a 2014 nuclear waste accident, have caused some to question the extent to which information from CAS can be relied on for overseeing M&O contractors. This testimony discusses NNSA's policy and procedures for implementing the framework, including its use of information from CAS and its process for evaluating oversight effectiveness. Based mainly on GAO's May 2015 report ( GAO-15-216 ), it also discusses preliminary observations from ongoing work related to the 2014 accident for which GAO is analyzing NNSA and DOE policies and guidance on oversight and accident investigation reports completed by DOE and others In May 2015, GAO found that the Department of Energy's (DOE) National Nuclear Security Administration (NNSA) had not fully established policy or guidance for using information from contractor assurance systems (CAS) to conduct oversight of management and operating (M&O) contractors. NNSA did not provide comprehensive guidance to agency officials on how to conduct assessments required by its oversight framework. In particular, NNSA did not provide guidance for assessing the maturity of contractors' CAS to determine whether information from these systems is sufficiently reliable for oversight purposes. As a result, NNSA cannot ensure that it is appropriately relying on information from CAS in overseeing these contractors. NNSA agreed with GAO's recommendation to establish a comprehensive oversight policy, including for assessments to determine how to use information from CAS for oversight. In the absence of headquarters level policy or guidance, GAO found in May 2015 that NNSA field offices established their own procedures for determining appropriate oversight approaches, but these procedures were not always complete, and they differed. For example, five of NNSA's seven field offices reported having complete procedures for assessing CAS maturity, but these procedures described different processes and rating scales for conducting such assessments, which could affect the consistency of how field offices determine oversight approaches. NNSA agreed with GAO's recommendation for field offices to develop new or modify existing procedures consistent with new headquarters policy. NNSA's 2011 policy included a process for validating the effectiveness of field offices' oversight approaches, including the extent to which their approaches appropriately used information from CAS, but GAO found in May 2015 that NNSA discontinued this process after determining that it had not been effective. Discontinuing this process without replacing it eliminated NNSA's internal control for ensuring the effectiveness and consistency of oversight approaches. NNSA agreed with GAO's recommendation to reestablish such a process. Preliminary observations from GAO's ongoing work to evaluate the 2014 nuclear waste accident at DOE's Waste Isolation Pilot Plant in New Mexico parallel GAO's findings on NNSA's framework for contractor oversight. For example, DOE's accident investigation board reported that the NNSA field office responsible for overseeing waste packaging and processing overrelied on contractor-generated information from CAS instead of directly conducting assessments and that the decision to do so was inconsistent with a 2011 NNSA review, which concluded the contractor's CAS was still maturing. GAO made several recommendations in its May 2015 report with which NNSA concurred and for which it plans to take action. |
Concerns about discrimination in the credit markets, particularly in the market for home mortgages, have existed for some time and have recently moved to the fore among civil rights issues. This resurgence of interest is due in large part to repeated reports in the media and elsewhere suggesting that the problem of lending discrimination is of such magnitude that it demands immediate and increased public attention. Most prevalent among these reports are ad hoc statistical analyses of data collected under the Home Mortgage Disclosure Act (HMDA), which reveal that applicants who are members of various racial and ethnic groups are more likely to be denied credit for a home mortgage than are white applicants with comparable incomes. In addition, a few widely-cited econometric studies of mortgage lending decisions have also reported results that indicate that lenders discriminate against minority applicants. While none of these studies or analyses has offered conclusive evidence that lending discrimination is pervasive or represents an industrywide problem, their collective weight has raised concerns. In light of these continuing reports, Congress and others have questioned the effectiveness of supervision and oversight in the fair lending area and the zeal with which the nation’s antidiscrimination laws governing the credit markets have been enforced. As a consequence, responsible federal agencies have rededicated themselves to upholding the fair lending laws, and have revamped outdated supervisory and compliance policies as well as examination procedures in the fair lending area. Even so, the fair lending laws still pose many difficult policy and legal questions and offer a number of operational challenges to federal oversight enforcement efforts. This report responds to a request from the former Chairmen of the House Committee on Banking, Finance and Urban Affairs, and its Subcommittee on Consumer Credit and Insurance, asking us to review federal efforts to oversee and enforce the nation’s “fair lending laws”—principally the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)—and to discuss the challenges federal regulators face in their efforts to detect discrimination and ensure compliance. In conjunction with the Chairmen’s request to review enforcement of the fair lending laws, we were also asked to evaluate compliance with the Community Reinvestment Act (CRA) and report on the strengths and weaknesses of current reform efforts. Our response to the request regarding CRA is contained in a separate report. During the late 1960’s and 1970’s, Congress enacted a number of laws for the purpose of ensuring fair and equitable access to credit for both individuals and communities. These laws included the Fair Housing Act (1968), the Equal Credit Opportunity Act (1974), the Home Mortgage Disclosure Act (1975), and the Community Reinvestment Act (1977). Two of these laws, ECOA and FHA, comprise the federal antidiscrimination statutes applicable to lending practices and have become commonly referred to as the “fair lending laws.” Additionally, HMDA, as amended in 1988, is intended to support enforcement of ECOA, FHA, and CRA by requiring certain lending institutions to provide federal regulators and the public with information on mortgage loan applicants and borrowers. Such information can be useful in identifying possible discriminatory lending patterns. Unlike ECOA and FHA, HMDA does not prohibit any specific activity of lenders, but only establishes a reporting obligation for particular institutions. For more detail on the scope, applicability, and evolution of these laws and their related implementing regulations, see appendix I. General rulemaking authority for implementing the fair lending laws is divided between the Federal Reserve Board (FRB), which has such authority for ECOA and HMDA, and the Department of Housing and Urban Development (HUD), which has similar authority for FHA. Oversight and enforcement responsibilities, however, are divided among at least 12 separate federal agencies, including but not limited to the 5 federal banking regulatory agencies, the Department of Justice (DOJ), HUD, the Federal Trade Commission (FTC), the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), the Securities and Exchange Commission (SEC), and the Farm Credit Administration (FCA). These agencies use varying approaches to discharge their oversight and enforcement responsibilities. For depository institutions, compliance with ECOA, FHA, and HMDA is primarily assessed through regularly scheduled consumer compliance examinations conducted by the federal bank regulators. These agencies are also responsible for administrative enforcement of both ECOA and HMDA, whereas HUD has such authority for FHA (and for HMDA in the case of independent mortgage companies). In addition, federal regulatory agencies are required to refer to DOJ any matter in which an agency has reason to believe that a pattern or practice of lending discrimination has occurred. Moreover, the agencies are also required to notify HUD of apparent FHA violations. In contrast, mortgage companies and other nondepository lending institutions are generally not subject to regularly scheduled compliance examinations, but may be periodically investigated for noncompliance by their primary regulator or HUD, DOJ, or FTC. In addition to federal supervision, private litigation also serves as a prominent enforcement method under the fair lending laws. Under both ECOA and FHA, however, private civil suits must be brought within prescribed periods—generally within 2 years of the date of the occurrence or termination of the alleged violation. Individual claimants under ECOA can recover actual damages and punitive damages up to $10,000. In class action suits, punitive damages are limited to the lesser of $500,000 or 1 percent of the institution’s net worth. Under FHA, plaintiffs can also recover both kinds of damages, but the amount of punitive damages is not limited. To assist private enforcement of FHA, amendments to FHA in 1988 created within HUD an administrative system within which a complainant could pursue a fair lending complaint at little or no cost. Within HUD’s system, a case can be heard in a formal administrative proceeding before an administrative law judge, or the complainant or respondent can elect to move the case to federal district court. The objectives of this study were to (1) review recent federal efforts to oversee and enforce the fair lending laws and (2) discuss the challenges federal regulators face in their efforts to detect discrimination and ensure compliance. To achieve this, we began by reviewing the legislative and case history of the laws to discern their original intent and to see how the interpretation of that intent has evolved over time. We also undertook an extensive review of the literature on lending discrimination. We then interviewed officials from the five federal banking regulatory agencies, HUD, and DOJ. These interviews served to help us more fully understand the existing regulatory system, including the practices and procedures used to detect discrimination, and the policies in place to deal with violations, especially violations of a serious or substantive nature. Information and documentation regarding various aspects of the agencies’ fair lending oversight and enforcement activities were collected from all of the federal banking regulators, HUD, FTC, and DOJ. Also, the impressions and experiences of 40 bank compliance officers and agency examiners, who were participants in compliance examinations during 1993, were obtained through surveys and interviews. These surveys and interviews were conducted as part of our work related to our review of CRA. In that review, the case study approach was used to review in detail compliance examinations at 40 banks and thrifts. The institutions included in the review were judgmentally chosen to represent a cross section of geographic areas, federal banking regulatory agencies, and depository institutions. Of the institutions studied, 6 were examined by FRB, 13 by FDIC, 9 by OCC, and 12 by OTS. In addition to contacts with federal agency officials, we also judgmentally selected and interviewed individuals from the banking industry, industry trade groups, and consumer groups, as well as a number of private consultants, academic and legal experts, and officials at firms active in the secondary mortgage market. We also attended workshops and conferences on fair lending sponsored by a variety of industry and community groups, professional law associations, and the federal banking regulatory agencies. Finally, we reviewed letters submitted by bankers and other concerned parties responding to public policy statements and proposed rule changes related to the fair lending laws. We did the work underlying this report between January 1994 and December 1995 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from FRB, FDIC, OCC, OTS, NCUA, HUD, and DOJ. Their written comments, along with our evaluation, are summarized at the end of chapter 4 and are presented in appendixes VI through XII. The fair lending laws prohibit discrimination with regard to any aspect of a consumer, commercial, or real estate credit transaction based on a number of protected personal characteristics, including but not limited to race, color, religion, gender, and national origin. However, interpretation and applicability of the fair lending laws is unclear in a number of areas and federal regulatory agencies have had to translate and apply the laws to a wide variety of lending practices, including some that are not specifically mentioned in the statutes. Lenders, federal regulators, and consumers have not always agreed on these interpretations. As a result, there has been, and continues to be, some controversy and confusion regarding the scope and applicability of the laws and what it means in practice to discriminate against a credit applicant. Moreover, this uncertainty has been compounded by numerous difficulties encountered in measuring and assessing the nature of lending discrimination. In fair lending cases, courts and the federal agencies have adopted the analytical framework applicable to employment discrimination cases under Title VII of the Civil Rights Act of 1964. Under this framework, two methods of analysis are used to evaluate discrimination claims. The first method, known as disparate treatment analysis, determines whether a borrower has been treated less favorably than his or her peers due to race, sex, or other characteristic that places the individual within a group protected by ECOA or FHA. The second method, known as disparate impact analysis, determines (a) whether a seemingly innocuous lending policy or practice has a disproportionately adverse effect on a protected group and, if so, whether the policy or practice can be justified by business necessity; and (b) whether a less adverse alternative to such a policy or practice exists. Both of these tests have generally recognized that discriminatory behavior can enter the credit search and lending processes in a number of forms and at various stages. For example, the courts have held that discrimination can be blatant or it can consist of extremely subtle behavior that may leave the victim or victims unaware that they have been treated unfairly. Furthermore, the courts have ruled that in disparate impact cases, discrimination can occur even without actual, subjective animus against an individual or a protected group. In other words, when a protected group is adversely affected, discrimination may be found even in the absence of any discriminatory intent. In practice, all potential violations of the fair lending laws have been categorized by federal regulators into three distinct types of discriminatory behavior: (1) blatant or overt, (2) disparate treatment, and (3) disparate impact (see table 2.1). To help lenders and examiners better understand the various forms that lending discrimination can take, the Interagency Task Force on Fair Lending released a policy statement in March 1994 that provides examples of the three types of discriminatory behavior and illustrates through hypothetical case examples the types of lending-related activities that might be considered to constitute illegal discrimination. Under ECOA and FHA, the statement explained, lenders may not, because of a prohibited factor, fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards; discourage or selectively encourage applicants with respect to inquiries about or applications for credit; refuse to extend credit or use different standards in determining whether vary the terms of credit offered, including the amount, interest rate, duration, or type of loan; use different standards to evaluate collateral; treat a borrower differently in servicing a loan or invoking default remedies; use different standards for pooling or packaging a loan in the secondary express, orally or in writing, a preference for or against protected discriminate because of a person associated with a credit application (for example, a co-applicant, spouse, business partner, or live-in aide); or discriminate because of the present or prospective occupants of the area where property to be financed is located. The policy statement is particularly notable in part because it represents the first time that the federal regulatory agencies comprising the Task Force have spoken with one voice on the subject of fair lending. As such, the respective agencies believe it represents a significant step in arriving at a uniform and effective fair lending policy. However, individual lenders and banking trade associations, while applauding the agencies’ efforts, have expressed serious concerns about certain aspects of the policy and its implementation. Among other things, lenders have expressed concern that the new fair lending policy will not be implemented in a manner consistent with safety and soundness; i.e., they are concerned that safety and soundness examiners will question the adequacy of relaxed underwriting standards for loans made to applicants in protected groups who may not otherwise be deemed creditworthy. Lenders have also voiced concern that enforcement will not be administered equitably across industry segments, since depository institutions are examined regularly for fair lending compliance and other lenders, like mortgage companies, are not. Lenders have further argued that, in some instances, the statement goes beyond the strictures of settled law, particularly with respect to disparate impact theory. In addition, the agencies’ interpretation of the fair lending laws could, lenders contend, result in unintended consequences in a number of areas. For example, bankers point out that the policy has the potential to eliminate so-called “character lending” by forcing the adoption of credit scoring systems in an effort to demonstrate that all applicants are treated alike. They suggest that this could actually restrict, rather than expand, credit to marginal applicants as banks amend underwriting criteria and practices to remove elements of judgment in the lending process. Hence, while the federal regulatory agencies and the lending industry are both on record as being committed to combating lending discrimination, the two do not necessarily agree on the legal definitions and techniques to be used in implementing fair lending policy. Much has been written on the topic of discrimination in housing and housing-related practices over the last 20 years, and reviews of the literature by a number of reputable researchers aptly assess and critique the myriad of individual studies related to those subjects. Upon review, the literature on discrimination in housing seems generally well developed, and there appears to be widespread recognition that discrimination in the housing market exists and has been and continues to be a serious problem. Evidence of racial and ethnic steering and discriminatory real estate marketing and advertising practices, for example, is particularly well documented. In contrast, the literature on the subject of lending discrimination is not nearly as extensive and a consensus has not yet been reached regarding the nature and pervasiveness of discrimination in the mortgage markets and elsewhere in the credit industry. Indeed, one scholar well known in the discrimination literature may have said it best when he observed that “given its social importance and media attention, it is staggering that researchers in fact have little definitive knowledge about the existence and severity of discrimination in mortgage markets.” The absence of consensus on the nature and pervasiveness of lending discrimination may be explained, at least in part, by the complexity of the lending process itself. The home-buying process, for example, is a multifaceted and perplexing process that involves many different participants. The process and the roles of the various agents, brokers, underwriters, insurers, lenders, and even the buyers themselves are not well understood. Additionally, the multifariousness of the process has presented a number of methodological obstacles to researchers that have not yet been resolved. Thus, our perspective is limited by the imprecise and often contradictory nature of the work to date. A description of the various press accounts, HMDA data analyses, statistical studies, and other sources of information is provided in appendix II. For example, statistical studies examining the lending discrimination issue have not yielded consistent results. Although several studies of loan application denial rates have reported finding evidence of disparate treatment among mortgage lenders, recent studies of redlining (the refusal of lenders to make loans in certain geographic areas regardless of the creditworthiness of the individual loan applicant) and mortgage default rates have generally not found such evidence. Additionally, a number of reputable researchers have argued that the findings from contemporary statistical studies are severely limited by the data sources, the accuracy of model specifications, and the current state of knowledge regarding the mortgage search and underwriting processes. Insights regarding the pervasiveness of discrimination from other sources have also proven to be contradictory. Information derived from the examination of depository financial institutions (together with information from consumer complaints), for example, has not indicated a major problem. In contrast, testing programs recently conducted around the country by private fair housing groups have exposed numerous instances of differential treatment during the mortgage application process. If confirmed by further tests, the findings from these programs would suggest a fair lending problem of greater dimensions. Hence, despite all that has been said and done, there remains much to be learned about the forms, occurrence, and magnitude of discrimination in the credit markets, particularly in markets other than the mortgage credit market. Prior to DOJ’s initiation of its first major fair lending investigation in 1989 against Decatur Federal Savings and Loan, federal efforts to detect, deter, and punish instances of lending discrimination were quite limited—confined for the most part to the examination programs of the federal banking regulatory agencies. Before that time, few, if any, federal lawsuits involving lending discrimination had been filed under ECOA. Federal enforcement efforts under FHA were similar. However, actions taken since 1988 by Congress, the Executive Branch, federal banking regulatory agencies, DOJ, HUD, and others have contributed to a more aggressive regulatory environment designed to engender greater compliance by the lending industry. In the late 1980s, Congress, the administration, and the banking regulatory agencies began taking actions to more effectively oversee and enforce the fair lending laws. Congress passed several amendments to the laws aimed at strengthening the statutes’ enforcement provisions and to provide regulators with additional information on loan applicants and mortgage lending patterns. At about the same time, DOJ began its first investigation into alleged discriminatory lending practices, and the federal banking regulators began to revise their fair lending policies and examination procedures. The movement toward more aggressive enforcement of the fair lending laws received additional momentum in 1993 when the new administration declared that the development of an effective and aggressive fair lending enforcement program would be a top priority. In 1993, the administration formed an interagency task force charged with clarifying regulatory policies in the fair lending area. The Interagency Task Force on Fair Lending subsequently released a major policy statement on fair lending enforcement policies in March 1994 and has continued to meet regularly.Numerous other federal initiatives were also underway by this time. Figure 3.1 provides a chronology of events and key fair lending initiatives undertaken at the federal level over the last several years. The administration also spurred the executive branch regulatory agencies and others to reconsider their fair lending policies and procedures. On June 10, 1993, four of the five federal banking regulatory agencies (FRB, OCC, FDIC, and OTS) responded by announcing initiatives that they would undertake to improve the effectiveness of their examination and enforcement efforts. Specifically, the agencies pledged to develop new training programs for examiners in fair lending detection develop and sponsor regional fair lending seminars for senior industry executives to foster increased sensitivity and awareness among lenders for discrimination issues, explore the use of statistically-based discrimination detection models as tools in the examination process, implement an internal process for making referrals to DOJ for violations of ECOA, and refine their consumer complaint systems to improve the agencies’ ability to detect and correct credit discrimination. By year-end 1994, the agencies had made progress in several of these areas. For example, since the announcement, each of the federal banking regulatory agencies had developed and initiated new or enhanced fair lending training programs for their examiners and had substantially increased the number of examiners who received training in fair lending detection techniques in a given year. For example, in 1994, FRB implemented a new 2-week school for its examiners devoted solely to fair lending issues. Seventy-one FRB examiners attended the 2-week program in its first year. NCUA, meanwhile, retained a private consulting firm to instruct its examiners on compliance with the fair lending laws. The training was completed in February 1996. The agencies have also followed through on their pledge to sponsor fair lending seminars for top-level industry executives. The first of three regional seminars was held in Washington, D.C., on July 18, 1994. Other seminars were held later in the year in Chicago and San Francisco. In total, the seminars drew more than 900 executives from bank and thrift institutions around the country. In responses to questionnaires circulated by the Federal Financial Institutions Examination Council (FFIEC), numerous participants indicated that the seminars provided a useful forum for them to exchange information and open channels of communication between top bank management and federal regulators and enforcement authorities. The banking regulatory agencies have also made a commitment to reforming their examination procedures to reflect a new emphasis on the more subtle forms of discrimination like disparate treatment. These reforms have included, among other things, the development and use of sophisticated statistical methods for detecting discriminatory lending patterns. For example, FRB has already adopted statistical techniques as a means to more efficiently identify loan files for comparative analysis—eliminating the need for manual sampling at many institutions. Several of the agencies have also supported the examination function by adding fair lending specialists to their staffs, not only to support the examination function but to provide technical assistance to financial institutions on fair lending matters as well. Finally, the agencies have also made some progress in refining their consumer complaint systems. At the time of the agencies’ June 1993 announcement that each agency would undertake an evaluation of the effectiveness of its consumer complaint system in detecting credit discrimination, several of the agencies had already begun the process. The FRB initiative in the area, for example, had begun in November 1992, and new complaint procedures were adopted in June 1995. By the end of fiscal year 1995, OTS had joined FRB in completing revisions to its consumer complaint procedures. In its response, FDIC advised us that it planned to complete revisions to its procedures by June 1996. Another major effort by the responsible federal agencies to ensure compliance with the fair lending laws has been the encouragement of preventative measures in the lending industry. In May 1993, the federal banking regulators released the following list of recommended activities or practices for financial institutions to consider when planning their fair lending compliance programs: Use of an internal second review system for consumer, mortgage, and small business loan applications that would otherwise be denied. Enhanced employee training that engenders greater sensitivity by financial institution management and employees to racial and cultural differences in our society. Training of loan application processors to assure that any assistance provided to applicants in how to best qualify for credit is provided consistently to all applicants. Efforts to ensure that all persons inquiring about credit are provided equivalent information and encouragement. Use of flexible underwriting and appraisal standards that preserve safety and soundness criteria while responding to special factors in low- and moderate-income and minority communities. Efforts to encourage equal employment opportunity at all levels throughout the institution, including lending, credit review, and other key positions related to credit applications and decisions. Affirmative marketing and call programs designed to assure minority consumers, realtors, and business owners that credit is available on an equal basis. Marketing may involve sustained advertising programs covering publications and electronic media that are targeted to minority audiences. Ongoing outreach programs that provide the institution with useful information about the minority community, its resources, credit needs, and business opportunities. Participation on multilender Mortgage Review Boards that provide second reviews of applications rejected by participating lenders. Participation in public or private subsidy or guarantee programs that would provide financing on an affordable basis in targeted neighborhoods and communities. Use of commissions or other monetary or nonmonetary incentives for loan officers to seek and make safe and sound consumer and small business loans in minority communities. Variations of the list of recommended activities have also been published by other agencies, lending institutions, compliance consultants, and a number of financial industry trade groups. These recommendations reflect the input of a variety of sources, including mortgage lenders, bankers’ associations, credit counseling agencies, fair housing organizations, and social research groups. Among the recommended activities are such things as enhanced employee training programs, participation in multilender review boards, self-assessment activities, and affirmative marketing programs. HUD formalized its push for “best practices” by asking mortgage lenders to sign voluntary Fair Lending Best Practices Agreements that incorporate many of the suggested activities from the above list. Despite some delays due to resource and staffing constraints and extended one-on-one negotiations with interested mortgage lenders, HUD reported that as of November 30, 1995, 70 lenders had either signed agreements or had agreed in principle on agreements and were expected to sign soon. Many banking institutions have already incorporated at least some of the recommended activities into their lending operations. For example, in a recent survey of bank chief executives conducted by KPMG Peat Marwick, of the 660 chief executive officers who responded, 85 percent reported that they had reviewed fair lending policies and procedures at their institutions; 43 percent reported having done a quantitative analysis of application and loan files; and 23 percent acknowledged having tested their banks using mystery shoppers. All recommendations, however, have not been enthusiastically endorsed by the entire financial services industry. Some bankers see certain aspects of the Interagency Policy Statement on Discrimination in Lending, as well as some of the recommended activities, as problematic. In public letters to the regulatory agencies and in the press, individual bankers and industry trade groups have cited the high costs associated with some activities, and the legal liabilities associated with others, as potential barriers to acceptance. Other bankers expressed concern that special-purpose lending and credit assistance programs developed by banks to increase lending to certain groups may run afoul of the fair lending laws by excluding nontargeted groups and individuals in a discriminatory manner. While ECOA makes exceptions for such programs, FHA does not directly address the issue. Although failure to adopt any of the recommended practices is to have no express bearing on an institution’s compliance rating, DOJ has suggested that by undertaking such activities a lender could possibly avoid severe sanctions if the government were to discover discriminatory activity at the institution at a later date. Federal efforts to ensure compliance with the fair lending laws have not always been so energetic. In the period immediately following the passage of FHA, federal enforcement efforts were almost exclusively limited to matters related to housing discrimination rather than lending discrimination. For example, HUD and DOJ had initiated programs to identify discriminatory behavior by landlords and other agents in the housing search process. Similarly, no significant enforcement actions were taken under ECOA for more than a decade after its enactment. In the late 1980s, however, Congress, DOJ, and other responsible federal agencies began to respond to the growing number of media reports suggesting that lending discrimination was widespread. In 1988 and 1989, respectively, Congress amended FHA and HMDA to both expand the scope and breadth of the laws and to strengthen FHA’s enforcement provisions. Soon thereafter, DOJ began laying the groundwork for an intensive fair lending enforcement campaign. Other federal agencies with oversight responsibilities in the fair lending area also began, at about this time, to respond to the increasing calls for stepped up fair lending enforcement efforts. Similarly, the banking regulatory agencies recognized shortcomings in their existing fair lending compliance policies and examination procedures and began extensive revisions. For depository institutions, compliance with the fair lending laws is primarily assessed through regularly scheduled consumer compliance examinations conducted by the federal banking regulatory agencies. Fundamentally, the objectives of fair lending examinations are to determine (1) whether a lender’s written policies and standards for creditworthiness are nondiscriminatory and (2) whether those standards are applied uniformly and without discrimination. While the purpose of the examination process is to reveal any unlawful practices that affect large numbers of people, as well as more isolated cases of discrimination, the subtle nature of nonovert forms of discrimination might defy detection by conventional means. This was especially true prior to 1993 when fair lending compliance examination procedures were, for the most part, designed to identify cases of blatant discrimination—i.e., cases in which clearly qualified minority loan applicants were unjustifiably denied credit. For example, under the pre-1993 examination procedures, examiners were directed to select a small judgmental sample of rejected minority applications and review them for consistency with a lender’s written underwriting standards. With this focus, examiners rarely detected instances of discriminatory lending activity. By the early 1990s, the federal banking regulatory agencies had recognized the inability of their examination process to detect the more subtle forms of discriminatory behavior and moved to revamp their examination procedures. Since announcing in June 1993 their intention to work on improving fair lending examination procedures, in general, and detection capabilities, in particular, the agencies have made considerable progress. By 1994, FRB, OCC, FDIC, OTS, and NCUA had each adopted revised or interim procedures that abandoned the past process of only comparing rejected applications with underwriting standards and emphasized a “comparative-file” approach. The comparative-file approach seeks primarily to detect disparate treatment by comparing the outcomes of the lending process for similarly qualified, but racially or ethnically different, applicants. The interim procedures for fair lending oversight vary by regulatory agency but essentially share the same focus—a hands-on search for evidence of differential treatment of applicants based on prohibited factors like race or gender. In theory, a comparative-file review for disparate treatment seeks to answer two questions: (1) are the outcomes of the lending process equivalent for racially or ethnically different applicants with equivalent qualifications and (2) did the lender give equivalent levels of assistance during the application and underwriting processes to applicants from different racial or ethnic groups? When conducting a comparative-file analysis, an examiner can employ a variety of techniques for selecting files to compare. For example, files may be selected by choosing a particular period (time-period approach), or be chosen based on reasons for denial (questionable-transaction approach), or by matching comparable files (matched-pair analysis), or through scientific sampling, or some other method. Regardless of the method chosen, the comparative-file approach attempts to find individual cases in which disparate treatment may have occurred or when an institution’s credit standards were not applied consistently. The effectiveness of the comparative-file technique was recently illustrated in DOJ’s fair lending investigation of the Northern Trust Company and several of its affiliates. By examining numerous applications from potential borrowers who were deemed by DOJ to be only marginally creditworthy, the department was able to find what it considered to be substantial evidence of differential or disparate treatment of minority loan applicants. The differences in treatment described included disparities in the level of assistance and advice, dissimilarities in the way financial information was analyzed, and variations in how and when “offsetting” qualifications were considered as compensation for credit deficiencies. Despite its obvious benefits, however, comparative-file analysis is time-consuming and is often limited in its application because of the difficulties that can be encountered in finding a sufficient number of comparable files to review. Because of these difficulties, the agencies have continued to seek ways to improve their practical ability to detect discrimination. In 1994, FRB began to use, on a regular basis, a computerized statistical model in bank examinations. OCC and other agencies are also experimenting with statistical models. Essentially, FRB’s model automates the comparative-file analysis of the fair lending examination (see app. III). The use of statistically-based methods to detect discrimination can offer a more systematic means of examination than that of older methods. In combination with HMDA data, census data, and geographic information, computerized statistical analysis can allow examiners to more quickly identify institutions that may require a more intensive review of their mortgage lending decisions. Use of statistical models also essentially automates the approach of on-site fair lending examinations and allows examiners to quickly sort through vast quantities of data, focus on data for specific lending markets, select a sample of files, and draw comparisons. However, the use of statistics and statistical models as examination tools is not a panacea. Economists and statisticians have repeatedly pointed out that statistical approaches have limitations and can be misleading. For example, the application and effectiveness of such models as examination tools can be limited by an institution’s size and volume of lending activity. Moreover, statistical models of the loan underwriting process are difficult to construct and data errors or omitted variables can cause such models to give unreliable results. These and other limitations associated with the use of statistics in overseeing and enforcing the fair lending laws are further discussed in appendix IV. Adoption of the new statistical-based examination techniques, combined with certain statutory reforms, has led to an increase in the number of cases being reviewed by DOJ. ECOA, as amended by the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991, requires the federal banking regulatory agencies to refer pattern and practice violations of ECOA to DOJ, and to notify HUD when it appears that ECOA violations not referred to DOJ would also violate FHA. To implement this requirement, each of the banking regulatory agencies has put in place an internal process under which apparent fair lending violations are to be referred to the responsible department. As a result, agency referrals to DOJ have risen noticeably since 1990 (see figure 3.2). Upon receiving a referral, DOJ is to assess the nature of the case to determine if the violation warrants a full investigation. If not, the case is to be returned to the appropriate agency to be handled administratively. In practice, this process can be informal, with DOJ and the banking regulatory agencies engaged in two-way discussions regarding the merits of individual cases so as to ascertain how best to pursue enforcement. Table 3.1 provides a breakdown of the number of referrals by banking regulatory agencies to DOJ by year. Table 3.2 briefly describes the nature of the referrals and any subsequent action taken by DOJ. Although the number of referrals to DOJ has increased since passage of the 1992 amendments to ECOA, there remains a degree of uncertainty on the part of some agency officials and examiners as to the characteristics of possible “pattern or practice” cases of lending discrimination. Such uncertainty arises, in part, from two terms within the statutory language, “reason to believe” and “pattern or practice.” Because the meaning of these terms is often defined on a case-by-case basis, the standard for referrals to DOJ is unclear. Such uncertainty could possibly result in inconsistent application of the referral mandate and ultimately to inconsistent enforcement of the fair lending laws across agencies and financial institutions. This issue is discussed in greater detail in chapter 4. DOJ has independent authority under both ECOA and FHA to conduct investigations and bring a civil suit against financial institutions when it appears that a pattern or practice of lending discrimination has occurred.However, like other federal agencies, DOJ did not use its authority to aggressively enforce these laws prior to 1988. According to a senior DOJ official, DOJ’s lack of involvement prior to that time was primarily due to a lack of sufficient information and because evidentiary standards for lending discrimination had not yet been developed. The implementation of expanded HMDA reporting requirements in 1990, however, provided DOJ with sufficient information to begin investigations of mortgage lending patterns at financial institutions. In 1992, DOJ filed its first major complaint alleging discriminatory lending practices against Decatur Federal Savings and Loan (N.D. GA. 1992). That action resulted in a consent decree in which Decatur Federal, while denying the allegations of discrimination, agreed to set aside $1 million to compensate the alleged victims and to adopt a detailed business plan designed to make home mortgage loans more available to African-Americans (see app. V). Since then, DOJ has filed nine additional lawsuits against lending institutions alleging illegal discriminatory lending practices under ECOA and FHA. They are (1) U.S. vs. Shawmut Mortgage Company (D. Conn. 1993); (2) U.S. vs. First National Bank of Vicksburg (S.D. Miss. 1994); (3) U.S. vs. Blackpipe State Bank (D. S.D. 1994); (4) U.S. vs. Chevy Chase Savings and Loan (D. D.C. 1994); (5) U.S. vs. Northern Trust Company (N.D. Ill. 1995); (6) U.S. vs. Security State Bank of Pecos (W.D. Tex. 1995); (7) U.S. vs. Huntington Mortgage Company (N.D. Ohio 1995); (8) U.S. vs. First National Bank of Gordon (D. S.D. 1996); and (9) U.S. vs. Fleet Mortgage Corporation (E.D. N.Y. 1996). None of these cases has gone to court. Rather, in every case but one, DOJ obtained a consent agreement with the accused institution. Only the tiny First National Bank of Gordon, Nebraska, refused to agree to a settlement at the time the complaint was filed. Disposition of that case was still pending at the time of our review (see table 3.3 and figure 3.3 for details on all these cases). In initiating these legal actions, DOJ has adhered to a broadened philosophy regarding what constitutes discrimination—scrutinizing not only an institution’s lending policies and loan files for evidence of discrimination but also its geographic branching patterns and marketing efforts as well. For example, in the Decatur and Chevy Chase cases particularly, DOJ alleged that given the racial characteristics of the thrifts’ lending areas, the institutions’ credit standards and practices and branching and marketing strategies discriminated against protected minority groups. Initiatives to address these problems were an integral part of the consent decrees agreed to by these institutions. In addition to the ten lawsuits brought against financial institutions to date, DOJ officials have acknowledged that several other investigations are underway both within and outside of the banking industry. For example, DOJ has already entered into an agreement with HUD to investigate independent mortgage companies and is also investigating, in cooperation with FTC, the finance units of the “Big Three” U.S. automobile companiesfor possible lending bias in automobile loans. DOJ officials believe that joint investigations such as these can be particularly effective given the mix of knowledge, experience, and resources that could be brought to bear in these efforts. However, Decatur-like investigations, i.e., those involving in-depth statistical analyses of loan files, are time consuming and expensive. According to DOJ, a full and thorough investigation typically takes 6 to 9 months to complete and can cost as much as $500,000.Because of the increased workload stemming from lending discrimination investigations and from FHA “election” cases; i.e., those cases in which the complainant elects to have their FHA-related complaint heard in federal court rather than by HUD’s administrative law judge, Attorney General Reno has added 34 new positions to DOJ’s Housing Section since 1992 (the authorized staffing level for fiscal year 1994 was 76 full-time positions). Additionally, she has also asked that U.S. District Attorneys make some of their staff members available for these investigations. However, although DOJ has increased its enforcement efforts, officials suggest that limited resources and the high cost of Decatur-like investigations will necessarily limit the number of cases that can be pursued. DOJ investigations and legal actions appear to have had a significant impact both on lenders’ compliance efforts and on the enforcement efforts of other federal agencies. By illustrating their willingness to single out individual financial institutions for prosecution and by extracting consent agreements with substantial monetary penalties, DOJ has reawakened the lending industry to its responsibilities under the fair lending laws. Although we cannot confirm the extent to which the financial industry has reacted by increasing its efforts to ensure compliance with the fair lending laws, indications are that the industry has been generally responsive. For example, it has been reported in the press that the industry has been voluntarily implementing many of the preventative practices, like second review programs, affirmative marketing programs, and self-testing, as prescribed in the settlement agreements with Decatur Federal and others, and as recommended by federal banking regulators. In addition to apparently spurring increased industry compliance activity, DOJ’s enforcement efforts may also have had an impact on the enforcement efforts of other federal agencies—prompting stepped-up enforcement by all of the federal banking regulatory agencies, HUD, and FTC. Moreover, the findings from DOJ investigations have aided the banking regulators in their efforts to improve their own fair lending policies and procedures, and in developing and implementing more sophisticated examination techniques. The Secretary of Housing and Urban Development (HUD) is authorized to administer FHA. However, under the original act, HUD’s enforcement authority was limited to complaint investigation, referral, and attempts at voluntary conciliation. It was not until 1988, with the passage of the Fair Housing Amendments Act, that a full administrative enforcement system was put in place to administer and enforce the law. Also, through the establishment of the Fair Housing Initiatives Program (FHIP) in 1987, Congress made additional funding available to HUD for the purpose of conducting investigations—through grants with private organizations—of possible FHA violations and to take such enforcement actions as necessary to remedy violations detected by those organizations. Several units within HUD share fair lending oversight and enforcement responsibilities. HUD’s Office of Fair Housing and Equal Opportunity (FHEO) has overall responsibility for enforcing FHA and other civil rights laws and makes referrals to DOJ when appropriate. The Federal Housing Administration is responsible for ensuring that HUD-approved mortgagees (lenders) comply with all fair housing and fair lending laws and promulgates rules implementing fair lending requirements. In this capacity, the Federal Housing Administration has outlined requirements covering such fair lending-related topics as minimum loan amounts, tiered pricing, overages, and second review programs. HUD-approved lenders that violate the fair lending laws are subject to administrative sanctions and civil money penalties by HUD’s Mortgagee Review Board. In 1992, HUD was also given authority to oversee the two major housing government-sponsored enterprises—Fannie Mae and Freddie Mac (the GSEs) to, among other things, ensure that they were not discriminating in their mortgage purchases based on factors protected under FHA. As just mentioned, FHEO has been delegated primary responsibility for enforcing FHA’s provisions. FHEO’s enforcement program has several components: (1) complaint investigations, (2) Fair Housing Initiatives Program grants, and (3) voluntary “best practices” agreements. The largest component of FHEO’s fair lending enforcement program is its complaint investigation program. As described by HUD, it consists of two parts: consumer complaints, and Secretary-initiated complaints.Consumer complaints can be narrow or broad in scope depending on the number and type of allegations. In contrast, Secretary-initiated complaints are normally broader in scope, require more resources, and take longer to investigate than do consumer complaints. All Secretary-initiated complaints are processed by HUD staff in FHEO. Consumer complaints are primarily processed by HUD, but about one-third of them are processed by state and local government agencies under the Fair Housing Assistance Program (FHAP). The FHA requires that HUD allow state and local government agencies, which have been determined to have fair housing enforcement programs substantially equivalent to those under FHA, to process complaints filed in those agencies’ jurisdictions. Under FHAP, HUD is to provide financial support and technical assistance to these agencies for complaint processing. In the past 7 years since the Fair Housing Amendments Act of 1988 was implemented (in 1989), HUD and the FHAP agencies have processed 2,356 fair lending complaints. Of this number, HUD processed 1,598 (68 percent), and the FHAP agencies processed 758 (32 percent). In fiscal year 1995, HUD closed 456 complaints alleging discrimination in housing finance (6.5 percent of all FHA-related complaints closed by HUD that year). HUD’s Secretary-initiated complaint program began focusing on mortgage lending issues in fiscal year 1993. FHEO and HUD’s Federal Housing Administration reviewed 16 FHA-approved lenders to determine whether a formal investigation was warranted. The review resulted in two Secretary-initiated investigations. In all, HUD has initiated four investigations of mortgage lenders, all of which were nearing completion at the time of our review. Although HUD is required to process all consumer complaints, FHA requires that HUD attempt to conciliate complaints and try to avoid a time-consuming and costly investigation or enforcement action. Conciliation is voluntary and both the respondent and complainant must agree for it to occur. Through this process, a large percentage (38 percent) of the fair lending complaints that HUD processes are conciliated (See table 3.4). Conciliation agreements may provide compensatory and equitable relief for the complainant(s) and relief in the public interest. They may also enjoin the respondents from further discriminatory behavior. According to HUD, in fiscal year 1995, it conciliated 105 mortgage lending complaints that resulted in some form of monetary compensation to the complainant. As a result of these conciliations, complainants received $1.3 million in monetary compensation—an average of over $12,000 per complainant. However, this is only a fraction of the amount that lenders agreed to expend in the public interest. For example, HUD stated that it had recently negotiated a settlement of $175,000 for a Hispanic female employee who was discharged by a lender for making loans to minority persons and for questioning why one of her clients, a Hispanic male, was denied a loan. As part of the settlement, the lender agreed to advertise the availability of loans in minority media, contribute $2,500 to a nonprofit housing organization for the purpose of promoting fair housing, and to make $250,000 available to a lending program for low- to moderate-income borrowers. Another case described by HUD involved a black developer who was denied a commitment to finance homes to be constructed in a minority area. The lender agreed to settle the case by paying the complainant $68,000 and establishing a $500,000 fund to counsel credit applicants under a program established pursuant to the Community Reinvestment Act (CRA). The lender also agreed to provide mortgages for qualified applicants presented by the complainant for up to 250 newly constructed homes at an average of $70,000. According to HUD, this represents a commitment of over $17 million in predominantly minority areas. Under FHA, the Secretary is to investigate complaints of discriminatory lending practices. However, according to HUD, investigations of complaints are generally only conducted if the complainant and/or respondent refuse to participate in the conciliation process or when conciliation is attempted but fails. As a result, HUD actually investigates only about one-third of all fair lending complaints. Of the 740 fair lending complaints that were not administratively closed or successfully conciliated by HUD during fiscal years 1990-1995, and which required an investigation, only 23 (or 3 percent) were found to substantiate a violation of FHA. If a conciliation agreement is not reached and HUD believes that discrimination has occurred, the Secretary must file a charge on behalf of the aggrieved person. Once the charge is filed, the aggrieved person on whose behalf the charge was filed may elect to have the matter administratively adjudicated within HUD or have HUD commence a civil action on behalf of that person. If during the investigation of a consumer complaint, or when considering matters for Secretary-initiated complaints, HUD has reason to believe that a pattern or practice of discriminatory behavior is evident, the Department must transmit the pertinent information to DOJ. In addition to its referral obligations, HUD officials have told us that they have agreed to cooperate with DOJ in investigations of independent mortgage companies. In the past, these investigations have taken place either sequentially or concurrently, but not jointly. As mentioned earlier, the federal banking regulatory agencies must notify HUD of cases not referred to DOJ when the agencies believe that an institution’s apparent violation of ECOA also would violate FHA. Moreover, under an agreement with member agencies of the FFIEC and by executive order, FHA-related complaints of lending discrimination received by the agencies must be referred to HUD for investigation. (Likewise, if the complaint is received by HUD and it involves a federally regulated financial institution, HUD is to inform the appropriate regulatory agency of the complaint and any pending investigation.) During the past 3 fiscal years, HUD has received 560 complaint referrals from the regulators, and, during the same period, HUD notified the banking regulators of 139 complaints it received against lending institutions regulated by them. The Fair Housing Initiatives Program (FHIP) The Fair Housing Initiatives Program, which was established by the Housing and Community Development Act of 1987, provides grants to private organizations and State and local government agencies to provide education and outreach and to conduct enforcement-related activities. As currently administered, FHIP provides funding for activities in four program areas: (1) administrative enforcement, (2) education and outreach, (3) private enforcement, and (4) fair housing organizations. FHIP funds are awarded on a competitive basis. In fiscal year 1993, HUD awarded $9.6 million in grants under FHIP, with almost $5 million of that targeted to projects related to insurance redlining and mortgage lending discrimination. In fiscal year 1994, congressional appropriations for FHIP were increased to $20.5 million, with approximately $12 million targeted for enforcement projects in those same two areas. Through fiscal year 1994, FHIP competitions have awarded more than $21.5 million in funds to support fair housing enforcement efforts. Included among those awards was a fiscal year 1992 grant for $1 million to support a large-scale national testing program to assess mortgage lending discrimination. Information obtained from FHIP-funded projects can be used by either public or private nonprofit organizations, or HUD, as the basis for a formal complaint against individuals or lending institutions. Following passage of the Housing and Community Development Act of 1992, HUD lifted a requirement that FHIP-funded testing activities be restricted to bona fide complaints and expanded FHIP to permit contract recipients to carry out testing programs whenever there is a reasonable basis for doing so. According to HUD, a reasonable basis may be obtained from complaints, allegations, statistical disparities, or other types of substantive information. Testing programs involve the use of “testers” posing as renters, purchasers, or borrowers in order to ascertain if a similarly situated member of a protected group has been subject to discrimination. Beginning with the fiscal year 1990 and 1991 FHIP competitions, funding started to become available for testing programs focusing on mortgage lending discrimination. Those first testing projects were largely experimental but have served as the prototype for other FHIP-funded testing programs now under way in a variety of locations. Several FHIP-funded projects involving testing of mortgage lenders and insurance companies were completed in 1995 and, as a result, complaints have been filed with HUD against three of the largest home insurance companies and five of the largest independent mortgage companies in the country. Additional large-scale investigations are still under way. HUD “Best Practices” Agreements Section 809 of FHA charges the Secretary of HUD to endeavor to work out programs of voluntary compliance and enforcement with the housing industry and other interested parties. In 1994, as part of these efforts, HUD and the Mortgage Bankers Association (MBA) signed a best practices agreement designed to encourage individual mortgage banking firms to use fair lending “best practices”; i.e., practices or activities that firms could undertake to deter discriminatory activity and further lending to underserved groups and communities. Under this agreement, MBA agreed to urge its members, which are not regulated like banks, to sign individually negotiated, nonbinding agreements with HUD to increase credit and homeownership opportunities for historically underserved borrowers. Generally, these agreements encourage initiatives similar to those recommended for the banking industry, and include initiatives like second review programs, self-testing, and minority targeted advertising and recruitment. In addition, HUD has also included tailor-made lending targets within the agreements for lending to underserved communities. According to HUD, as of November 30, 1995, 70 mortgage lenders had either signed, or agreed in principle to sign, best practices agreements. In January 1996, HUD also reported that it had signed its first voluntary fair lending agreements with commercial banking institutions. It should be noted that while HUD, MBA, and consumer groups have generally hailed the agreements, the banking industry has publicly decried the use of formalized “best practices” agreements—citing them as credit allocation and an attempt by the unregulated mortgage banking industry to ensure that laws like CRA are not amended to apply to mortgage bankers. Partly in response to public concerns regarding the potential for discrimination (disparate impact) by primary lenders who follow the underwriting standards created by secondary mortgage market institutions, Congress passed the Federal Housing Enterprises Financial and Safety and Soundness Act (the GSE Act) in October 1992. In the GSE Act, Congress reaffirmed the Secretary of HUD’s role as the programmatic regulator for Fannie Mae and Freddie Mac—the two largest housing GSEs. Among the provisions of the GSE Act were requirements for the Secretary of HUD to set levels of congressionally-mandated housing goals that require the GSEs to purchase mortgages for very low- and moderate-income families and families living in areas underserved by the mortgage markets; establish fair lending requirements for the GSEs; monitor the GSEs’ performance in meeting housing goals; and create a public-use database, making available information on the GSEs’ activities. More specifically, the GSE Act required HUD to issue regulations to prohibit the housing GSEs from discriminating in their mortgage purchases and to carry out a number of other fair lending obligations. Under the GSE Act, the Secretary of HUD must prohibit discrimination by the GSEs in their mortgage purchases because of race, color, religion, sex, handicap, familial status, age, or national origin, including any consideration of the age or location of a dwelling or age of the neighborhood or census tract where the dwelling is located in a manner that has a discriminatory effect; require that the GSEs submit information to the Secretary to assist enforcement of FHA and ECOA; advise the GSEs of violations of FHA, ECOA, and state and local fair lending periodically review the underwriting and appraisal guidelines of the GSEs to ensure compliance with FHA and the Federal Housing Enterprises Financial Safety and Soundness Act; review the annual assessment by the GSEs, in their statutorily required Annual Housing Activities Report, of their underwriting standards, business practices, repurchase requirements, pricing fees and procedures that affect the purchase of mortgages of low- and moderate-income families, or that may yield disparate results based on the race, status, age, or national origin of the borrower; direct the GSEs to take action, following adjudication, against lenders for violations of FHA and ECOA; and refer potential violations of the fair lending provisions of the Federal Housing Enterprises Financial Safety and Soundness Act to the Director of the Office of Federal Housing Enterprise Oversight (OFHEO) for enforcement action. HUD published a proposed rule implementing the Secretary’s regulatory authorities on February 16, 1995, with a 75-day comment period. After reviewing comments on the proposed rule, including extensive comments from the GSEs, HUD met with each of the GSEs, industry trade groups, public interest groups, the Treasury Department, the U.S. Department of Agriculture, the federal banking regulatory agencies, and various state and local officials to discuss issues related to the rule. HUD issued its final rule implementing the GSE Act on December 1, 1995. The Federal Trade Commission has the authority to investigate certain lenders suspected of lending discrimination. The FTC’s authority is provided in ECOA and extends to lenders subject to ECOA whose activities are not regulated by the federal agencies specified in the act. FTC, through DOJ or on its own, may file suit in federal district court against lenders suspected of violating the law. In so doing, FTC can seek injunctions to prohibit future illegal conduct, civil money penalties of up to $10,000 for each violation, and redress for consumers unfairly denied loans. In addition, FTC can impose recordkeeping and reporting requirements on defendants to assist FTC in monitoring compliance. Since fiscal year 1991, FTC has obtained consent decrees against eight small-loan and mortgage finance companies for alleged violations of ECOA and Regulation B, which implements the act. In December 1993, FTC and DOJ jointly entered into a settlement agreement with Shawmut Mortgage Company. In signing the agreement, Shawmut agreed to pay almost $1 million into a redress fund to compensate minority applicants who allegedly were unfairly denied mortgage loans during the period from 1990 through late 1992. The agreement with Shawmut is of particular note in that it organized a framework for recordkeeping and reporting that could be followed in future cases to identify and compensate applicants that have been the victims of lending discrimination. In addition to their oversight and enforcement initiatives, the federal banking regulatory agencies, HUD, DOJ, and FTC have also increased their education and outreach efforts to assist institutions in creating effective antidiscrimination programs. By 1993, FRB, FDIC, OCC, and OTS had created or substantially expanded their community affairs programs, especially in the areas of fair lending and community reinvestment. Included among these educational and outreach efforts are training workshops, seminars, major conferences, and the development of new publications and educational materials to assist lenders, community organizations, and others to better understand and respond to fair lending concerns. The Boston Federal Reserve Bank, for example, developed and distributed more than 90,000 copies of Closing the Gap: A Guide to Equal Opportunity Lending, a publication highlighting various techniques that banks can use to help combat possible discrimination in lending and to ensure equitable treatment for loan applicants. It is the most widely circulated publication ever developed by FRB. FDIC also achieved great success with its publication on self-testing, Side-by-Side: A Guide to Fair Lending. By late 1995, FDIC reported that more than 35,000 copies of the guide had been distributed. In addition, the federal banking regulatory agencies, HUD, DOJ, and FTC have supported or participated in a number of public/ private working groups that provide forums for the development of a public consensus on actions to ensure equal access to mortgage and other types of credit. One example of this is the Cleveland Residential Housing and Mortgage Credit Project, in which nearly 100 housing, real estate, and lending organizations throughout the Cleveland area formed a group to identify potential discriminatory lending practices in the home-buying process and to recommend ways of eliminating them. The project, begun in 1993, identified 18 points in the mortgage lending process where discrimination could occur. Smaller task forces were then formed to study what the larger forum thought were the four most critical points. These areas were explored in depth, problems were identified, and possible solutions were recommended to the forum. The project is still active and the different industries involved in the project are currently implementing some of the task force’s recommendations. In recent years, the federal banking regulatory agencies, DOJ, HUD, and most other responsible federal agencies have devoted considerable effort toward improving compliance with the nation’s fair lending laws. Beginning in the late 1980s, these agencies have stepped-up enforcement of the fair lending laws and have tried to heighten the level of awareness and sensitivity of the lending community. The federal banking regulatory agencies have also moved to strengthen their ability to detect discrimination through improved examination procedures and techniques. A number of these agencies have also put forward a list of recommended compliance activities and programs for use by lenders who seek to ensure that all loan applicants are treated fairly. Most of these agencies have also intensified their efforts over the last several years to develop and deliver educational and informational programs designed to help lenders ensure equal access to credit. All of these efforts are ongoing. We believe the totality of the actions taken by the responsible federal agencies over the last several years has served to increase the level of awareness and sensitivity to the issue of fair lending throughout most of the lending industry. If maintained, we believe these efforts are also likely to lead to increased lender compliance and improved enforcement of the fair lending laws in the future. Even though responsible federal agencies have made substantial progress in the area of fair lending oversight and enforcement, there remain a number of issues that present significant and continuing challenges to the efforts of federal regulators to combat lending discrimination. For instance, during the course of our review, we identified several areas related to the banking regulatory agencies’ existing fair lending examination policies and procedures where we believe the agencies have not taken full advantage of opportunities to (1) strengthen their ability to detect discrimination in all of its forms and (2) improve the consistency of oversight and enforcement. For example, because fair lending examination procedures are not uniform across agencies, the likelihood of finding evidence of discrimination may vary by regulator due to differences in examination techniques. Additionally, the ability of the agencies to detect discrimination during the early stages of the lending process is constrained because they have not incorporated pre-application testing as an examination tool. Finally, most agencies have not used the full range of their enforcement authority to ensure that HMDA reporting requirements are adhered to in a timely and accurate manner. Although issues such as those mentioned above can be directly confronted and addressed by the agencies, others, by their nature, are more problematic and defy immediate resolution. For example, the subtle and sometimes statistical nature of some types of lending discrimination makes detection difficult even with newer, more advanced techniques. Additionally, some key legal issues associated with the interpretation and application of the fair lending laws remain unresolved. Nevertheless, it remains important to understand that these issues exist, and that they pose substantial challenges to oversight and enforcement of the fair lending laws. In June 1993, the banking regulatory agencies indicated that they had begun several efforts to promote compliance with the fair lending laws. These efforts included revisions to their fair lending examination procedures aimed at strengthening their ability to detect discrimination. We began our review of the agencies’ fair lending examination procedures by conducting in-depth interviews with bank management, compliance officers, and federal bank examiners who were involved in recently completed compliance examinations at 40 financial institutions around the country. On the basis of this work, and on the insights and knowledge we gained from other aspects of our review of the lending discrimination issue, we identified several areas where we believe the agencies have not taken full advantage of opportunities to strengthen their fair lending examination procedures. Although our case studies of 40 compliance examinations were specific to examination practices in effect during 1993, the issues are still relevant to the revised and interim examination procedures now in use. On the basis of our review, we found that past and current fair lending examination policies and procedures of the federal banking regulators: (1) lack uniformity across agencies—a situation that could result in inconsistent application and enforcement of the laws; (2) have inadequate methods for detecting discrimination prior to a prospective borrower’s submission of a formal application; and (3) have not resulted in vigorous enforcement of HMDA data reporting requirements by all agencies. Also, responses to our surveys of bank compliance officers and agency examiners indicated that additional examiner training in the latest fair lending examination and detection techniques would be beneficial and that, in some instances, examiners felt they were not allowed sufficient time to develop evidence of substantive violations. Finally, some officials and examiners at several of the federal agencies responsible for fair lending oversight have expressed some uncertainty about the identification of “pattern or practice” cases. In June 1993 the federal banking regulatory agencies announced their intention to work on improving fair lending examination procedures and to improve their detection capabilities. Initially, FRB, OCC, OTS, FDIC, and NCUA had sought to develop uniform fair lending examination procedures through the FFIEC—the interagency body charged with bringing uniformity to all examination procedures and processes. As part of this effort the FFIEC awarded, in late 1992, a $75,000 contract to Arthur Andersen & Co. to review the agencies’ fair lending examination procedures and training programs and to recommend improvements. However, agency officials told us that the contract yielded little of value. Partly as a result, the drive toward development of uniform examination procedures stalled. Each of the banking regulatory agencies then began independent efforts to improve their own fair lending examination procedures. These efforts included experimentation with such things as alternative ways of analyzing HMDA data, new sampling paradigms for comparative-file analysis, and the use of regression models for detecting discriminatory lending patterns. By the end of 1994, each of the federal banking regulatory agencies had made significant revisions to, or had replaced, older examination procedures with procedures that, while similar in some respects, lacked uniformity in a number of areas. For example, while FRB’s revised procedures have formalized a statistically-based approach to aid in the detection of discriminatory lending patterns at large institutions, most other bank regulatory agencies have not adopted similar procedures. Also, in 1994, OCC initiated a pilot testing program involving the use of mystery shoppers to search for disparate treatment of similarly situated loan applicants and has subsequently adopted testing as an optional component of its examination procedures. If continued, we believe the agencies’ independent efforts to revise their examination procedures could result in a situation in which the same degree of oversight is not necessarily applied to all lenders; e.g., some depository institutions may be subject to compliance examinations involving the use of advanced detection methodologies such as regression analysis or testing, while others may not. Consequently, it may be that the likelihood of finding evidence of lending discrimination, and/or being referred to DOJ, will vary by regulator due to differences in examination techniques. In light of the economic and legal consequences that could arise from allegations of discriminatory lending practices, as illustrated in recent DOJ settlement agreements, the lack of uniform examination procedures raises an important issue regarding the evenhanded application of the law. Furthermore, adoption of uniform examination procedures would also help to avoid confusion within the banking industry—a situation that could possibly inhibit voluntary compliance efforts. Both examiners and their respective agencies agree that the ability of examiners to detect illegal credit discrimination in the preapplication stage is limited. At this point in the mortgage application process there is no paper trail for the bank examiner to review. Although examination procedures call for examiners to routinely interview those bank personnel who serve as initial contact points for potential applicants, it is extremely difficult, if not impossible, for an examiner to determine whether any applicant was illegally discouraged from making a formal application or steered to a less advantageous product or institution—unless a complaint had been filed. Furthermore, it is not possible for examiners to know how many prospective applicants have even approached an institution to inquire about credit. Inadequate procedures for detecting discrimination at the preapplication stage represent a serious omission, especially since pre-application testing programs conducted by private groups have uncovered evidence of disparate treatment among prospective loan applicants. One technique that has the potential to be a useful means of detecting and preventing illegal activities, especially in the preapplication stage, is testing. Generally, the testing methodology involves having matched pairs of “testers” pose as prospective loan applicants. After discussing loan possibilities on an individual basis, the testers document their treatment and the completeness of the information given to them by the institution’s personnel. Although they do not actually complete an application, the testers do experience the important preapplication phase of the loan process. Although the use of testers as an examination tool has been formally discussed by FFIEC and individual banking regulatory agencies, the regular use of a testing procedure has never been widely supported except by HUD and DOJ. For example, in a 1991 feasibility study on the application of the testing methodology to the detection of lending discrimination, FRB expressed reservations regarding the use of testers because of ethical concerns involving entrapment or self-incrimination. FRB also expressed concern about the ability to measure treatment accurately, objectively, and in quantifiable terms, and about the high costs associated with a reliable testing program. It should be noted, however, that FRB’s concerns about costs were primarily associated with using testing methodologies to obtain statistically valid results regarding the extent and nature of possible mortgage discrimination in a given marketplace (for example, a selected metropolitan area). A testing project with this objective would necessarily involve hundreds of tests and entail significant labor and overhead expenses. In contrast, the FRB acknowledged that an alternative approach that they considered—referred to as an “enforcement design,” whose objective was only to determine if systemic differences in treatment based on race were present at individually selected institutions—could yield useful information for enforcement purposes from a relatively small number of tests per institution, but only if differential treatment of testers was unambiguous and very commonplace. Indeed, this approach has been employed by a number of private fair housing groups for detecting disparate treatment by mortgage lenders (See app. II). The renewed emphasis on lending discrimination and the impotence of current examination procedures in the preapplication stage prompted OCC to undertake a pilot testing program based on the “enforcement design” in 1994 and early 1995. Of the eight institutions tested for illegal preapplication discrimination under OCC’s pilot program, no evidence of discrimination was found in six of them. In the remaining two institutions, questionable treatment was reported by the testing contractor, but after reviewing the raw data, OCC concluded that discrimination did not occur. Even though the pilot testing program proved to be labor-intensive and failed to uncover evidence of illegal lending discrimination, OCC concluded that testing can be a valuable tool in its overall fair lending program. Consequently, in April 1996, OCC formerly adopted a policy to use matched-pair testing as an examination technique on a case-by-case basis when information received from examiners, consumers, or the media indicated that an institution might be engaged in illegal discrimination, particularly when such information indicated a problem at the institution’s preapplication stage. FDIC also recently considered a testing program but postponed any action on the proposal indefinitely—opting instead to wait and see if efforts to encourage voluntary testing programs bear fruit. Amendments to HMDA in 1989, requiring the collection and reporting of data on race, gender, and income characteristics of mortgage applicants, were intended to provide data to assist in identifying discriminatory lending practices. Although the banking agencies and HUD are supposed to ensure that the lenders they supervise provide complete and accurate HMDA information, concerns have arisen regarding the accuracy of reported data. These concerns were echoed repeatedly in our interviews with bank examiners and FRB staff involved in the processing of HMDA data. Findings from recently completed internal agency audits at FRB and FDIC have also lent some credence to these longstanding concerns about HMDA data accuracy. For example, based on the results of its 1994 review, FRB required one out of every five banks it examined to resubmit their reported HMDA data for the year 1992 (See figure 4.1). We believe that large and frequent errors in HMDA data, especially in critical variables like applicant income, could impair fair lending examination and enforcement efforts of the federal agencies. For example, despite its limitations, HMDA data is still widely used by regulators and the public to target institutions for further scrutiny and to perform mechanical analyses of institutional lending patterns. If based on inaccurate data, these analyses could be misleading and result in a misappropriation of time and resources by regulatory agencies, the public, and lending institutions. Until recently, enforcement of HMDA reporting requirements by the federal regulatory agencies has been limited to verbal warnings or requiring institutions to correct and resubmit the required data. Not until fiscal year 1994 did a federal regulatory agency levy a civil money penalty against a financial institution for untimely and/or inaccurate HMDA reporting. In December 1993, HUD imposed a civil money penalty of $500 on an independent mortgage company it supervised for violating HMDA reporting requirements. Since then, it has assessed penalties of up to $2,000 on an additional 16 lenders for violating HMDA. In June 1994, FDIC announced that it had fined six institutions for late submissions of 1992 and 1993 HMDA data. By the end of fiscal year 1995, FDIC had levied civil money penalties totaling $79,000 against 31 institutions. The penalties ranged from $1,000 to $5,000. The willingness on the part of HUD and FDIC to impose monetary penalties on HMDA violators is an important step toward ensuring more accurate HMDA data reporting. However, adherence to a consistent enforcement policy across all federal agencies for late and inaccurate HMDA data submissions is still needed to help ensure the integrity of the entire HMDA dataset. Otherwise, enforcement of HMDA will not be perceived to be a priority of the regulators—thereby making HMDA data quality less likely to become a priority of financial institution management. In its response, OTS indicated that it had recently adopted a new policy and issued specific guidelines regarding the use of civil money penalties (CMP) against HMDA reporters who submit late or inaccurate reports. According to OTS, after this policy was announced, institutions that had been significantly tardy in their 1993 and 1994 reporting filed timely reports covering 1995. Agency examiners have cited as hindrances to their examination efforts a lack of sufficient training in HMDA data analysis and in discrimination detection techniques, and an insufficient time allowance in which to uncover discriminatory conduct. The lack of examiner training in some fair lending procedures was mentioned by a number of consumer compliance examiners in our case studies of institutions examined by FRB, OCC, FDIC, and OTS in 1993. Of the 39 examiners responding to our survey questions about training, 17 reported not having received HMDA-related training as part of their own agencies’ general compliance training program and 7 reported that as of December 30, 1993, they had no HMDA-related training whatsoever. Inexperience in HMDA data analysis and fair lending detection techniques was also cited by the examination staff at FDIC. During a year-long, agency-initiated review of FDIC-supervised institutions with large disparities in minority/white mortgage application denial rates, which was completed in 1995, examination staffs cited the lack of formal training, unclear guidance, and the need for improved resource tools as causing difficulties in conducting fair lending examinations. Another problem cited by some examiners in our case studies was an insufficient time allowance during examinations to develop evidence of substantive violations. During interviews and in survey responses, a number of examiners told us that they had insufficient time during consumer compliance examinations to conduct useful HMDA analyses or comparative-file analyses. The HMDA data, they said, are simply too voluminous and too complex to analyze in the time allotted. Examiners often criticized the FFIEC-standardized HMDA output for being too narrow in scope—it only includes mortgage lending—or too institution-specific to give a full picture of lending patterns in a community. It would be more helpful, they suggested, if HMDA analyses were done by well-trained specialists prior to each examination so that examiners could focus more quickly on suspicious patterns. Also, some examiners felt that a graphical representation of HMDA and census data combined could be more quickly and easily interpreted than the summary tables currently being provided. If not addressed, the time constraints and lack of training cited by examiners may prove to be major obstacles to using the new comparative-file techniques designed to detect disparate treatment. The comparative-file approach, as currently practiced, is relatively more labor intensive and time consuming than the older procedures. Not only do the newer comparative-file procedures require examiners to review many more loan files than was previously dictated, but they also may require them to search for “matched-pairs” to compare for equal treatment. While our survey results and interviews highlighted the needs of some examiners for training in fair lending issues and examination techniques, we acknowledge the fact that the federal banking regulatory agencies and HUD have already instituted advanced HMDA training programs and have upgraded their automated systems to improve their ability to analyze HMDA data and to integrate it with other databases. It will take some time, however, before all agency examination staff receive such training and become familiarized with the new software programs for analyzing HMDA data. Furthermore, adoption of uniform fair lending examination procedures, as recommended later in this report, would necessitate an additional training effort focusing on those examination techniques and procedures not previously common to all the banking regulatory agencies. Since 1992, ECOA has required the regulatory agencies to refer certain violations of ECOA to DOJ. Specifically, section 706(g) of ECOA states that an agency charged with enforcing the act “shall refer the matter to the Attorney General whenever the agency has reason to believe that one or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of ”. A similar provision in FHA also charges HUD with the referral mandate. However, officials at HUD and several of the banking regulatory agencies have expressed some uncertainty about how to identify a “pattern or practice” in a particular case. Such uncertainty arises, in part, from two terms within the statutory language—“reason to believe” and “pattern or practice.” Since the law does not precisely define the meanings of these terms, they must be discerned on a case-by-case basis. Hence, the standard for referrals to DOJ is sometimes unclear. For instance, if a “pattern or practice” decision is not necessarily a mathematical process (the Interagency Policy Statement on Discrimination in Lending says it is not), then whatever decisionmaking process should be used merits clarification. Although both DOJ and the Fair Lending Task Force have discussed some of these issues informally and in the Interagency Policy Statement on Discrimination in Lending, agency officials and examiners indicated during discussions with us that further clarification would be helpful. Additional guidance on the characteristics of a referable case should be possible. Since the agencies have frequently sought such guidance from DOJ on a case-by-case basis over the last several years, it should now be possible for DOJ to share its accumulated experience regarding “pattern or practice” inquiries. At the core of many of the difficulties encountered in attempts to improve enforcement of the fair lending laws is the fact that detection of lending discrimination has been, and continues to be, a difficult and time-consuming task. One that, in the end, often requires examiners to use their professional judgment in determining whether violations have occurred. For example, research studies have suggested that the problem of disparate treatment is highly concentrated among marginal loan applications—those that have one or more deficiencies. This observation has been independently supported by both agency and DOJ investigations. Yet, to uncover disparate treatment at the margin is extremely difficult and time consuming, even with improved examination techniques. Automated statistics-based detection methods may aid examiners in their search for possible discriminatory lending patterns or practices, but they are as yet not deemed accurate or reliable enough by economists and agency officials to replace examiner judgment—nor is that the intention of the agencies. Even though several of the agencies have adopted revised fair lending examination procedures that emphasize comparative-file analysis, it seems unlikely that all instances of discriminatory treatment could be discovered. It is, therefore, critical that the agencies continue to research and develop better detection methodologies in order to increase the likelihood of detecting illegal practices. Moreover, we encourage the agencies’ efforts to broaden their knowledge and understanding of the credit search and lending processes in general. Such knowledge is prerequisite to both improved detection and prevention of discriminatory lending practices. To date, all but one of the cases brought by DOJ under ECOA and FHA have been settled by consent agreements wherein the defendants have not admitted any wrongdoing. While these agreements serve a public purpose by speedily bringing cases to closure, remedying the alleged wrongs, and highlighting the government’s commitment to enforce the fair lending laws, they leave some complex legal issues unanswered. For example: what liabilities are associated with self-assessment programs? How will the disparate effects test be applied across widely divergent geographic markets with different demand and supply pressures? Is credit scoring and accompanying differential pricing illegal? As long as these issues remain unresolved, they could contribute to the reluctance of some financial institutions to initiate self-testing and other voluntary compliance programs suggested by the bank regulatory agencies to improve compliance with the fair lending laws. Some of the more pressing areas in need of clarification are discussed below. Among the banking regulatory agencies’ list of suggested activities for banks and other lending institutions to employ to ensure compliance with the fair lending laws is a continuing program of self-assessment. As described by FDIC, self-assessment is a way of measuring, in a controlled manner, differences in treatment of customers and potential customers. It can consist of a variety of programs, including preapplication testing and comparative-file analysis. The goal of these programs is to help find potential problems so that corrective actions can be taken and to help ensure that an institution’s lending practices and decisions are not discriminatory. In addition, an institution can also gain insight into how its lending personnel and practices are perceived by prospective loan applicants, a valuable insight not readily available through other audit methods. However, 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. A few states have recognized this dilemma faced by financial institutions and have moved to eliminate, or at least partially mitigate the fears institutions have regarding self-incrimination. For example, Maryland has passed legislation that partially protects from discovery by third parties information obtained through the use of self-testing programs. Additionally, the Attorney General of Massachusetts has entered into an agreement with the Massachusetts Banker’s Association to seek the enactment of legislation to ensure that institutions engaging in self-testing and comparative-file review evaluation by senior level management, as it relates to residential financing, will not be (a) forced to disclose to private litigants in civil actions the results of the use of such methods and (b) subject to legal action by nonregulatory government agencies based on the results of such self-testing and comparative-file reviews. The legislation was under consideration by the Massachusetts State legislature at the time of our review. Such legal protection is intended to engender voluntary self-testing programs and place greater emphasis on prevention rather than ex-post government enforcement through regulation and legal action. Some legal experts have suggested that a lending institution’s relationship with appraisers, loan brokers, and other financial institutions could pose potential compliance problems if the third-party were found to be in violation of FHA or ECOA. For example, if loan brokers were found to be charging, in an unlawfully discriminatory manner, “overage” or rates above that rate at which the underwriting bank was willing to lend, then the funding institution could possibly be held liable as well. This argument is based on the premise that the funding institution would be in a position to know the magnitude and distribution of the price differentials charged by its affiliate brokers. In light of this potential liability, institutions may be reluctant to monitor third-party lending practices. As interpreted by the federal regulators and others, there exists under the fair lending laws a disparate impact test for discrimination. Under this test, unlawful discrimination is presumed to occur if a lender maintains a neutral lending policy or practice that has a disproportionate adverse effect on members of a protected group and for which there is no business necessity and no less discriminatory alternative. Yet, because no case involving the disparate impact test within the context of lending discrimination has been decided by a court, considerable controversy exists as to how the test should or will be applied in certain lending scenarios. Although DOJ and the federal banking regulatory agencies have tried to provide some guidance as to what constitutes a discriminatory impact, the applicability of the disparate impact test to certain lending practices remains hotly debated. Additionally, legal scholars, bankers, and others have pointed out some common practices in the financial services industry which may prove to be problematical under the disparate impact test as defined in the agencies’ fair lending policy statement. Because of the lack of case law, many significant legal questions also remain regarding the nature of the evidence required to prove a disparate impact claim under ECOA and FHA. Some of the areas that may prove to be problematic are described below. Standard of Proof: Business Necessity. Some controversy has arisen regarding the threshold showing a lender must make in order to prove that a practice having a disparate impact is not discriminatory. Under the Civil Rights Act of 1991, a defendant in an employment discrimination case can rebut a presumption that a disparate impact was discriminatory by demonstrating that the challenged practice is “job related ... and consistent with business necessity.” The federal agencies charged with administering ECOA and FHA have adopted this standard with adjustments to practices relevant to fair lending. However, disagreement exists as to what constitutes a “business necessity.” Some legal experts have argued that the test can be satisfied when the lender shows that the challenged practice serves a “legitimate business purpose.” Others have contended that the necessity of the practice in question must be more closely scrutinized. Resolution of this issue could prove to be significant given the far-reaching effects such a change could have on the development of fair lending law and policy and the burden of proof that financial institutions and the industry would have to meet in order to avoid liability. Differential and Tiered Pricing Systems. Half of the fair lending lawsuits filed against financial institutions to date by DOJ have alleged disparate treatment in the pricing of mortgage and consumer loans. Legal experts have indicated that some common loan pricing strategies also have the potential to cause compliance problems for many lending institutions under the disparate impact test. For example, experts questioned whether differential and tiered pricing strategies based on cost and risk factors could be said to constitute a necessary business practice under the disparate impact test. With differential pricing, the interest rate charged on a loan (its price) typically will vary based on the credit risk of the borrower or some other factor or factors that affect the lender’s perception of the borrower’s ability to repay the loan. Under the disparate impact test, however, the lender’s use of such a pricing scheme (and uniform pricing schemes as well) could prove to be problematic, especially if a protected group were to be disproportionately adversely affected. If that were to occur, the experts contended, a lender could conceivably be required to prove the business necessity of each price differential and to show that no less discriminatory pricing alternative was available—a potentially costly proposition. Similar problems were envisioned by legal experts for tiered pricing systems. Under a tiered pricing system, interest rates for loans or mortgages vary by size, with higher rates charged on loans of lesser amounts. For example, for mortgages under a certain amount, say $25,000, the policy might be to increase the interest rate charged by 0.5 percentage points for each $5,000 increment below the floor amount. Fair housing advocates have argued, however, that this pricing scheme has a disparate impact on minority or female applicants because they tend to borrow smaller amounts. Lenders counter, however, that higher rates on smaller denomination loans are justified because of the business need to cover origination and servicing expenses. Questions have also arisen regarding profit margins under tiered pricing systems. For example, some in the banking industry query whether profit margins would need to be similar for each tier for an institution to be in compliance. How much of a problem the disparate effects test proves to be for banks will depend on how broadly the courts, DOJ, and the regulators apply disparate impact theory. Computerized Underwriting Programs. Some bankers argue that rigorous interpretation and enforcement of the fair lending laws will result in more and more institutions adopting computerized underwriting systems to alleviate any chance of unequal or disparate treatment. Although it is generally agreed that overall loan processing costs are expected to decline as a result of automated underwriting, lenders are uncertain whether such standardized systems using uniform criteria will pass a disparate impact test, given the relative socioeconomic status of protected groups. While some experts believe that the use of computerized underwriting programs would be within the bounds of the law, they point out that defending the selection and weighting of underwriting factors could raise costs and further limit the availability of credit to marginal applicants. As can be seen, there remain a number of practical issues unique to the business of lending that raise significant legal questions under the disparate effects test for discrimination. The issues are substantive and regulatory interpretations are likely to be controversial. Due to the complexities of these questions, it appears unlikely that more concrete judicial or administrative guidance on these issues will be forthcoming in the near future. Since 1988, the federal regulatory agencies have made significant strides in strengthening their oversight and enforcement of the fair lending laws. However, during the course of our review, we identified several areas related to the banking regulatory agencies’ existing fair lending examination policies and procedures where we believe that the agencies have failed to take full advantage of opportunities to ensure thorough and consistent supervision. Additionally, unresolved legal issues involving, among other things, interpretations of statutory language and practical applications of the laws appear to present barriers to an immediate formulation of a more effective policy and greater acceptance of voluntary compliance efforts by financial institutions. Finally, it should be remembered that the detection of discrimination in its more subtle forms can be a difficult and time-consuming task. Even with improved detection methodologies and clearer legal interpretations, detection of lending discrimination in all its forms will continue to pose a significant challenge to regulators. Congress may wish to consider measures that would remove or diminish the disincentives associated with self-testing by alleviating the legal risks of self-testing when conducted by lenders who in good faith are seeking to prevent discriminatory lending activity and who move to correct such discriminatory practices when they are identified. Despite significant improvement in federal fair lending oversight and enforcement, we believe that further efforts can still be made in some areas, which would strengthen the ability of federal banking regulators to detect lending discrimination in all of its forms and help ensure greater consistency in oversight and enforcement. To this end, we recommend that the heads of FRB, FDIC, OCC, OTS, and NCUA: work together to develop and adopt uniform fair lending examination procedures and provide all compliance examination staff with the necessary training to implement those procedures; adopt, as a component of their fair lending examination and training programs, guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process; and use their full range of enforcement authority, including the use of civil money penalties, to ensure that the HMDA data is submitted in a timely and accurate manner. We also recommend that the U.S. Attorney General provide updated guidance to the banking regulatory agencies and HUD on the characteristics of referable “pattern or practice” cases under ECOA and FHA. GAO requested and received comments on a draft of this report from FRB, OCC, FDIC, OTS, NCUA, HUD, and DOJ. These written comments appear along with GAO’s responses in appendices VI-XII. NCUA did not comment on the conclusions and recommendations. Overall, the agencies were in general agreement with the report findings, conclusions, and recommendations. Agency remarks regarding individual recommendations and our evaluations are summarized below. All agencies expressed general agreement with GAO’s recommendation that the banking regulatory agencies adopt uniform fair lending examination procedures and provide appropriate training with respect to such procedures. FRB commented that they have been working on the development of uniform procedures and anticipated submitting a draft for consideration by other agencies in the very near future. OCC, however, maintained that some differences in examination procedures were appropriate, given the supervisory needs of the agencies and the varying sizes and risk profiles of the financial institutions they regulate. We agree that the initiatives by OCC and the other banking regulatory agencies to establish their own fair lending procedures in the absence of an interagency agreement on uniform procedures seems prudent given the pressing need for improvements in the interim. We reiterate, however, that the adoption of uniform fair lending examination procedures would increase the likelihood that each of the banking agencies would use the most advanced and proven techniques to detect discrimination while applying the same degree of oversight to all depository institutions. Among the regulatory agencies, only HUD and OCC fully supported GAO’s recommendation that the agencies adopt guidelines and procedures for the use of testing methodologies for detection of discrimination at the preapplication stage of the lending process. In general, the banking regulatory agencies had concerns about the routine use of testing because of its associated costs and time requirements. Despite these concerns, OCC and FRB have already authorized its limited use in individual cases when compelling evidence exists that an institution may be discriminating. OTS commented that it would consider the future use of testing only after careful study, while FDIC preferred to promote voluntary self-testing by the financial institutions themselves. As we discuss in chapter 4, we believe that the ability of examiners to detect illegal discrimination at the preapplication stage of the lending process is limited. Thus, we believe that our recommendation to adopt testing as a tool for examinations is well grounded. However, our recommendation does not necessarily suggest that testing be used routinely, only that the technique be employable when a situation may warrant its use—such as when compelling evidence from other sources suggests that discriminatory behavior may be occurring prior to submission of a formal written loan application. FRB, FDIC, OCC, OTS, and HUD agreed with GAO’s recommendation that the regulatory agencies use their full range of enforcement authorities to ensure timely and accurate HMDA data. Although FRB and OCC expressed a willingness to consider civil money penalties in certain cases, current policy and preference of these agencies regarding violations of HMDA has been to require institutions they supervise to resubmit HMDA data if it contains errors that compromise its integrity. Although we agree that the cost associated with correcting and resubmitting HMDA data can be significant, we believe that the use of CMPs represents a more formal and public deterrent to future inaccurate HMDA data submissions for both the violating institution and others in the lending industry. DOJ accepted our recommendation to provide updated guidance to the bank regulatory agencies and HUD on the characteristics of referable “pattern or practice” cases. FRB, OTS, and HUD said they would welcome DOJ’s insights regarding these cases. FRB pointed out, however, that the ultimate responsibility to make determinations of the meaning of statutory phrases in the absence of court opinions rested with the agency. We are in agreement with FRB that the absence of clear statutory language regarding the characteristics of referable pattern and practice cases under ECOA and FHA necessitates independent interpretations by the various agencies responsible for fair lending enforcement. It is for precisely this reason we recommend that DOJ provide additional guidance to the agencies regarding the referral mandate. It is hoped that such guidance would be of assistance to the agencies in making their own determinations by providing a “case history” of prior referral decisions made in agreement with DOJ. Finally, FDIC, OCC, and HUD expressed support for our suggestion that Congress consider legislative initiatives that remove or diminish the disincentives associated with self-testing by protecting institutions from having to release results of self-testing reviews when they are followed by actions to correct any discriminatory behavior that may have been discovered. In their comments HUD stressed how important it was that any protection be granted only in those cases in which lenders promptly corrected the problems found through self-testing. We agree in principle that the implementation of corrective measures should be a prerequisite for gaining protection for self-testing activities and have used language to that effect in the Matter for Congressional Consideration. Although there are some differences in the agencies’ response to our recommendations, these differences generally reflect the agencies’ desire to retain the discretion necessary to consider the specific facts and circumstances of individual cases. GAO agrees that agency discretion is necessary once due consideration has been given to the full range of regulatory alternatives and analytical techniques available to ensure effective fair lending oversight of financial institutions. | Pursuant to congressional requests, GAO reviewed federal oversight and enforcement of fair lending laws, focusing on: (1) efforts to strengthen law enforcement procedures; and (2) challenges bank regulators face in their efforts to detect discrimination and ensure compliance. GAO found that: (1) since 1992, bank regulators and other enforcement agencies have increased enforcement of fair lending laws and encouraged greater compliance by the lending industry; (2) bank regulators have also overhauled their compliance policies and examination procedures which strengthened their ability to detect discriminatory lending practices; (3) several agencies have recommended a number of compliance programs and activities that could help lenders ensure fair treatment of all loan applicants; (4) referrals to the Department of Justice (DOJ) have increased significantly and DOJ has settled several civil suits that alleged fair lending violations; (5) challenges to fair lending oversight and enforcement include nonuniform examination procedures among regulatory agencies, inadequate provisions to detect discrimination prior to submission of a formal loan application, inadequate disclosure data, examiners' inexperience and lack of training, and insufficient time allowances; (6) unresolved legal issues associated with the interpretation and application of these laws impede formulation of concise guidance and leave lending institutions confused and reluctant to implement voluntary compliance programs; and (7) resolution of these problems may require civil or administrative judicial proceedings or legislative action. |
The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards, these factors also pose enormous risks that make it easier for individuals and groups with malicious intent to intrude into inadequately protected systems and use such access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. Protecting the computer systems that support critical operations and infrastructures has never been more important because of concerns about attacks from individuals and groups with such malicious intent, including terrorists. These concerns are well founded for a number of reasons, including the dramatic increase in reported computer security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive cyber attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent computer security weaknesses that place a variety of critical federal operations, including those at Treasury, at risk of disruption, fraud, and inappropriate disclosure. This body of audit evidence led us, in 1997, to designate computer security as a governmentwide high-risk area in reports to the Congress. It remains so today. How well federal agencies are addressing these risks is a topic of increasing interest in both the Congress and the executive branch. This is evidenced by recent hearings on information security and recent legislation intended to strengthen it—the Federal Information Security Management Act (FISMA) and the Government Information Security Reform (GISRA) provisions of the Fiscal Year 2001 National Defense Authorization Act. In addition, the administration has taken important actions to improve information security, such as integrating information security into the President’s Management Agenda Scorecard. Moreover, the Office of Management and Budget (OMB) and the National Institute of Standards and Technology (NIST) have issued security guidance to agencies. The Department of the Treasury is responsible for promoting prosperous and stable domestic and international economies, managing the government’s finances, and safeguarding federal financial systems. Treasury is organized into two major components—departmental offices and operating bureaus. The departmental offices are primarily responsible for formulating policy and managing the department as a whole, while the operating bureaus carry out the specific functions of the department. The basic functions of the department include collecting taxes and monies due to the U.S. and making most of the payments of the U.S. government; producing all postage stamps, currency, and coinage; managing government accounts and the public debt; supervising national banks and thrift institutions; advising on domestic and international financial, monetary, economic, trade, and tax policy; enforcing federal finance and tax laws; and investigating and prosecuting tax evaders. In fiscal year 2003, Treasury experienced significant organizational changes. The Homeland Security Act of 2002 (signed by the President on November 25, 2002) called for several Treasury bureaus or elements to be transferred to the newly formed Department of Homeland Security and to the Department of Justice. On January 24, 2003, the Bureau of Alcohol, Tobacco, and Firearms’ law enforcement function moved to Justice. The tax and trade functions of the bureau remained with Treasury under the newly formed Alcohol and Tobacco Tax and Trade Bureau. On March 1, 2003, three Treasury bureaus moved to Homeland Security: the Federal Law Enforcement Training Center, the U.S. Customs Service, and the U.S. Secret Service. The reorganized department had a fiscal year 2003 budget of $10.7 billion and a staff of about 115,000. Staff located at the bureaus makes up about 97 percent of the Treasury work force. To support the department’s overall mission, Treasury and its key bureaus, including the Internal Revenue Service (IRS)—-by far the largest; Financial Management Service (FMS); U.S. Mint; and the Bureau of the Public Debt (BPD), have diverse functions. For example, IRS is responsible for determining, assessing, and collecting internal revenue in the United States. It collects taxes, processes tax returns, and enforces the nation’s tax laws. In fiscal year 2003, IRS processed about 130 million individual tax returns, accounted for almost $2 trillion in collections, and paid about $300 billion in refunds to taxpayers. FMS receives and disburses public monies, maintains government accounts, and prepares reports on the status of government finances. As the government’s financial manager, FMS disbursed more than $1.6 trillion in fiscal year 2003. BPD borrows the money needed to finance the federal government and administers the public debt through Treasury financial instruments. It is responsible for ensuring that reliable systems and processes are in place for purchasing and servicing Treasury securities. In fiscal year 2003, BPD conducted about 200 auctions and issued about $4 trillion in marketable securities. Treasury and its bureaus rely heavily on information management systems to fulfill their many financial management stewardship roles and responsibilities for the nation. The bureaus have distinct, numerous, and complex information systems to process, store, and secure highly sensitive data. Treasury and its bureaus report in fiscal year 2003 that they have 708 distinct information systems supporting their operations. A centralized data communications network and management system interconnects networks and systems at the bureaus and departmental offices. FISMA provides that the Secretary of the Treasury is responsible 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 under the act. Treasury’s CIO is responsible for developing and maintaining a departmentwide information security program; developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements; and assisting senior agency officials concerning their responsibilities under the act. In addition, the CIO provides oversight, strategic management, and policy direction on all information security programs within Treasury. The Office of Security Compliance within the Office of the CIO is responsible for developing departmentwide information security policies and ensuring bureau implementation. Each bureau is responsible for implementing Treasury-mandated security policies within its domain. In order to implement departmentwide security policies, the bureaus are required to develop their own information security programs, including their own security compliance functions. Our objectives were to (1) determine whether Treasury and its key bureaus have effectively implemented information security controls to protect the confidentiality, integrity, and availability of their systems and data and (2) determine whether Treasury has effectively implemented its departmentwide information security program. To determine the effectiveness of the information security controls implemented at Treasury and its bureaus, we considered the results of prior information security reviews that we performed at IRS, BPD, and FMS. We also examined and analyzed the contents of audit reports and associated work papers for information security and internal control reviews performed by the Treasury Office of the Inspector General (OIG) or independent auditors in connection with their audits of the bureaus’ financial statements. In addition, we reviewed the department’s performance and accountability reports to document Treasury’s information security-related weaknesses. To assess Treasury’s departmentwide information security program, we reviewed and evaluated the department’s information security policies in effect at the time of our review; analyzed data presented in Treasury’s GISRA report for fiscal year 2002 and FISMA report for fiscal year 2003; examined and assessed reports and other documents related to the department’s information security program, and interviewed Treasury officials regarding their processes and procedures for overseeing, monitoring, evaluating, and reporting on the implementation of information security across the department. Our review was performed at Treasury headquarters and our headquarters in Washington, D.C., from March through October 2003, in accordance with generally accepted government auditing standards. The effective implementation of appropriate, properly designed security controls is an essential element for ensuring the confidentiality, integrity, and availability of information systems and information. Weak security controls can expose information systems and information to an increased risk of unauthorized access, use, disclosure, disruption, modification, and destruction. Treasury’s bureaus have not consistently implemented effective information security programs and resolved known information security control weaknesses. Some bureaus have consistently reported implementing effective controls over their information systems and/or limiting the negative effect control weaknesses could have on the preparation of financial statements and internal controls. Other key Treasury bureaus, including IRS and FMS, have reported long-standing weaknesses in information security controls and continued to report significant weaknesses in fiscal year 2002. As a result of the weaknesses and inconsistencies in the overall implementation of the bureaus’ information security programs, the Treasury OIG designated information security as a departmentwide material weakness in its fiscal year 2002 financial audit report. Several Treasury bureaus have consistently implemented effective information security controls over their computing environments and/or implemented compensating controls to correct or mitigate the weaknesses identified during previous audits. For example, the external auditors for the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Bureau of Engraving and Printing have not reported significant information security control weaknesses. BPD has also consistently implemented internal control over its financial systems. Since 1997 we have reviewed the general and application controls over key BPD systems as part of our audit of the Schedule of Federal Debt managed by BPD. We found that, although security over its computer systems and service continuity controls needed strengthening, BPD maintained, in all material respects, effective internal control, including general and application computer controls, related to reporting reliable financial information on the Schedule of Federal Debt. In instances in which information security improvements were needed, BPD management has been responsive in taking corrective action or in implementing compensating controls to mitigate the weaknesses identified during our reviews. As the following table indicates, our subsequent audits have found that, as of May 2003, BPD had taken action to correct or mitigate a substantial percentage of the security weaknesses reported during the prior year’s audit. Strengthening information systems controls at other bureaus is one of the management challenges currently facing the Department of the Treasury. In fiscal year 2002, significant information security weaknesses existed in the computer systems used at key Treasury bureaus to process sensitive information and data needed to accomplish Treasury’s mission. Weaknesses span all six general control audit areas addressed in our information security audit methodology. These six areas are (1) security program management, 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, which ensures that computer-dependent operations experience no significant disruptions. We identified information systems security as a major challenge for Treasury in our 2003 performance and accountability report on the department. The following examples highlight the serious information security weaknesses that existed at Treasury’s key bureaus. Since 1992, we have reviewed the effectiveness of IRS information security in connection with our annual audit of IRS’s financial statements and conducted information security reviews over IRS’s computing facilities and electronic filing systems at the request of the Congress. The results of these reviews have led us each year to designate information security as a material weakness. During the 3-year period ending July 31, 2002, we conducted 14 information security reviews at 11 IRS tax processing facilities nationwide. These reviews identified 765 specific general control weaknesses and demonstrate the departmentwide challenge IRS and Treasury face in addressing information security. In addition, we conducted 5 application control reviews and reported 112 application control weaknesses during this same period. While the majority of general control weaknesses identified fell in the area of logical access controls, weaknesses in physical security, software change controls, segregation of duties, and service continuity also posed significant risk to IRS systems and taxpayer information, as the following illustrates: Inadequate logical access controls diminished the reliability of IRS’s computerized data and increased the risk of unauthorized disclosure, modification, and use of sensitive systems and taxpayer data. Logical access controls at IRS facilities did not effectively prevent, limit, or detect access to computing resources. IRS did not adequately control user accounts and passwords to ensure that only authorized individuals were allowed access to computer systems. Inactive and unused user system accounts were found at all 11 IRS computing facilities reviewed. In addition, IRS inappropriately granted powerful operating system privileges to users who did not need them and granted users access to certain system files for which they had no business need. Further, inadequate controls over network services and devices were found that could allow intruders to gain unauthorized access to valuable information about IRS systems without logging on to the systems. Physical security control weaknesses, such as inadequate physical barriers and ineffective screening of visitors, contributed to weakening the perimeter security at several IRS facilities. As a result, increased risk exists that individuals could gain unauthorized access to facility grounds, buildings, sensitive computing resources, and taxpayer data, without detection. Software change control procedures at two facilities did not provide sufficient control mechanisms to ensure that the facilities received all authorized program updates. In addition, software developer accounts and/or development tools were allowed on production servers at five facilities, which increases the risk that individuals could make unauthorized modifications to production software on these servers. Inadequate segregation of duties was also an issue, as IRS did not consistently separate incompatible computer-related activities among individuals performing system administration and security administration duties at its computing facilities. In addition, IRS assigned incompatible operating system privileges to users, such as granting auditing privileges to system administrators at 10 facilities. As a result, increased risk exists that erroneous or unauthorized activity could occur and go undetected. Service continuity control weaknesses limited IRS’s ability to restore and continue critical data processing services in the event of unexpected service interruptions. IRS had not developed disaster recovery plans for certain key systems and/or had not adequately tested service continuity plans at several facilities. As a result, increased risk exists that IRS will not be able to protect or recover essential information and critical business processes in the event of an unexpected interruption of service. IRS has made progress in correcting the general and application control weaknesses identified in our information security reviews during this 3- year period. In May 2003 we reported that IRS had corrected about one- third of the 765 general control weaknesses and 55 percent of the application control weaknesses identified in our reviews. Although IRS has corrected a significant number of weaknesses, many significant weaknesses in information security controls remain. FMS has experienced long-standing weaknesses in its computer controls. It has reported its overall information systems security environment as a material weakness every year since fiscal year 1998. Treasury has recognized the seriousness of this problem and reported FMS’s computer controls as a material weakness in its annual accountability reports for each of those fiscal years. In January 2002, we reported that FMS’s overall information security control environment was ineffective in identifying, deterring, and responding promptly to computer control weaknesses. In November 2002, the independent external auditor responsible for auditing FMS’s fiscal year 2001 and 2002 financial statements reported a material weakness in the general controls over the Hyattsville (Md.) Regional Operations Center. The external auditor reported that general controls did not effectively prevent (1) unauthorized access to the disclosure of sensitive information, (2) unauthorized changes to systems and application software, (3) unauthorized access to programs and files that control computer hardware and secure applications, or (4) disruption of critical operations. Specifically, the external auditor found weaknesses in the following areas: Access controls. The majority of information security weaknesses were identified in this area. Weaknesses were found in the administration of access controls, access to computer programs and files, and access to sensitive data. Systems software. The development and enforcement of systems software policies and procedures over usage and modifications to operating system upgrades and utilities were inadequate. Change controls. Configuration change management control procedures were not consistently enforced across all major FMS applications reviewed. Service continuity. Although FMS has completed its business impact assessment, the results of this assessment had not been incorporated into detailed disaster recovery plans. Although the independent external auditor reported that FMS had made improvements in its information security control environment during fiscal year 2002, the external auditor was critical of the overall effectiveness of FMS’s information security management program. FMS management was still in the process of implementing its new entitywide security plan—authorized in September 2002—for most of the year under audit. While FMS has corrected vulnerabilities in some areas, subsequent reviews have found that previously identified weaknesses continue to exist on other systems. Significant information security weaknesses also existed at the U.S. Mint. The independent external auditor responsible for auditing the Mint’s fiscal year 2001 financial statements identified numerous general and application control weaknesses. Due to the magnitude of these weaknesses, the external auditor reported two separate material weaknesses—one for general controls and one for application controls. In its audit report on the Mint’s fiscal year 2002 financial statements, the external auditor aggregated the two previously reported material weaknesses into one material weakness on information systems controls. The auditor noted that the Mint had made improvements in its computer control environment and systems security control activities, which included the development of a comprehensive corrective action plan, and hired a new chief information officer. However, the external auditor noted weaknesses in the Mint’s information systems general controls relating to its network infrastructure, systems documentation, software change control, and related security policies and procedures. Assessing and managing the risks associated with information systems are key elements of an information security program. FISMA and other federal guidance require federal agencies to develop comprehensive information security programs based on assessing and managing risks. OMB requires agencies to report performance measure data related to required aspects of their information security programs. These data include the number and percentage of systems that have been assessed for risk and assigned a level of risk, been certified and accredited, security controls that have been tested/evaluated within the last year, tested contingency plans. Treasury also requires that its bureaus use these same performance measures when reporting to it on the status of bureau information security programs. Performance data reported by the bureaus indicate that the bureaus have not consistently performed these required information security activities and that certain bureaus performed them better than others. For example, bureaus reported that the percentage of systems that they performed these required activities ranged from 0 to 100 percent of their systems. Risk management is a process that allows information technology managers to balance the operational and economic costs of protective measures to achieve gains in mission capability by protecting the information technology systems and data that support organizational missions. Agencies, including Treasury, are required to perform periodic threat-based risk assessments for systems and data. Risk assessments are an essential element of risk management and overall security program management and, as our best practice work has shown, 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. Treasury bureaus have not consistently assessed their systems for risk. According to Treasury’s FISMA report for 2003 and as illustrated in figure 1, four bureaus reported that they had assessed risk for 90 to 100 percent of their systems. However, figure 1 also shows that the other nine bureaus, including the four that reported that less than half of their systems had been assessed for risk, did not consistently assess risks for their systems. The bureaus also experienced mixed results in fiscal year 2003 with increasing the percentage of their systems that have been assessed for risk. Of the 11 bureaus that reported this security metric in both fiscal years, 4 reported an increase in the percentage of systems assessed for risk in fiscal year 2003 compared with fiscal year 2002, while 4 reported a decrease. The remaining 3 bureaus did not report a change in the percentage of systems assessed for risk. OMB Circular A-130 requires that security plans be prepared for all federal systems that contain sensitive information. 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, (2) delineate the responsibilities and expected behavior of all individuals who access the system, and (3) serve as documentation of the structured process of planning adequate, cost-effective security protection for a system. Treasury bureaus did not consistently maintain up-to-date security plans for their systems. According to Treasury’s FISMA report for 2003, only 304 (43 percent) of the department’s 708 systems had up-to-date security plans. Although IRS had by far the largest number of systems without a security plan, 8 of the 13 bureaus reported that they had up-to-date security plans for less than 90 percent of their systems for fiscal year 2003, as shown in figure 2. OMB and Treasury require management officials to formally authorize the use of each general support system and major application through a certification and accreditation process before it becomes operational, when a significant change occurs, and at least every 3 years thereafter. System certification is based on a technical evaluation of an information system to see how well it meets its security requirements, including all applicable federal laws, policies, regulations, and standards. System accreditation is the written management authorization for a system to operate and/or process information. Treasury bureaus did not certify and accredit many of their systems. According to Treasury’s FISMA report for fiscal year 2003 and as shown in figure 3, 11 of 13 bureaus reported that less than 90 percent of their systems had been certified and accredited for fiscal year 2003. Moreover, 2 bureaus reported that none of their systems had been authorized for processing following system certification and accreditation. Our analysis of data submitted by the 11 bureaus that reported on this performance measure for both fiscal years 2002 and 2003 showed mixed progress. For example, 5 of the 11 bureaus reported a decrease in the percentage of systems authorized for processing following certification and accreditation, while 5 of the remaining 6 bureaus showed improvement in this area. An agency head is responsible for ensuring that the appropriate agency officials evaluate the effectiveness of the information security program, including testing controls. Further, the agencywide information security program is to include periodic management testing and evaluation of the effectiveness of information security policies and procedures. 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 the program reviews can supplement control testing and evaluation in IG and our audits to help provide a more complete picture of the agency’s security posture. FISMA requires that agencies test the management, operational, and technical controls of every information system identified in their inventories of major information systems no less than annually. Most Treasury bureaus did not test the security controls on each of their inventoried systems during fiscal year 2003. As illustrated below, 9 of the 13 Treasury bureaus reported in Treasury’s FISMA report that they had tested the controls on less than 90 percent of their systems for fiscal year 2003, including 6 that tested controls on less than half of their systems. Contingency plans provide specific instructions for restoring critical systems, including such items as arrangements for alternative processing facilities, in case the usual facilities are significantly damaged or cannot be accessed. These plans and procedures help to ensure that critical operations can continue when unexpected events occur, such as a temporary power failure, an accidental loss of files, or a major disaster. Contingency plans should also identify which operations and supporting resources are critical and need to be restored first and should be tested to identify their weaknesses. Without such tested plans, agencies have inadequate assurance that they can recover operational capability in a timely, orderly manner after a disruptive attack. Treasury bureaus have not consistently prepared or tested contingency plans for their information systems. According to Treasury’s FISMA report for fiscal year 2003, only 44 percent of its systems had a contingency plan. Bureaus also reported that 41 percent of their systems had tested contingency plans. As shown in figure 5, only 2 of 13 bureaus reported that they had tested contingency plans for at least 90 percent of their systems. Moreover, 4 bureaus reported that none of their contingency plans had been tested. The bureaus’ inconsistent track record for performing these essential information security activities can lead to the implementation of insecure systems and/or the implementation of inadequate or inappropriate security controls that do not sufficiently address threats to these systems and could result in costly efforts to subsequently implement effective controls. The information security weaknesses and inconsistent security practices identified at the bureaus exist, in part, because Treasury’s departmentwide security program, while evolving, is not yet fully institutionalized across the entire department. At Treasury, the vast majority of the department’s information system assets and computing operations are located at the operating bureaus. Each bureau has been assigned responsibility for developing and maintaining an effective information security program for managing its information security risks, in accordance with departmental policies. Although responsibility for developing and maintaining an effective bureau-specific information security program has been delegated to each operating bureau, broad program responsibility for information security throughout the department is assigned to the Treasury CIO. However, prior to fiscal year 2003, Treasury had not provided adequate direction to or oversight of the bureaus to ensure that key elements of a strong information security program were fully and consistently implemented at each bureau, as the following examples illustrate. Treasury’s information security policies and procedures were outdated and incomplete. The principal policy document governing Treasury’s information security program was Treasury Directive 71-10, Department of Treasury Security Manual. The primary purpose of this document was to establish comprehensive, uniform security policies, procedures, and guidelines that were to be followed by each bureau in developing its own specific policies and operating directives. However, the security manual contained policies that had not been revised since 1992 and did not reflect current federal guidance. For example, the manual was silent in many areas where security policy was needed, such as voice mail, e-mail, and security-incident reporting. In addition, Treasury’s security manual did not provide to the bureaus policies or guidance in the areas of virus protection, audit trails, and warning banners. Although most bureaus have developed their own information security policies, five relied exclusively on these outdated and incomplete policies to implement their information security programs. Treasury had not established effective processes and procedures for monitoring and overseeing the implementation of security at the bureaus. The Office of Security Compliance within the Office of Treasury CIO is responsible for monitoring Treasury bureaus and ensuring compliance with federal and Treasury security policies. However, prior to fiscal year 2002, the office did not conduct security reviews of bureau information security programs. In fiscal year 2002, the office conducted 35 security reviews of the bureaus’ information systems and programs. According to Treasury officials, these reviews were limited in scope, were conducted only at selected bureaus, and did not represent a complete security program review. For example, some security reviews consisted primarily of reviewing a system’s security plan and did not include testing security controls for the system. To address these issues and improve oversight of information security at the bureaus, Treasury launched or expanded several initiatives during fiscal year 2003 that were designed to promote the implementation of key elements of a departmentwide information security program. Appointment of chief information officer. In March 2003, Treasury appointed a new departmental CIO. FISMA provides that the authority to ensure compliance with the requirements imposed on the agency under the act be delegated to the agency CIO. The CIO’s responsibilities include developing and maintaining a departmentwide information security program and security policies and providing oversight, strategic management, and policy direction on all information security programs within Treasury. Development of information security governance model. The Treasury CIO proposed a governance model for information security during fiscal year 2003. Elements of the model include integrating security programs both functionally with capital planning and organizationally across bureaus; increasing CIO oversight; increasing bureau self-assessments; creating and distributing comprehensive security policies, standards, and procedures; establishing a security policy forum; and linking the information technology governance process to the enterprise architecture and capital investment and planning process. Updated departmental information security policies and procedures. During fiscal year 2003, Treasury undertook a major revision of its outdated and incomplete information security policies. In August 2003, Treasury published a comprehensive, up-to-date body of information security policies and procedures—the Treasury Information Systems Security Program—consisting of the Treasury Information Technology Security Program Policy (Volume 1) and the Treasury Information Technology Security Program Handbook (Volume 2). The documents replaced Treasury Directive 71-10 and formally establish a uniform baseline for the department’s information security requirements. They are based on requirements levied by the FISMA, NIST, and OMB and are to serve as a framework for the bureaus as they develop their specific policies and operating directives. Expanded program and system review. Treasury expanded its review of the bureaus’ information security programs and systems during fiscal year 2003. According to Treasury’s fiscal year 2003 FISMA report, one departmental initiative to create and maintain a system inventory revealed an additional 270 systems in fiscal year 2003. The department also conducted reviews of each bureau’s information security program and performed 21 system certification and accreditation package reviews. In addition, Treasury conducted vulnerability scans on networks and performed system penetration tests as part of its program and system reviews. Analysis of bureaus’ plans of action and milestones. Treasury continued tracking and analyzing the plan of action and milestones (POA&M) reported by the bureaus on a quarterly basis. This plan is a tool that details the tasks that need to be accomplished and the resources required, milestones, and scheduled completion dates for accomplishing the tasks. The purpose of a POA&M is to help agencies identify, assess, prioritize, and monitor the progress of corrective efforts for security weaknesses found in programs and systems. OMB requires agencies to (1) develop a separate POA&M for every program and system for which weaknesses were identified and (2) report quarterly on progress implementing the plans. Accordingly, Treasury requires its bureaus to maintain POA&Ms on all information security weaknesses and provide quarterly updates to the Treasury CIO’s office. Treasury monitors bureau progress in correcting weaknesses by using the plans as a performance tracking mechanism. According to the Treasury CIO, Treasury analyzes the updated plans for quality and completeness and evaluates progress and other significant trends that may influence the resolution of security-related weaknesses. Educational outreach programs. According to Treasury’s FISMA report for fiscal year 2003, Treasury’s oversight and compliance program also developed and maintained a series of outreach programs that are designed to educate Treasury employees about elements of information security compliance and to stimulate dialogue among security practitioners and stakeholders across the department. Increased funding for information technology security. According to Treasury’s FISMA report for fiscal year 2003, the department more than doubled its total information security spending, from $85 million in fiscal year 2002 to $174 million in fiscal year 2003. Although Treasury has significantly increased funding for information security and has begun to make progress implementing key elements of its information security program, it remains challenged to effectively and consistently implement security controls and procedures across the department. As illustrated in figure 6, an analysis of security metric data in Treasury’s fiscal year 2002 GISRA report and its fiscal year 2003 FISMA report shows that the majority of Treasury systems do not meet key information security requirements, and Treasury’s reported performance in meeting certain of these requirements has decreased. Treasury reported that it did not implement any of these six required information security activities on a majority of its systems for fiscal year 2003. For example, Treasury established a specific goal that 80 percent of all information systems be certified and accredited by the end of fiscal year 2003. However, as of August 15, 2003—the date of data contained in its FISMA report for fiscal year 2003—Treasury had certified and accredited only about 24 percent of its 708 systems. According to Treasury’s CIO, this was due to (1) the discovery of 276 additional systems at the IRS as a result of an effort to compile an accurate inventory and (2) a new reporting requirement that stipulated that systems with an interim authority to operate not be counted in fiscal year 2003 as an accredited system. In fiscal year 2002, such systems were counted as accredited for reporting purposes. In addition, implementation of certain information security requirements has decreased from fiscal year 2002. For the 11 bureaus that reported performance measures for both years, the percentage of Treasury systems implementing five of the six requirements decreased in fiscal year 2003, while it increased for one. For example, Treasury-reported data for fiscal year 2002 shows that 93 percent of the systems at those bureaus were assessed for risk and assigned a level of risk, while for fiscal year 2003 only 42 percent were. Treasury’s overall performance demonstrates that it continues to face challenges implementing and monitoring information security throughout the department. The following factors contribute to the challenges confronting Treasury as it endeavors to improve the security of its information systems and data: Treasury reorganization. Throughout fiscal year 2003, Treasury underwent a major reorganization. The reorganization resulted in the reassignment of three bureaus to the Department of Homeland Security, the creation of a new entity within Treasury, and the transfer of about 50 percent of Treasury’s information technology security staff to the Department of Homeland Security. The reduction in staff resulting from the reorganization, combined with the reported increase in the total number of departmental systems, could hinder the department’s ability to provide effective oversight and direction over the bureaus’ information security programs. Senior information security officer has not been designated. FISMA requires that a senior agency information security officer be designated to carry out the information security duties and responsibilities of the CIO under the act. This senior level official is to (1) have information security as his or her primary duty; (2) head an office with the mission and resources necessary to assist in ensuring compliance with the act; and (3) possess the professional qualifications, including training and experience, required to administer the functions described in the act. The official would oversee the development and implementation of departmental information policies, procedures, and control techniques and coordinate departmentwide security-related activities to ensure that weaknesses identified in one bureau’s systems do not place the entire department’s information assets at undue risk. However, Treasury has not designated a senior agency information security officer to develop, maintain, and oversee the department’s security program. The lack of a senior information security officer with the stature and experience as well as the responsibility and authority for directing and overseeing the implementation of the departmentwide program could impair departmental control or influence in information security program decisions made by the bureaus. Reliability and completeness of performance information. Although FISMA reporting provided performance information on key security areas, it is important for agencies to ensure that they have the appropriate management structures and processes in place to strategically manage information security, as well as to ensure the reliability of performance information. For example, disciplined processes can routinely provide the agency with timely, accurate, and useful information for day-to-day management of information security. Treasury has established a process for receiving quarterly updates on the bureaus’ plans of actions and milestones and issuing an annual data call to the bureaus for performance information on key information security requirements used in FISMA reports. However, the Treasury reports reveal issues with the reliability and completeness of bureau-reported information. For example, in Treasury’s fiscal year 2002 GISRA report, there were significant differences between what Treasury and the OIG reported for the percentage of systems that met certain information security requirements. In addition, the Treasury Inspector General for Tax Administration (TIGTA) states in the fiscal year 2003 FISMA report that IRS’s POA&Ms do not report on the status of system-specific vulnerabilities and are not specific enough to ensure accountability and timely remediation of the vulnerabilities. TIGTA also states that since IRS’s POA&Ms are not reported by system, justifications for information security funding found in its business cases cannot be tied to or linked with weaknesses reported in the POA&M. With the need for effective oversight to ensure compliance with the departmentwide information security program and the need to comply with a new requirement by OMB for quarterly reporting of agency progress against certain information security performance measures, disciplined processes that can routinely provide Treasury with timely, accurate, and useful information for day-to-day management of information security will become more important for the department. Weaknesses in information security controls at Treasury bureaus have placed its financial and information management systems at risk and could hinder its ability to effectively and efficiently accomplish its mission. Although Treasury has taken the initial steps necessary to implement a departmentwide information security program, key elements of such a program—those needed to help mitigate Treasury’s long-standing information security weaknesses—have not been fully implemented. Implementing an effective information security program could help ensure that known weaknesses affecting Treasury’s computing resources are promptly mitigated and that general controls effectively protect its computing environments. Until Treasury oversees the implementation of a departmentwide security program, limited assurance exists that it and its bureaus will be able to resolve known information security weaknesses and adequately safeguard their information resources. To improve oversight and compliance with Treasury’s information security program, we recommend that the Secretary of the Treasury direct the chief information officer to do the following: Assess the staffing and resource requirements for performing the department’s oversight and compliance efforts to ensure that departmental information security policies are effectively and consistently implemented throughout the organization. Designate a senior agency information security officer. Examine existing reporting processes and implement procedures to enhance the reliability and completeness of the bureau-provided information required for day-to-day management of information security. In providing written comments on a draft of this report (which are reprinted as appendix 1), the Treasury CIO responded on behalf of the department and concurred with our assessment and recommendations. In addition, the CIO underscored his commitment to implementing a new security governance model that not only aligns with Treasury’s information technology governance model but also aligns with security policies and security operations. The Treasury CIO also provided technical comments that have been incorporated into the report as appropriate. If you have any questions or need further information, please contact Gregory C. Wilshusen, Assistant Director, at (202) 512-6244, or me at (202) 512-3317. We can also be reached by e-mail at wilshuseng@gao.gov and daceyr@gao.gov, respectively. Kenneth A. Johnson and Ronald E. Parker made key contributions to this report. Information Security: Computer Controls Over Key Treasury Internet Payment System. GAO-03-837. Washington, D.C.: July 30, 2003. Information Security: Progress Made, but Weaknesses at the Internal Revenue Service Continue to Pose Risks. GAO-03-44. Washington, D.C.: May 30, 2003. Bureau of the Public Debt: Areas for Improvement in Computer Controls. GAO-03-524R. Washington, D.C.: May 1, 2003. Information Security: Progress Made, But Challenges Remain to Protect Federal Systems and the Nation’s Critical Infrastructures. GAO-03-564T. Washington, D.C.: Apr. 8, 2003. High-Risk Series: Protecting Information Systems Supporting the Federal Government and the Nation’s Critical Infrastructures. GAO-03-121. Washington, D.C.: January 2003. Major Management Challenges and Program Risks: Department of the Treasury. GAO-03-109. Washington, D.C.: January 2003. Computer Security: Progress Made, But Critical Federal Operations and Assets Remain at Risk. Washington, D.C.: GAO-03-303T. Nov. 19, 2002. Financial Audit: IRS’s Fiscal Years 2002 and 2001 Financial Statements. GAO-03-243. Washington, D.C.: Nov. 15, 2002. Financial Audit: Bureau of the Public Debt’s Fiscal Years 2002 and 2001 Schedules of Federal Debt. GAO-03-199. Washington, D.C.: Nov. 1, 2002. Bureau of the Public Debt: Areas for Improvement in Computer Controls. GAO-02-1082R. Washington, D.C.: Sept. 18, 2002. Information Security: Comments on the Proposed Federal Information Security Management Act of 2002. GAO-02-677T. Washington, D.C.: May 2, 2002. Information Security: Additional Actions Needed to Implement Reform Legislation. GAO-02-470T. Washington, D.C.: Mar. 6, 2002. Financial Audit: IRS’s Fiscal Years 2001 and 2000 Financial Statements. GAO-02-414. Washington, D.C.: Feb. 27, 2002. Financial Audit: Bureau of the Public Debt’s Fiscal Years 2001 and 2000 Schedules of Federal Debt. GAO-02-354. Washington, D.C.: Feb. 15, 2002. Financial Management Service: Significant Weaknesses in Computer Controls Continue. GAO-02-317. Washington, D.C.: Jan. 31, 2002. Computer Security: Improvements Needed to Reduce Risk to Critical Federal Operations and Assets. GAO-02-231T. Washington, D.C.: Nov. 9, 2001. Bureau of the Public Debt: Areas for Improvement in Computer Controls. GAO-01-1131R. Washington, D.C.: Sept. 13, 2001. Management Letter: Improvements Needed in IRS’s Accounting Procedures and Internal Controls. GAO-01-880R. Washington, D.C.: July 30, 2001. Computer Security: Weaknesses Continue to Place Critical Federal Operations and Assets at Risk. GAO-01-600T. Washington, D.C.: Apr. 5, 2001. Internal Revenue Service: Progress Continues But Serious Management Challenges Remain. GAO-01-562T. Washington, D.C.: Apr. 2, 2001. Financial Audit: Bureau of the Public Debt’s Fiscal Years 2000 and 1999 Schedule of Federal Debt. GAO-01-389. Washington, D.C.: Mar. 1, 2001. Financial Audit: IRS’ Fiscal Year 2000 Financial Statements. GAO-01-394. Washington, D.C.: Mar. 1, 2001. Information Security: IRS Electronic Filing System. GAO-01-306. Washington, D.C.: Feb. 16, 2001. Computer Security: Critical Federal Operations and Assets Remain at Risk. GAO/AIMD-00-314. Washington, D.C.: Sept. 11, 2000. Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies. GAO/AIMD-00-295. Washington, D.C.: Sept. 6, 2000. Information Security: Software Change Controls at the Department of Treasury. GAO/AIMD-00-200R. Washington, D.C.: June 30, 2000. Management Letter: Suggested Improvements in IRS’s Accounting Procedures and Internal Controls. AIMD-00-162R. Washington, D.C.: June 14, 2000. Financial Audit: IRS’s Fiscal Year 1999 Financial Statements. AIMD-00- 76. Washington, D.C.: Feb. 29, 2000. Federal Information System Controls Audit Manual. GAO/AIMD-12.19.6. Washington, D.C.: January 1999. Organizations Information Security Management: Learning from Leading. GAO/AIMD-98-68. Washington, D.C.: May 1998. High-Risk Series: Information Management and Technology. GAO/HR- 97-9. Washington, D.C.: February 1997. Financial Audit: Examination of IRS’s Fiscal Year 1992 Financial Statements. GAO/AIMD-93-2. Washington, D.C.: June 30, 1993. | The Department of the Treasury relies heavily on information systems--and on the public's trust in its work. Information security is therefore critical to Treasury operations. In support of its annual audit of the government's financial statements, GAO assessed the effectiveness of (1) Treasury's information security controls in protecting the confidentiality, integrity, and availability of the department's systems and data and (2) Treasury's implementation of its departmentwide information security program. In assessing the adequacy of Treasury's information security program, GAO focused on the effectiveness of its departmentwide policies and processes, rather than on bureau-specific directives and guidance. The Department of the Treasury and its key bureaus have not consistently implemented information security controls to protect the confidentiality, integrity, and availability of their information systems and data. Several bureaus have reported effective controls over their systems. However, longstanding information security weaknesses in access and software change controls, segregation of duties, and service continuity have been consistently identified at certain key Treasury bureaus, such as IRS and the Financial Management Service. Weaknesses at these bureaus place the sensitive information managed by the bureaus at increased risk of unauthorized access, use, disclosure, disruption, modification, or destruction. Moreover, bureaus have not consistently implemented key information security requirements. An analysis of performance data for the 11 Treasury bureaus that reported on these requirements for fiscal years 2002 and 2003 reveals that most Treasury systems did not meet certain key information security requirements in fiscal year 2003 and that the percentage of systems that meet certain requirements has decreased from fiscal year 2002. The information security weaknesses and inconsistent implementation of security controls at Treasury bureaus exist, in part, because Treasury's departmentwide security program, while evolving, has not yet been fully institutionalized across the entire department. During fiscal year 2003, Treasury launched or expanded several initiatives to implement key elements of its program. However, additional actions are needed to effectively and consistently implement information security controls throughout the department. |
Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies, where the public’s trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards, systems are unprotected from individuals and groups with malicious intent who can intrude and use their access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. These concerns 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. Our previous reports, and those by the Treasury Inspector General for Tax Administration (TIGTA), describe persistent information security weaknesses that place federal agencies, including IRS, at risk of disruption, fraud, or inappropriate disclosure of sensitive information. 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. Such a program includes developing and implementing security plans, policies, and procedures; testing and evaluating the effectiveness of controls; assessing risk; providing specialized training; planning, implementing, evaluating, and documenting remedial action to address information security deficiencies; and ensuring continuity of operations. We have designated information security as a governmentwide high-risk area since 1997—a designation that remains in force today. IRS has demanding responsibilities 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. In fiscal year 2006, IRS collected about $2.5 trillion in tax payments, processed hundreds of millions of tax and information returns, and paid about $277 billion in refunds to taxpayers. IRS is a large and complex organization, adding unique mission operational challenges for management. It employs tens of thousands of people in 10 service center campuses, 3 computing centers, and numerous other field offices throughout the United States. IRS also collects and maintains a significant amount of personal and financial information on each American taxpayer. The confidentiality of this sensitive information must be protected; 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, availability, and integrity of the information and information systems that support the agency and its operations. FISMA states that the Chief Information Officer (CIO) is responsible for developing and maintaining an information security program. Within IRS, this responsibility is delegated to the Chief of Mission Assurance and Security Services (MA&SS). The Chief of MA&SS is responsible for developing policies and procedures regarding information technology security; establishing a security awareness and training program; conducting security audits; coordinating the implementation of logical access controls into IRS systems and applications; providing physical and personnel security; and, among other things, monitoring IRS security activities. To help accomplish these goals, MA&SS has developed and published information security policies, guidelines, standards, and procedures in the Internal Revenue Manual, the Law Enforcement Manual, and other documents. The Modernization and Information Technology Services organization, led by the CIO, is responsible for developing security controls for systems and applications; conducting annual tests of systems; implementing, testing, and validating the effectiveness of remedial actions; ensuring that continuity of operations requirements are addressed for all applications and systems it owns; and mitigating technical vulnerabilities and validating the mitigation strategy. The objectives of our review were to determine (1) the status of IRS’s actions to correct or mitigate previously reported weaknesses at two data processing sites and (2) whether controls over key financial and tax processing systems located at three sites were effective in ensuring the confidentiality, integrity, and availability of financial and sensitive taxpayer information. This review was completed to support the annual financial statement audit, by assessing the effectiveness of information system controls for the purposes of supporting our opinion on internal controls over the preparation of the financial statements. We concentrated our evaluation primarily on threats emanating from sources internal to IRS’s computer networks. Our evaluation was based on (1) 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; (2) FISMA, which establishes key elements that are required for an effective agencywide information security program; and (3) previous reports from TIGTA and GAO. Specifically, we evaluated information security controls that are intended to prevent, limit, and detect electronic access to computer resources (information, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from espionage, sabotage, damage, and theft; prevent the exploitation of security vulnerabilities; prevent the introduction of unauthorized changes to application or system ensure that work responsibilities for computer functions are segregated so that one individual does not perform or control all key aspects of computer-related operations and, thereby, have the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection; provide confidentiality of used media; and limit the disruption to a system due to the intentional or unintentional actions of individuals. In addition, we evaluated IRS’s agencywide information security program. We identified and reviewed pertinent IRS information security policies and procedures, guidance, security plans, relevant reports, and other documents. We also tested the effectiveness of information security controls at three IRS sites. We focused on five critical applications that directly or indirectly support the processing of material transactions that are reflected in the agency’s financial statement. These applications are used for procurement, asset management, and tax administration, which are located at the sites. We also discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. IRS has made limited progress toward correcting previously reported information security weaknesses at two data processing sites. Specifically, it has corrected or mitigated 25 of the 73 weaknesses that we reported as unresolved at the time of our last review. IRS corrected weaknesses related to access controls and configuration management, among others. For example, it has made progress in implementing controls used to authorize access to Windows systems, network devices, databases, and mainframe systems by, among other things, removing administrative privileges from Windows users who did not need them to perform job duties; securely configuring the protocol used for managing network performance; improving control over data sharing among mainframe users; and restricting a certain access privilege to mainframe users who did not need it to perform their job duties; improved password controls on its servers by installing a password filter on Windows systems requiring users to create passwords in accordance with IRS policy, discontinuing the use of stored passwords in clear text for automatic logon files and structured query language scripts, and requiring password complexity and stronger password expiration policies on Windows systems; enhanced audit and monitoring efforts for mainframe and Windows user conducted a facility risk assessment at a critical data processing site; and improved change controls over one of IRS’s mainframe systems. In addition, IRS has made progress in enhancing its information security program. For example, IRS has trained its staff to restore operations in the event of an emergency at an off-site location, assessed risks for the systems we reviewed, certified and accredited the systems we reviewed, enhanced information security awareness and training by providing training to employees and contractors, and established an ongoing process of testing and evaluating its systems to ensure compliance with policies and procedures. Although IRS has made progress in correcting many of the previously identified security weaknesses, 48 weaknesses (66 percent) remain unresolved. For example, IRS continued to, among other things, use inadequate account lockout settings for Windows servers, improperly restrict file permissions on UNIX systems, routinely permit unencrypted protocols for remote logon capability to servers, insufficiently monitor system activities and configure certain servers to ensure adequate audit trails, inadequately verify employees’ identities against official IRS photo identification, use an ineffective patch management program, and use disaster recovery plans that did not include disaster recovery procedures for certain mission-critical systems. Significant weaknesses in access controls and other information security controls continue to threaten the confidentiality, integrity, and availability of IRS’s financial and tax processing systems and information. A primary reason for these weaknesses is that IRS has not yet fully implemented its information security program. As a result, IRS’s ability to perform vital functions could be impaired and the risk of unauthorized disclosure, modification, or destruction of financial and sensitive taxpayer information is increased. 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. Inadequate access controls diminish the reliability of computerized information and increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and disruption of service. Access controls include those related to user identification and authentication, authorization, cryptography, audit and monitoring, and physical security. IRS did not ensure that it consistently implemented effective access controls in each of these areas, as the following sections in this report demonstrate. A computer system must be able to identify and authenticate different 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 also must 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. According to IRS policy, user accounts will be associated with only one individual or process and should automatically lockout after three consecutive failed logon attempts. If user accounts are not associated with an individual (e.g., group user accounts), they must be controlled, audited, and managed. In addition, IRS policy requires strong enforcement of passwords for authentication to IRS systems. For example, passwords are to expire and are not to be shared by users. IRS did not adequately control the identification and authentication of users to ensure that only authorized individuals were granted access to its systems. For example, administrators at one site shared logon accounts and passwords when accessing a database production server for the procurement system. By allowing users to share accounts and passwords, individual accountability for authorized system activity as well as unauthorized system activity could be lost. In addition, at the same site, IRS did not enforce strong password management on the same database production server. Accounts did not lock out users after failed logon attempts and passwords did not expire. As a result, the database was susceptible to a brute force password attack that could result in unauthorized access. Furthermore, at another site, IRS stored user IDs and passwords in mainframe files that could be read by every mainframe user. As a result, increased risk exists that an intruder or unauthorized user could read and use these IDs and passwords to log on to the computer systems and masquerade as an authorized user. 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 access rights is the concept of “least privilege.” Least privilege is a basic principle for securing computer resources and information. This principle 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 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 regulate which users can access a particular file or directory and the extent of that access. To avoid unintentionally authorizing users access to sensitive files and directories, an organization must give careful consideration to its assignment of rights and permissions. IRS policy requires that all production systems be securely configured to specifically limit access privileges to only those individuals who need them to perform their official duties. IRS permitted excessive access to key financial systems by granting rights and permissions that gave users more access than they needed to perform their official duties. For example, at one site, excessive read access was allowed to production system libraries that contained mainframe configuration information. In addition, this site did not maintain documentation of approved access privileges allowed to each system resource by each user group. Without such documentation, IRS limits its ability to monitor and verify user access privileges. Furthermore, IRS did not appropriately restrict the use of anonymous e-mails on the two mainframe systems we reviewed. These servers allowed anonymous e-mails from one of our analysts masquerading as a legitimate sender and could expose IRS employees to malicious activity, including phishing. At another site, IRS granted all users excessive privileges to sensitive files on its production database server for the procurement system. Additionally, the procurement system was vulnerable to a well-known exploit whereby database commands could be inserted into the application through a user input screen that was available to everyone on the agency’s network. Administrative privileges also were granted to the procurement system’s database application user ID at this location. This user ID allowed extensive administrative privileges that were inappropriate for this type of account. Excessive or unauthorized access privileges provide opportunities for individuals to circumvent security controls. 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 plain text into cipher text using a special value known as a key and a mathematical process known as an algorithm. IRS policy requires the use of encryption for transferring sensitive but unclassified information between IRS facilities. The National Security Agency also recommends disabling protocols that do not encrypt information transmitted across the network, such as user ID and password combinations. IRS did not consistently apply encryption to protect sensitive data traversing its network. For example, at one site, IRS was using an unencrypted protocol to manage network devices on a local server. In addition, the procurement application and the UNIX servers we reviewed at another site were using unencrypted protocols. Therefore, all information, including user ID and password information, was being sent across the network in clear text. These weaknesses could allow an attacker to view information and use that knowledge to gain access to financial and system data being transmitted over the network. 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, or logs of system activity, that they can use to determine the source of a transaction or attempted transaction and to monitor users’ activities. 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, organizations should configure their software to collect and maintain audit trails that are sufficient to track security-relevant events. The Internal Revenue Manual requires that auditable events be captured and audit logs be used to review what occurred after an event, for periodic reviews, and for real-time analysis. In addition, the manual requires that audit logs be maintained and archived in a way that allows for efficient and effective retrieval, viewing, and analysis, and that the logs be protected from corruption, alteration, or deletion. IRS did not consistently audit and monitor security-relevant system activity on its applications. According to IRS officials, IRS did not capture auditable events for its procurement application as a result of system performance issues. Therefore, no audit reports were being reviewed by managers for this application. In addition, IRS was unable to effectively monitor activity for its administrative financial system because the volume of the information in the log made it difficult for IRS officials to systematically analyze targeted activities and security-relevant events or archive logs. As a result, unauthorized access could go undetected, and the agency’s ability to trace or recreate events in the event of a system modification or disruption could be diminished. Physical access controls are used to mitigate the risks to systems, buildings, and supporting infrastructure related to their physical environment and to control the entry and exit of personnel in buildings as well as data centers containing agency resources. Examples of physical security controls include perimeter fencing, surveillance cameras, security guards, and locks. Without these protections, IRS computing facilities and resources could be exposed to espionage, sabotage, damage, and theft. IRS policy states that only authorized personnel should have access to IRS buildings and structures. Although IRS has implemented physical security controls over its information technology resources, certain weaknesses reduce the effectiveness of these controls. For example: IRS did not physically protect a server containing source code for its procurement application. The server was not located in a secured computer room; instead, it was located in a cubicle. IRS did not consistently manage the use of proximity cards, which are used to gain access to secured IRS facilities. For example, one of the sites we visited could not account for active proximity cards for at least 11 separated employees. At that same site, at least 12 employees and contractors were given proximity cards that allowed them access to a computer room, although these individuals did not need this access to perform their official duties. IRS did not always effectively secure certain restricted areas. For example, it implemented motion detectors at one site to release the locks on doors that lead from areas that are accessible by the general public directly into IRS-controlled areas. The motion detector’s field of view was set wider than necessary, so that an unauthorized individual would simply have to wait for an authorized individual to pass by the motion detector on the IRS-controlled side of the door to gain unauthorized access to the IRS facility. As a result, IRS is at increased risk of unauthorized access to financial information and inadvertent or deliberate disruption of procurement services. In addition to access controls, other important 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, segregating incompatible duties, sufficiently disposing of media, and implementing personnel security. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of IRS’s information and information systems. The purpose of configuration management is to establish and maintain the integrity of an organization’s work products. By implementing configuration management, organizations can better ensure that only authorized applications and programs are placed into operation through establishing and maintaining baseline configurations and monitoring changes to these configurations. According to IRS policy, changes to baseline configurations should be monitored and controlled. Patch management, a component of configuration management, is an important factor in mitigating software vulnerability risks. Proactively managing vulnerabilities of systems will reduce or eliminate the potential for exploitation and involves considerably less time and effort than responding after an exploit has occurred. Up-to-date patch installation can help diminish vulnerabilities associated with flaws in software code. Attackers often exploit these flaws to read, modify, or delete sensitive information; disrupt operations; or launch attacks against other organizations’ systems. According to the National Institute of Standards and Technology (NIST), tracking patches allows organizations to identify which patches are installed on a system and provides confirmation that the appropriate patches have been applied. IRS’s patch management policy also requires that patches be implemented in a timely manner, and that critical patches are applied within 72 hours to minimize vulnerabilities. IRS did not properly implement configuration management procedures. For example, IRS did not record successful changes to baseline configurations on one of its mainframe systems, which supports its general ledger for tax administration activities. Without adequately logging system configuration changes, IRS cannot adequately ensure they are properly monitored and controlled. In addition, IRS did not effectively track or install patches in a timely manner. For example, one IRS location did not have a tracking process in place to ensure that up-to-date patches have been applied on UNIX servers. Furthermore, installation of critical patches through the configuration management process for Windows systems was not timely. For example, critical Windows patches released in July 2006 had not yet been applied at the time of our review in August 2006. As a result, increased risk exists that the integrity of IRS systems could be compromised. Segregation of duties refers to the policies, procedures, and organizational structures that help ensure that no single individual can independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often, organizations achieve segregation of duties by dividing responsibilities among two or more individuals or organizational groups. This 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 the other. 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. The Internal Revenue Manual requires that IRS divide and separate duties and responsibilities of incompatible functions among different individuals, so that no individual shall have all of the necessary authority and system access to disrupt or corrupt a critical security process. IRS did not always properly segregate incompatible duties. For example, IRS established test accounts on a production server for its procurement system. Test accounts are used by system developers and are not typically found on production servers. Allowing test accounts on production servers creates the potential for individuals to perform incompatible functions, such as system development and production support. Granting this type of access to individuals who do not require it to perform their official duties increases the risk that sensitive information or programs could be improperly modified, disclosed, or deleted. Media destruction and disposal is a key to ensuring confidentiality of information. Media can include magnetic tapes, optical disks (such as compact disks), and hard drives. Organizations safeguard used media to ensure that the information it contains is appropriately controlled. Improperly disposed media can lead to the inappropriate or inadvertent disclosure of an agency’s sensitive information or the personally identifiable information of its employees and customers. This potential vulnerability can be mitigated by properly sanitizing the media. According to IRS policy, all media should be sanitized prior to disposal in such a manner that sensitive information on that media cannot be recovered by ordinary means. The policy further requires that IRS maintain records certifying that sanitation was performed. IRS did not have an appropriate process for disposing of information stored on optical disk. According to agency officials at one of the sites we visited, discarded optical disks were left unattended in a hallway bin awaiting destruction by the cleaning staff. These disks had not been sanitized, and IRS staff were unaware if the unattended disks contained sensitive information. Furthermore, the cleaning staff did not maintain records certifying that the media were destroyed. As a result, IRS could not ensure the confidentiality of potentially sensitive information stored on optical disks marked for destruction. The greatest harm or disruption to a system comes from the actions, both intentional and unintentional, of individuals. These intentional and unintentional actions can be reduced through the implementation of personnel security controls. According to NIST, personnel security controls help organizations ensure that individuals occupying positions of responsibility (including third-party service providers) are trustworthy and meet established security criteria for those positions. Organizations should also ensure that information and information systems are protected during and after personnel actions, such as terminations and transfers. Organizations can decrease the risk of harm or disruption of systems by implementing personnel security controls associated with personnel screening and termination. Personnel screening controls should be implemented when an individual requires access to facilities, information, and information systems before access is authorized. Organizations should also implement controls for when employment is terminated, including ceasing information system access and ensuring the return of organizational information system-related property (e.g., ID cards or building passes). According to the Internal Revenue Manual, contractor employees must complete a background investigation to be granted on-site, staff-like access to IRS facilities. However, if a background investigation has not been completed, individuals may not have access to IRS sensitive areas unless they are escorted by an IRS employee. The manual further states that managers are responsible for identifying separated employees in order to recover IRS assets, such as ID media. Separated employees’ accounts are to be deactivated within 1 week of an individual’s departure on friendly terms and immediately upon an individual’s departure on unfriendly terms. IRS did not always ensure the effective implementation of its personnel security controls. For example, at two sites, IRS granted contractors who did not have a completed background investigation unescorted physical access to sensitive areas. In addition, at all three sites we reviewed, IRS did not appropriately remove application access for separated personnel. For example, 19 individuals who had separated from IRS for periods ranging from 3 weeks to 14 months still maintained access to applications during our review this year. These practices increase the risk that individuals might gain unauthorized access to IRS resources. A key reason for the information security weaknesses in IRS’s financial and tax processing systems is that it has not yet fully implemented its agencywide information security program to ensure that controls are effectively established and maintained. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes periodic assessments of the risk and the 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 risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, 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; at least annual testing and evaluation of the effectiveness of information security policies, procedures, and practices relating to management, operational, and technical controls of every major information system that is identified in the agency’s inventories; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in its information security policies, procedures, or practices; and plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Although IRS continued to make important progress in developing and documenting a framework for its information security program, key components of the program had not been fully or consistently implemented. Identifying and assessing information security risks are essential to determining what controls are required. Moreover, by increasing awareness of risks, these assessments can generate support for the policies and controls that are adopted in order to help ensure that these policies and controls operate as intended. The Office of Management and Budget (OMB) Circular A-130, appendix III, prescribes that risk be reassessed when significant changes are made to computerized systems— or at least every 3 years. Consistent with NIST guidance, IRS requires its risk assessment process to detail the residual risk assessed and potential threats, and to recommend corrective actions for reducing or eliminating the vulnerabilities identified. Although IRS had implemented a risk assessment process, it did not always effectively evaluate potential risks for the systems we reviewed. IRS has reassessed the risk level for each of its 264 systems and categorized them on the basis of risk. Furthermore, the five risk assessments that we reviewed were current, documented residual risk assessed and potential threats, and recommended corrective actions for reducing or eliminating the vulnerabilities they identified. However, IRS did not identify many of the vulnerabilities in this report and did not assess the risks associated with them. As a result, potential risks to these systems may be unknown. Another key element of an effective information security program is to develop, document, and implement risk-based policies, procedures, and technical standards that govern security over an agency’s computing environment. If properly implemented, policies and procedures should help reduce the risk that could come from unauthorized access or disruption of services. Technical security standards provide consistent implementation guidance for each computing environment. Developing, documenting, and implementing security policies is important because they are the primary mechanisms by which management communicates its views and requirements; these policies also serve as the basis for adopting specific procedures and technical controls. In addition, agencies need to take the actions necessary to effectively implement or execute these procedures and controls. Otherwise, agency systems and information will not receive the protection that the security policies and controls should provide. Although IRS has developed and documented information security policies, standards, and guidelines that generally provide appropriate guidance to personnel responsible for securing information and information systems, it did not always provide needed guidance on how to guard against significant mainframe security weaknesses. For example, IRS policy lacked guidance on how to correctly configure certain mainframe IDs used by the operating system and certain powerful mainframe programs used to control processing. As a result, IRS has reduced assurance that its systems and the information they contain are sufficiently protected. An objective of system security planning is to improve the protection of information technology resources. A system security plan provides an overview of the system’s security requirements and describes the controls that are in place—or planned—to meet those requirements. OMB Circular A-130 requires that agencies develop system security plans for major applications and general support systems, and that these plans address policies and procedures for providing management, operational, and technical controls. IRS had developed system security plans for four of the five systems we reviewed. The plans addressed policies and procedures for providing management, operational, and technical controls. However, IRS had not developed a system security plan for the system that supports its general ledger for tax administration activities. As a result, IRS cannot ensure that appropriate controls are in place to protect this key financial system and critical information. People are one of the weakest links in attempts to secure systems and networks. Therefore, an important component of an information security program is providing required training so that users understand system security risks and their own role in implementing related policies and controls to mitigate those risks. IRS policy mandates that personnel with significant security responsibilities be provided with specialized training. In addition, IRS policy requires that personnel performing information technology security duties meet minimum continuing professional education levels in accordance with their roles. Specifically, personnel performing technical security roles are required to have 24 hours of specialized training per year, personnel performing nontechnical roles are required to have 16 hours of specialized training per year, and personnel performing executive security roles should have 6 hours of specialized training per year. IRS policy also requires that effective tracking and reporting mechanisms be in place to monitor specialized training. Although IRS has made significant progress in providing security personnel with job-related training and established a methodology for identifying employees with significant security responsibilities, in fiscal year 2006, at least 95 individuals with significant security responsibilities did not have the minimum number of hours of specialized training required by IRS policy. Of those 95 individuals, 18 had not completed any training for the last reporting year. In addition, IRS was not able to determine whether all of its employees had met minimum continuing professional education requirements. For example, IRS monitored employee training through its Enterprise Learning Management System, but the system could not differentiate between employees who are required to have only 6 hours of training and employees who are required to have more. Furthermore, IRS did not track all security-related training courses taken by its employees. These conditions increase the risk that employees and contractors may not be aware of their security responsibilities. Another key element of an information security program is to test and evaluate policies, procedures, and controls to determine weather they are effective and operating as intended. This type of oversight is a fundamental element because it demonstrates management’s commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. Although control tests and evaluations may encourage compliance with security policies, the full benefits are not achieved unless the results improve the security program. FISMA requires that the frequency of tests and evaluations be based on risks and occur no less than annually. IRS policy also requires periodic testing and evaluation of the effectiveness of information security policies and procedures. IRS tested and evaluated information security controls for each of the systems we reviewed. However, these evaluations did not address many of the vulnerabilities we have identified in this report. For example, IRS’s test and evaluation plan for its procurement system did not include tests for password expiration, insecure protocols, or the removal of employees’ system access after separation from the agency. As a result, IRS has limited assurance that it has appropriately implemented controls, and it will be less able to identify needed controls. A remedial action plan is a key component described in FISMA. Such a plan assists agencies in identifying, assessing, prioritizing, and monitoring progress in correcting security weaknesses that are found in information systems. According to IRS policy, the agency should document weaknesses found during security assessments as well as document any planned, implemented, and evaluated remedial actions to correct any deficiencies. The policy further requires that IRS track the status of resolution of all weaknesses and verify that each weakness is corrected. IRS has developed and implemented a remedial action process to address deficiencies in its information security policies, procedures, and practices, however, this remedial action process was not working as intended. For example, the verification process used to determine whether remedial actions were implemented was not always effective. Of the 73 previously reported weaknesses, IRS had indicated that it had corrected or mitigated 57 of them. However, of those 57 weaknesses, 33 still existed at the time of our review. In addition, IRS had identified weaknesses but did not document them in a remedial action plan. For example, we reviewed system self-assessments for five systems and identified at least 8 weaknesses not documented in a remedial action plan. These weaknesses pertained to system audit trails, approval and distribution of continuity of operations plans, and documenting emergency procedures. TIGTA also reported that IRS was not tracking all weaknesses found during security assessments in 2006. As a result, increased risk exists that known vulnerabilities will not be mitigated. IRS did not proactively ensure that weaknesses found at one of its facilities or on one of its systems were considered and, if necessary, corrected at other facilities or on similar systems. Many of the issues identified in this report were previously reported at other locations and on similar systems. Yet, IRS had not applied those recommendations to the facilities and systems we reviewed this year. For example, we have been identifying weaknesses with encryption at IRS since 1998. However, IRS was not using encryption to protect information traversing its network. In addition, in 2002 we recommended that IRS promptly remove system access for separated employees and verify that system access has been removed. Nevertheless, IRS did not promptly remove system access for separated employees. Recognizing the need for a servicewide solution, IRS developed a plan in October 2006 to address many of the recurring weaknesses. This plan includes remedial actions to address various weaknesses such as access authorization, audit and monitoring, configuration management, and testing of technical controls. According to IRS, the plan should be fully implemented by fiscal year 2012. However, until IRS fully implements its plan to address recurring weaknesses, it may not be able to adequately protect its information and information systems from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. Continuity of operations planning is a critical component of information protection. To ensure that mission-critical operations continue, it is necessary to be able to detect, mitigate, and recover from service disruptions while preserving access to vital information. The elements of robust continuity of operations planning include, among others, identifying preventative controls (e.g., environmental controls); developing recovery strategies, including alternative processing locations; and performing disaster recovery exercises to test the effectiveness of continuity of operations plans. According to NIST, systems need to have a reasonably well-controlled operating environment, and failures in environmental controls such as air-conditioning systems may cause a service interruption and may damage hardware. IRS policy mandates that an alternate processing site be identified, and that agreements be in place when the primary processing capabilities are unavailable. The policy further requires that each application’s recovery plan be tested on a yearly basis. IRS did not have adequate environmental controls at one of the sites we visited. For example, the air-conditioning system for the computer room that houses the procurement system could not adequately cool down the systems in the room and was supplemented by a portable fan. In addition, the fire extinguishers for the same room had not had an up-to-date inspection. Without providing adequate environmental controls, IRS is at increased risk that critical system hardware may be damaged. Also, IRS had established alternate processing sites for four of the five applications we reviewed. However, it did not have an alternate processing site for its procurement system, and it had not tested the application’s recovery plan. As a result, unforeseen events could significantly impair IRS’s ability to fulfill its mission. IRS has made important progress in correcting or mitigating previously reported weaknesses, implementing controls over key financial and tax processing systems, and developing and documenting a solid framework for its agencywide information security program. 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 taxpayer information. These deficiencies represent a material weakness in IRS’s internal controls over its financial and tax processing systems. A key reason for these weaknesses is that the agency has not yet fully implemented critical elements of its agencywide information security program. Until IRS (1) fully implements a comprehensive agencywide information security program that includes risk assessments, enhanced policies and procedures, security plans, training, adequate tests and evaluations, and a continuity of operations process for all major systems and (2) begins to address weaknesses across the service, its facilities, computing resources, and the financial and sensitive taxpayer information on its systems will remain vulnerable. To help establish effective information security over key financial and tax processing systems, financial and sensitive taxpayer information, and interconnected networks, we recommend that you take the following 10 actions to implement an agencywide information security program: update the risk assessments for the five systems reviewed to include the vulnerabilities identified in this report; update policies and procedures to include guidance on configuring mainframe ID’s used by the operating system and certain powerful mainframe programs used to control processing; develop a system security plan for the system that supports the general ledger for tax administration activities; enhance the Enterprise Learning Management System to include all security-related training courses taken by IRS employees and contractors and to differentiate required training hours for all employees; update test and evaluation procedures to include tests for vulnerabilities identified in this report, such as password expiration, insecure protocols, and removal of system access after separation from the agency; implement a revised remedial action verification process that ensures actions are fully implemented; document weaknesses identified during security assessments in a remedial provide adequate environmental controls for the computer room that houses the procurement system, such as a sufficient air-conditioning system and up-to-date fire extinguishers; establish an alternate processing site for the procurement application; and test the procurement system recovery plan. We are also making 50 detailed recommendations in a separate report with limited distribution. These recommendations consist of actions to be taken to correct the specific information security weaknesses related to user identification and authentication, authorization, cryptography, audit and monitoring, physical security, configuration management, segregation of duties, media destruction and disposal, and personnel security. In providing written comments (reprinted in app. I) on a draft of this report, the Commissioner of Internal Revenue stated that IRS understands that information security controls are essential for ensuring information is adequately protected from inadvertent or deliberate misuse, disruption, or destruction. He also noted that IRS has taken several steps to create a strong agencywide information security program as required by FISMA. The commissioner recognized that continued diligence of IRS’s security and privacy responsibilities is required, and he further stated that IRS will continue to remedy all recommendations to completion to ensure that operations of its applications and systems adhere to security requirements. 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, GAO requests that the agency also provide it with a copy of your agency’s statement of action to serve as preliminary information on the status of open recommendations. We are sending copies of this report to interested congressional committees and the Secretary of 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 have any questions regarding this report, please contact Gregory Wilshusen at (202) 512-6244 or Keith Rhodes at (202) 512-6412. We can also be reached by e-mail at wilshuseng@gao.gov and rhodesk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the persons named above, Don Adams, Bruce Cain, Mark Canter, Nicole Carpenter, Jason Carroll, West Coile, Denise Fitzpatrick, Edward Glagola Jr., David Hayes, Kevin Jacobi, Jeffrey Knott (Assistant Director), George Kovachick, Joanne Landesman, Leena Mathew, Kevin Metcalfe, Amos Tevelow, and Chris Warweg made key contributions to this report. | In fiscal year 2006, the Internal Revenue Service (IRS) collected about $2.5 trillion in tax payments and paid about $277 billion in refunds. Because IRS relies extensively on computerized systems, effective information security controls are essential to ensuring that financial and taxpayer information is adequately protected from inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction. As part of its audit of IRS's fiscal years 2006 and 2005 financial statements, GAO assessed (1) IRS's actions to correct previously reported information security weaknesses and (2) whether controls were effective in ensuring the confidentiality, integrity, and availability of financial and sensitive taxpayer information. To do this, GAO examined IRS information security policies and procedures, guidance, security plans, reports, and other documents; tested controls over five critical applications at three IRS sites; and interviewed key security representatives and management officials. IRS has made limited progress toward correcting or mitigating previously reported information security weaknesses at two data processing sites, but 66 percent of the weaknesses that GAO had previously identified still existed. Specifically, IRS has corrected or mitigated 25 of the 73 information security weaknesses that GAO reported as unresolved at the time of our last review. For example, IRS has improved password controls on its servers and enhanced audit and monitoring efforts for mainframe and Windows user activity, but it continues to (1) use inadequate account lockout settings for Windows servers and (2) inadequately verify employees' identities against official IRS photo identification. Significant weaknesses in access controls and other information security controls continue to threaten the confidentiality, integrity, and availability of IRS's financial and tax processing systems and information. For example, IRS has not implemented effective access controls related to user identification and authentication, authorization, cryptography, audit and monitoring, physical security, and other information security controls. These weaknesses could impair IRS's ability to perform vital functions and increase the risk of unauthorized disclosure, modification, or destruction of financial and sensitive taxpayer information. Accordingly, GAO has reported a material weakness in IRS's internal controls over its financial and tax processing systems. A primary reason for the new and old weaknesses is that IRS has not yet fully implemented its information security program. IRS has taken a number of steps to develop, document, and implement an information security program. However, the agency has not yet fully or consistently implemented critical elements of its program. Until IRS fully implements an agencywide information security program that includes risk assessments, enhanced policies and procedures, security plans, training, adequate tests and evaluations, and a continuity of operations process for all major systems, the financial and sensitive taxpayer information on its systems will remain vulnerable. |
As is the case with each new Congress, we are beginning to have discussions with regard to many new requests for GAO’s professional, objective, fact-based, nonpartisan, and non-ideological information, analysis, and recommendations. On November 17, 2006, I was pleased to offer three sets of recommendations for your consideration as part of the agenda of the 110th Congress. The first recommendation suggests targets for near-term oversight; the second proposes policies and programs in need of fundamental reform and re-engineering; the third lists governing issues. The proposals represent an effort to synthesize GAO’s institutional knowledge and special expertise and suggest both the breadth and the depth of the issues facing the new Congress. We at GAO stand ready to assist the 110th Congress in meeting its constitutional responsibilities. To be effective, congressional hearings and other activities should offer opportunities to share best practices, facilitate governmentwide transformation, and promote accountability for delivering positive results. On January 9, 2007, we presented GAO’s assessment of the key oversight issues related to Iraq for consideration in developing the oversight agenda of the 110th Congress and in analyzing the President’s revised strategy for Iraq. This assessment was based on our ongoing work and the 67 Iraq- related reports and testimonies we have provided to the Congress since May 2003. Our work spans the security, political, economic, and reconstruction prongs of the U.S. national strategy in Iraq. The broad, crosscutting nature of this work helps minimize the possibility of overlap and duplication by any individual inspector general. Our work has focused on the U.S. strategy and costs of operating in Iraq, training and equipping the Iraqi security forces, governance and reconstruction issues, the readiness of U.S. military forces, and achieving desired acquisition outcomes. Our current work draws on our past work and regular site visits to Iraq and the surrounding region, such as Jordan and Kuwait. We plan to establish a presence in Iraq beginning later this fiscal year to provide additional oversight of issues deemed important to the Congress; subject to approval by the U.S. Department of State and adequate funding. We have requested supplemental fiscal year 2007 funds of $374,000 to support this effort. In January of this year, we also issued our High-Risk Series: An Update, which identifies federal areas and programs at risk of fraud, waste, abuse, and mismanagement and those in need of broad-based transformations. The issues affecting many of these areas and programs may take years to address, and the report will serve as a useful guide for the Congress’s future programmatic deliberations and oversight activities. Issued to coincide with the start of each new Congress, our high-risk update, first issued in 1993, has helped Members of the Congress who are responsible for oversight and executive branch officials who are accountable for performance. Our high-risk program focuses on major government programs and operations that need urgent attention or transformation to ensure that our government functions in the most economical, efficient, and effective manner possible. Overall, our high-risk program has served to identify and help resolve a range of serious weaknesses that involve substantial resources and provide critical services to the public. Table 1 details our 2007 high-risk list. In February of this year, we issued a new publication entitled Fiscal Stewardship: A Critical Challenge Facing Our Nation that is designed to provide the Congress and the American public, in a relatively brief and understandable form, selected budget and financial information regarding our nation’s current financial condition, long-term fiscal outlook, and possible ways forward. In the years ahead, our support to the Congress will likely prove even more critical because of the pressures created by our nation’s current and projected budget deficit and growing long-term fiscal imbalance. Indeed, as the Congress considers those fiscal pressures, it will be grappling with tough choices about what government does, how it does business, and who will do the government’s business. GAO is an invaluable tool for helping the Congress review, reprioritize, and revise existing mandatory and discretionary spending programs and tax policies. In addition, I have participated in a series of town hall forums around the nation to discuss the federal government’s current financial condition and deteriorating long-term fiscal outlook, including the challenges posed by known long-term demographic trends and rising health care costs. These forums, popularly referred to as the “Fiscal Wake-up Tour,” are led by the Concord Coalition and also include the Heritage Foundation, the Brookings Institution, and a range of “good government” groups. The Fiscal Wake-up Tour states the facts regarding the nation’s current financial condition and long-term fiscal outlook in order to increase public awareness and accelerate actions by appropriate federal, state, and local officials. We anticipate that the funds requested for fiscal year 2008 will support efforts similar to those just completed in fiscal year 2006. The following discussions summarize that work. In fiscal year 2006, major events like the nation’s recovery from natural disasters, ongoing military conflicts abroad, terrorist threats, and potential pandemics repeatedly focused the public eye on the federal government’s ability to operate effectively and efficiently and provide services to Americans when needed. Our work during the year helped the Congress and the public judge how well the federal government performed its functions and consider alternative approaches for improving operations and laws when performance was less than adequate. For example, teams supporting all three of our external strategic goals performed work related to every facet of the Hurricane Katrina and Rita disasters—preparedness, response, recovery, long-term recovery, and mitigation. We developed a coordinated and integrated approach to ensure that the Congress’s need for factual information about disaster preparedness, response, recovery, and reconstruction activities along the Gulf Coast was met. We examined how federal funds were used during and after the disaster and identified the disaster rescue, relief, and rebuilding processes that worked well and not so well throughout the effort. To do this, staff drawn from across the agency spent time in the hardest hit areas of Louisiana, Mississippi, Alabama, and Texas, collecting information from government officials at the federal, state, and local levels as well as from private organizations assisting with this emergency management effort. We briefed congressional staff on our preliminary observations early in fiscal year 2006 and subsequently issued over 30 reports and testimonies on Hurricanes Katrina and Rita by fiscal year end, focusing on, among other issues, minimizing fraud, waste, and abuse in disaster assistance and rebuilding the New Orleans hospital care system. The following tables provide summary information on GAO’s fiscal year 2006 performance and the results achieved in support of the Congress and the American people. Additional information on our performance results can be found in Performance and Accountability Highlights Fiscal Year 2006 at www.gao.gov. Table 2 provides examples of how GAO assisted the nation in fiscal year 2006. During fiscal year 2006, we used 16 annual performance measures that capture the results of our work; the assistance we provided to the Congress; our ability to attract, retain, develop, and lead a highly professional workforce; and how well our internal administrative services help employees get their jobs done and improve their work life (see table 3). We generally exceeded the targets we set for all of our performance measures, which indicate our ability to produce results for the nation and serve the Congress. In fiscal year 2006, our work generated $51 billion in financial benefits, primarily from actions agencies and the Congress took in response to our recommendations. Of this amount, about $27 billion resulted from changes to laws or regulations, $10 billion resulted from agency actions based on our recommendations to improve services to the public, and $14 billion resulted from improvements to core business processes. See figure 2 for examples of our fiscal year 2006 financial benefits. Our fiscal year 2008 budget request seeks the resources necessary to allow GAO to rebuild and enhance its workforce, knowledge capacity, employee programs, and infrastructure. These items are critical to ensure that GAO can continue to provide congressional clients with timely, objective, and reliable information on how well government programs and policies are working and, when needed, recommendations for improvement. In the years ahead, our support to the Congress will likely prove even more critical because of the pressures created by our nation’s current and projected budget deficit and growing long-term fiscal imbalance. GAO is an invaluable tool for helping the Congress review, reprioritize, and revise existing mandatory and discretionary spending programs and tax policies. Consistent with our strategic goal to be a model agency, we continuously assess our operations to ensure that GAO remains an effective, high- performing organization, providing timely, critical support to the Congress while being fiscally responsive. Our objective is to be an employer of choice; maintain skills/knowledge, performance-based, and market- oriented compensation systems; adopt best practices; benchmark service levels and costs against comparable entities; streamline our operations to achieve efficiencies; assess opportunities for cross-servicing, outsourcing, or business process re-engineering; and leverage technology to increase efficiency, productivity, and results. We also continue to partner within and across the legislative branch through the legislative branch Chief Administrative Officers, financial management, and procurement councils. Transformational change and innovation is essential for progress. Our fiscal year 2008 budget request includes funds to regain the momentum needed to achieve these goals. Our fiscal year 2008 budget request will allow GAO to address supply and demand imbalances in responding to congressional requests for studies in areas such as health care, homeland security, the global “war on terrorism,” energy and natural resources, and forensic auditing; address our increasing bid protest workload; be more competitive in the labor markets where GAO competes for talent; address critical human capital components, such as knowledge capacity building, succession planning, and staff skills and competencies; enhance employee recruitment, retention, and development programs; restore program funding levels and regain our purchasing power; undertake critical initiatives necessary to continuously re-engineer processes geared to increasing our productivity and effectiveness and addressing identified management challenges; and pursue critical structural and infrastructure maintenance and improvements. Our fiscal year 2008 budget request represents an increase of $41.7 million (or 8.5 percent) over our fiscal year 2007 funding level and includes about $523 million in direct appropriations and authority to use about $7.5 million in offsetting collections as illustrated in table 5. This request reflects a reduction of nearly $5.4 million in nonrecurring fiscal year 2007 costs used to offset the fiscal year 2008 increase. Mandatory pay and uncontrollable cost increases. We are requesting $24.9 million to cover anticipated mandatory performance-based pay and uncontrollable inflationary increases resulting primarily from annual across-the-board and performance-based increases, annualization of prior fiscal year costs, and an increase in the number of compensable days in fiscal year 2008. These costs also include uncontrollable inflationary increases imposed by vendors as the cost of doing business. Rebuilding our capacity. Our fiscal year 2007 budget request sought funds to support an increase of 50 FTEs from 3,217 to 3,267. However, in order to manage within expected funding levels in fiscal year 2007, we will significantly curtail hiring by about 50 percent below the previous year, resulting in a projected FTE utilization of 3,159—well below our planned level. In fiscal years 2007 and 2008, we anticipate attrition of over 600 staff that will result in a significant drain on GAO’s knowledge capacity or institutional memory. Further, almost 20 percent of all GAO staff will be eligible for retirement by the end of fiscal year 2008, including almost 45 percent of our senior executive service. Thus, in fiscal year 2008, we are seeking funds to rebuild our staff and knowledge capacity. In fiscal year 2008, we plan to hire about 490 staff— the maximum that we could reasonably absorb—increasing our FTE utilization to 3,217. While we are tempering our immediate FTE request, increasingly higher demands are being placed on GAO. We are experiencing supply and demand imbalances in several areas of critical importance to the Congress (e.g., health care, homeland security, and energy and natural resources). We have also seen an increase in the number of bid protest filings. Also, to remain competitive in the labor markets, we need to increase employee benefits in areas such as student loan repayments and transit subsidies where funding constraints in fiscal year 2007 limit our flexibility. For example, effective in January 2007, the IRS increased the monthly benefit for transit subsidies for eligible employees who commute using public transportation. GAO, however, is unable to extend this increased benefit to staff. In addition, we need to ensure that staff have the appropriate tools and resources to perform effectively, including training and development, travel funds, and technology. And when our staff perform well, they should be appropriately rewarded. Undertake critical investments. We are requesting funds to undertake critical investments that would allow us to implement technology improvements and streamline and re-engineer work processes to enhance the productivity and effectiveness of our staff, conduct essential investments that have been deferred as the result of funding constraints and cannot continue to be deferred, and implement responses to changing federal conditions, such as smart card technology. Also, during recent years, we reduced, deferred, and slowed the pace of critical upgrades (e.g., engagement and administrative process upgrades) and deferred nonessential administrative activities. In fiscal year 2008, we would like to have sufficient funding to take action to protect our current investments and continue to be a model agency and lead by example. Legislative authority. We are requesting legislation to establish a Board of Contract Appeals at GAO to adjudicate contract claims involving contracts awarded by legislative branch agencies. GAO has performed this function on an ad hoc basis over the years for appeals of claims from decisions of the Architect of the Capitol on contracts that it awards. Recently we have agreed to handle claims arising under Government Printing Office contracts. The legislative proposal would promote efficiency and predictability in the resolution of contractor and agency claims by consolidating such work in an established and experienced adjudicative component of GAO and would permit GAO to recover its costs of providing such adjudicative services from legislative branch users of such services. We also plan to request legislation that will assist GAO in performing its mission work and enhance our human capital policies, including addressing certain compensation and benefits issues of interest to our employees. While there are a number of important provisions, today I will only discuss several of the significant ones. Regarding provisions concerned with mission work, we have identified a number of legislative mandates that are either no longer meeting the purpose intended or should be performed by an entity other than GAO. We are working with the cognizant entities and the appropriate authorization and oversight committees to discuss the potential impact of legislative relief for these issues. Another provision would update the existing authority of the Comptroller General to administer oaths when appropriate for an audit or investigation. The Comptroller General has long had the authority to “administer oaths to witnesses when auditing and settling accounts”. Because of the variety of audits and investigations GAO now performs, we propose the deletion of “when auditing and settling accounts” so that in those limited circumstances where appropriate, the Comptroller General may authorize the administration of oaths to witnesses. To keep the Congress apprized of difficulties we have interviewing agency personnel and obtaining agency views on matters related to ongoing mission work, we will suggest new reporting requirements. When agencies or other entities ignore a request by the Comptroller General to have personnel provide information under oath, make personnel available for interviews, or provide written answers to questions, the Comptroller General would report to the Congress as soon as practicable and also include such information in the annual report to the Congress. In regard to GAO’s human capital flexibilities, among other provisions, we are proposing a flexibility that allows us to better approximate market rates for professional positions by increasing our maximum pay for other than the Senior Executive Service and Senior Level from GS-15, step 10, to Executive Level III. Additionally, under our revised and contemporary merit pay system, certain portions of an employee’s merit increase, below applicable market-based pay caps, are not permanent. Since this may impact an employee’s high three for retirement purposes, another key provision of the bill would enable these nonpermanent payments to be included in the retirement calculation for all GAO employees, except senior executives and senior level personnel. In summary, I believe that you will find our budget request reasonable, responsible, and well-justified given the important role that GAO plays and the unparalleled return on investment that GAO generates. We are grateful for the Congress’s continued support of our mutual effort to improve government and for providing the resources that allow us to be a world- class professional services organization. We are proud of our record performance and the positive impact we have been able to effect in government over the past year and believe an investment in GAO will continue to yield substantial returns for the Congress and the American people. Our nation will continue to face significant challenges in the years ahead. GAO’s expertise and involvement in virtually every facet of government positions us to provide the Congress with the timely, objective, and reliable information it needs to discharge its constitutional responsibilities. Madam Chair and Members of the Subcommittee, this concludes my prepared statement. At this time, I would be pleased to answer any questions that you or other Members of the Subcommittee may have. GAO exists to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. Provide Timely, Quality Service to the Congress and the Provide Timely, Quality Service to the Congress and the Federal Government to . . . Federal Government to . . . . . .. . . Address Current and Emerging Challenges to the Well-Being Address Current and Emerging Challenges to the Well-Being and Financial Security of the American People related to . . . and Financial Security of the American Peoplerelated to . . . Natural resources use and environmental protection . . .. . . Respond to Changing Security Threats and the Challenges of Respond to Changing Security Threats and the Challenges of Global Interdependence involving . . . Global Interdependence involving . . . Key management challenges and program risks Fiscal position and financing of the government Maximize the Value of GAO by Being a Model Federal Agency and Maximize the Value of GAO by Being a Model Federal Agency and a World-Class Professional Services Organization in the areas of . . . a World-Class Professional Services Organization in the areas of . . . This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | This testimony is given in support of the fiscal year 2008 budget request for the U.S. Government Accountability Office (GAO) before the House Subcommittee on the Legislative Branch, Committee on Appropriations. The requested funding will help us continue our support of the Congress in meeting its constitutional responsibilities and will help improve the performance and ensure the accountability of the federal government for the benefit of the American people. GAO is especially appreciative of the Subcommittee's efforts to help us avoid a furlough of our staff during fiscal year 2007. Had we not received additional funds this year and not taken other cost minimization actions, GAO would have likely been forced to furlough most staff for up to 5 days without pay. At the same time, due to funding shortfalls, we were not able to make pay adjustments retroactive to January 7, 2007. Our testimony today focuses on key efforts that GAO has undertaken to support the Congress, our fiscal year 2006 performance results, our budget request for fiscal year 2008 to support the Congress and serve the American people, and proposed legislative changes. Our fiscal year 2008 budget request is designed to restore GAO's funding to more reasonable operating levels. Specifically, we are requesting fiscal year 2008 budget authority of $530 million, an 8.5 percent increase over our fiscal year 2007 funding level. The additional funds provided in fiscal year 2007 have helped reduce our requested increase for fiscal year 2008 from 9.4 percent to 8.5 percent. This funding level also represents a reduction below the request we submitted to the Office of Management and Budget (OMB) in January as a result of targeted adjustments to our planned fiscal year 2008 hiring plan. Our fiscal year 2008 budget request will allow us to achieve our performance goals to support the Congress as outlined in our strategic plan and rebuild our workforce capacity to allow us to better respond to supply and demand imbalances in responding to congressional requests. This funding will also help us address our caseload for bid protest filings, which have increased by more than 10 percent from fiscal years 2002 through 2006. Our workload for the first quarter of fiscal year 2007 suggests a continuation of this upward trend in bid protest fillings. |
In contrast to workers in a traditional defined benefit (DB) plan, workers in a 401(k) plan, the predominant type of defined contribution (DC) plan in the United States, have more control over their retirement assets, but also bear greater responsibility and risk in the investment of assets. In a typical 401(k) plan, workers decide whether or not to make contributions into an individual account. Contributions may also be made by their employer. Participants direct these contributions to mutual funds and other financial market investments to accumulate pension benefits, dependent on investment returns net of fees. As we reported in 2006, investment fees are usually paid by participants and administrative fees are often paid by employers, but participants bear them in a growing number of plans. Depending on contributions and net investment returns, participants accumulate an account balance that will then be withdrawn at or after retirement. Over the last decade, participation in DC plans among all private industry employees has increased from 36 percent in 1999 to 43 percent in 2008. In 2008, about 49.8 million workers actively participated in a 401(k) plan. The degree of responsibility and risk borne by workers in 401(k) plans underscores the need for prudent investment decisions if these plans are to provide an adequate source of income in retirement. Poor investment decisions—either by the plan sponsors when they decide which investment options to offer in the plans, or by participants when, given these options, they decide where to invest their assets—can result in lower returns and correspondingly less retirement savings. Several studies have found that, from 1988 to 2006, DC plans underperformed DB plans by 1 percentage point or more, which may be explained by higher fees in 401(k) plans and a lack of diversification in participants’ investment allocations. Numerous studies on financial literacy have also pointed to the need to educate participants to improve their investment decision-making and savings outcomes. For example, one study found that a large percentage of American workers have not conducted meaningful retirement planning, even when retirement is in the near future. Another study found that most workers acknowledge they do not know as much as they should about retirement planning and that many workers actually guessed at their retirement savings needs. To address the challenges of investment risk in 401(k) plans, both plan sponsors and participants may seek assistance from service providers in selecting investment options. At the plan sponsor level, many plans rely heavily on the expertise and guidance of their advisers when making investment decisions. The service providers that offer these advisory services to plan sponsors can vary considerably in their business arrangements. While some service providers operate as independent, “fee- only” advisers, who are compensated solely by their clients and do not receive additional compensation contingent on the purchase or sale of a financial product, other service providers offer affiliated services, including brokerage and money management, in addition to advisory services. As shown in figure 1, service providers can be used to provide a number of services necessary to operate a 401(k) plan, which can be bundled or unbundled with investment management services or advisory services. Under a bundled service arrangement, the plan sponsor hires a company that provides multiple services directly or through subcontracts. At the participant level, advisory services can also be provided through a variety of methods, including call centers or help desks, group seminars, one-on-one sessions, computer models (e.g., software that estimates future retirement income needs or asset allocation models), or brochures and other printed materials provided by plan service providers. When providing this assistance to participants, a service provider may furnish either investment education or investment advice. As specified by EBSA, investment education consists of general investment information, including general information about the plan and asset allocation models that is not tailored to the needs or interests of an individual plan participant (see table 1). Investment advice, on the other hand, consists of one or more individualized investment recommendations tailored to a participant’s particular investment needs. While plan sponsors and participants may rely on service providers for assistance in making investment decisions, concerns have been raised about the independence of the advice provided in some cases. A 2005 SEC report noted that its examination of investment advisers providing pension consultant services found that many such consultants provide services to both plans and money managers, a situation that has the potential to compromise the objectivity of the consultant’s recommendations to the plan. Namely, the report states that concerns exist that consultants may steer plans to hire certain money managers or other vendors based on the consultant’s (or an affiliate’s) other business relationships and receipt of fees from these firms, rather than because the money manager is best suited to the plan’s needs. As we reported in 2007, no complete information exists about the presence of conflicts of interest at pension plan service providers. However, the 2005 SEC examination of the activities of 24 pension consultants from 2002 through 2003 revealed that 13 out of 24 of the service providers examined failed to disclose significant ongoing conflicts of interest, such as affiliated businesses or compensation received from money managers. Investment advice provided to plan sponsors and participants and any related conflicts of interest are regulated under ERISA. ERISA states that a person who renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or property of a plan or has any authority or responsibility to do so is a fiduciary and thus is subject to fiduciary standards outlined in the law and regulations. This statutory definition of fiduciary for investment advice is currently subject to a five- part test, set forth in regulations, each element of which must be met for an individual to be considered a fiduciary. Specifically, under this test, a consultant or adviser is determined to be providing investment advice only if the advice was provided for a fee either direct or indirect, and the advice was provided 1. as to the value of securities or other property or as to the advisability of investing in, purchasing, or selling securities or other property; 2. on a regular basis; 3. pursuant to a mutual agreement, arrangement, or understanding; 4. as a primary basis for investment decisions; and 5. based on the particular needs of the plan. Although plan sponsors often rely on consultants and other service providers to assist them in asset management, which includes selecting money managers and monitoring money managers’ performance and brokerage transactions, not all of these consultants and service providers are at all times fiduciaries under ERISA based on the application of the five-part test. For plan sponsors and other service providers who are fiduciaries, ERISA requires they discharge duties solely in the interest of the participants and beneficiaries with care, skill, prudence, and diligence. Although ERISA generally prohibits fiduciaries from acting on conflicts of interest, certain transactions are strictly precluded under prohibited transaction rules, regardless of whether or not participants are harmed. In particular, prohibited transaction rules preclude fiduciaries from “self-dealing,” which includes an individual dealing with plan assets for his or her own benefit. In addition, EBSA has explained that ERISA obligates fiduciaries to obtain and consider information relating to the cost of plan services and potential conflicts of interest presented by such service arrangements. EBSA is responsible for enforcing these provisions of Title I of ERISA, as well as educating and assisting plan participants, beneficiaries, and plan sponsors. Fiduciaries that breach their plan duties are personally liable for making up losses to the plan and restoring any profits made through the use of plan assets. In addition, they may face removal as plan fiduciaries. Participants may also seek recovery against nonfiduciaries in certain circumstances. In addition to carrying out its enforcement responsibilities, EBSA assists regulated parties in complying with ERISA by issuing technical guidance, including advisory opinions and interpretive bulletins, and educating plan participants, beneficiaries, and plan sponsors. In addition to being regulated by ERISA, investment advice and conflicts of interest are also regulated under securities laws. SEC regulates certain money managers and pension consultants under the Investment Advisers Act of 1940 (Advisers Act), which requires those firms meeting certain criteria to register with the commission as investment advisers. For these registered investment advisers, SEC requires that they disclose information about affiliations, business interests, and compensation arrangements to their advisory clients, primarily by providing a brochure that meets the requirements of Part 2 of SEC’s Form ADV to new and prospective clients. In addition, registered investment advisers must annually deliver either an updated brochure with a summary of material changes or a summary of material changes and offer to provide an updated copy of the brochure. According to SEC, all investment advisers— whether registered with SEC or not—have a fiduciary obligation under the Advisers Act to avoid conflicts of interest and, at a minimum, make full disclosure of material conflicts of interest to their clients. When an adviser fails to disclose information regarding material conflicts of interest, clients are unable to make informed decisions about entering into or continuing the advisory relationship. Failure to act in accordance with requirements under the Advisers Act may constitute a violation. If SEC becomes aware of conflicts of interest that are inadequately disclosed or pose harm to investors, it can take enforcement action against the service provider. SEC also regulates broker-dealers under the Securities Exchange Act of 1934 (Exchange Act), which requires that broker-dealers register with SEC, unless an exception or exemption applies. In addition, broker-dealers that deal with the public must become members of the Financial Industry Regulatory Authority, Inc. (FINRA). Under the anti-fraud provisions of the federal securities laws, including just and equitable principles of trade, broker-dealers are required to deal fairly with their customers. Salespersons of broker-dealers are subject to licensing requirements, including examinations. Broker-dealers are held to a suitability standard when rendering investment recommendations. When a broker-dealer makes a recommendation to buy, exchange, or sell a security to a retail investor, that broker-dealer must recommend only those securities that the broker reasonably believes are suitable for the customer. In addition, a broker-dealer must disclose all material information regarding the security and the recommendation, including, among other things, any material adverse facts or material conflicts of interest. However, according to FINRA staff, up-front general disclosure of a broker-dealer’s business activities and relationships that may cause conflicts of interest with retail customers is not required. SEC staff has noted that, in practice, with broker-dealers, required disclosures of conflicts have been more limited than with investment advisers and apply at different points in the relationship. Table 2 provides a comparison of the standards of conduct required by ERISA, and those required of investment advisers and broker- dealers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank), signed into law on July 21, 2010, includes provisions that amend the Advisers Act and the Exchange Act that affect investment advisers and broker-dealers. Under these provisions, SEC, among other things, conducted a 6-month study on the effectiveness of existing standards of care for broker-dealers and investment advisers and examined whether there are legal and regulatory gaps, shortcomings, or overlaps in legal or regulatory standards in the protection of retail customers. Based on its review, SEC staff recommended that SEC propose rules that apply a uniform standard of conduct which requires broker-dealers and investment advisers, when providing personalized investment advice to retail customers, to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser. SEC staff also recommended that SEC should facilitate the provision of uniform, simple and clear disclosures to retail customers about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest. Several industry experts we spoke with cited third-party payments, also known as revenue sharing, as a potential conflict of interest for service providers involved in the fund selection process for a 401(k) plan. Revenue sharing, in the pension plan industry, generally refers to indirect payments made from one service provider, such as the investment fund provider, to another service provider in connection with services provided to the plan, rather than payments made directly by the plan sponsor for plan services. According to industry experts, revenue sharing is a widespread practice among 401(k) service providers. As we have previously reported, revenue-sharing payments can be used to offset expenses the plan has agreed to pay and thus be cost-neutral to the plan. However, as shown in figure 2, revenue sharing may, depending on the circumstances, also create a conflict of interest if it is not structured to be cost-neutral to the plan and may result in increased compensation to service providers. Industry experts we spoke with explained that this situation creates an incentive for the service provider to suggest funds with higher revenue-sharing payments. Because of these conflicts of interest, the service provider may suggest funds that have poorer performance or higher costs for participants compared with other available funds. The amount of revenue-sharing payments can vary considerably, both across investment funds and within a fund through different share classes. Documentation we obtained showed revenue- sharing payments from hundreds of share classes of different investment funds that ranged from 5 to 125 basis points (bps). Given this variation, EBSA field investigators told us that a service provider might only recommend or include fund share classes that pay higher revenue sharing and exclude other fund share classes that pay lower or no revenue sharing. As described in table 3, revenue sharing can include various forms of payments, such as 12b-1 fees, that may create conflicts of interest for service providers assisting with the selection of investment options for a 401(k) plan. Besides creating a potential conflict of interest, using revenue sharing to reimburse for record-keeping expenses can have other adverse effects on the plan and participants. Service providers told us these payments are often not clearly disclosed to the plan. As shown in figure 3, this could result in participants paying a greater or lesser share of record-keeping expenses depending on which funds they choose to invest their assets. Further, because subtransfer agent fees are based on the amount of assets under management, the record-keeping costs increase as the fund grows and may get quite large if not revised. According to one service provider we interviewed, these fees can result in the plan continuing to pay more for record-keeping services as assets grow, although the cost of providing record-keeping services tends to remain the same. In addition to revenue-sharing payments from fund companies, payments from brokerage firms, which execute trades for participants’ investment funds, to other service providers can also create conflicts of interest related to a 401(k) plan’s investments. For example, in a 2007 SEC case, an investment adviser was alleged to have advised its pension plan clients, including 401(k) plans, to use a specific brokerage firm under certain circumstances. The brokerage firm allegedly paid the service provider annual compensation based in part on the amount of commissions generated, which the adviser failed to disclose to its pension plan clients although the adviser was required to do so. The contingent compensation from the brokerage firm to the investment adviser created an incentive for the service provider to steer plans to use that particular brokerage firm. In other cases, industry experts told us that, at the request of an investment adviser, brokerage firms can use commission revenues from trading shares to make payments to other service providers that can create conflicts of interests if not handled properly. Under the Securities Exchange Act of 1934, investment advisers are permitted to pay broker- dealers more than the lowest available commission rate for trading shares under certain circumstances. The investment adviser can direct the broker-dealer to use the commission revenues to pay the fees of other service providers or to purchase services of value to investors, such as investment research to improve the management of the fund. However, if the commission revenues are not used for the benefit of the plan, it could create a conflict of interest. A 2005 SEC report concerning examinations of pension consultants identifies several areas of concern and examples of poorly managed conflicts of interest. For example, Using commission revenues to pay for another service provider’s fees, (i.e., a “commission recapture” arrangement) such as for a pension consultant, can result in greater compensation to that service provider, because such arrangements may not be capped to terminate when fees due to the service provider have been paid in full, resulting in the plan overpaying for services. These arrangements are not always well documented and raise concerns that plans may not receive “best execution,” meaning that the plan’s service provider may recommend that the plan use a broker-dealer with whom it has such an arrangement even if the broker-dealer does not offer the most favorable terms for the plan. These arrangements can also create the incentive for the service provider to recommend a more active trading strategy to increase the number of transactions and, consequently, the amount of commissions. In addition to payments among service providers, other types of business arrangements can also create conflicts of interest. As shown in table 4, service providers may have affiliated businesses, such as proprietary investment funds or a brokerage arm, that can profit from the investment of plan assets. For example, a service provider that offers its own investment funds has the incentive to steer plan sponsors to select these proprietary funds even if other funds are available from different providers that better suit the needs of the plan. Although service providers that are subject to ERISA fiduciary standards are prohibited from benefiting from the investment of plan assets, many service providers that assist in selecting investment options are reported to structure their relationships with plans to avoid being subject to these standards. Under ERISA, a person who provides investment advice for direct or indirect compensation is a fiduciary; however, the EBSA regulations currently in effect establish a five-part test, each part of which must be met, to determine if a service provider is a fiduciary for purposes of providing investment advice. Many industry experts we spoke with said that service providers often do not meet one or more parts of the test and thus avoid being subject to ERISA fiduciary standards. Consequently, these service providers may have a conflict of interest by increasing their compensation based on the funds selected by the plan without violating ERISA. Service providers may structure their association with a 401(k) plan to avoid meeting one or more parts of the current five-part test, as shown in figure 4. For example, an ERISA attorney said that although service providers give investment recommendations, they will include a provision in their contract that states that the investment recommendations provided are not intended to be the primary basis for decision making. A recent report by Labor’s OIG found that some service providers included in their review and identified to have significant undisclosed conflicts of interest attempted to avoid meeting the criteria for ERISA fiduciary status under the current five-part test by simply stating in their investment adviser contract that they were not fiduciaries. The 2010 report examined EBSA’s handling of certain service providers, acting as pension consultants, that were determined by SEC in a 2005 staff report to have significant undisclosed conflicts of interest. According to the SEC report, many plan sponsors rely heavily on these pension consultants in making investment decisions. Other industry experts said that a service provider can avoid meeting the criteria of the five-part test if it offers investment recommendations as part of setting up the plan, rather than on a regular, recurring basis (see table 5). According to EBSA officials, it can easily be asserted by a service provider that advice given on a onetime basis does not meet the five-part test. When selecting investment options for the plan, plan sponsors can work with various types of service providers subject to different regulations, some of which may not be required to provide advice in the best interest of the plan or disclose conflicts of interest. Several industry experts we interviewed said that while some plan sponsors hire registered investment advisers (RIA) who are subject to SEC regulations and often acknowledge ERISA fiduciary responsibility, many other plan sponsors work with broker-dealer or insurance company representatives who are not subject to ERISA fiduciary responsibility and may also not be subject to SEC regulations. Under the Advisers Act, RIAs must seek to avoid conflicts of interest and, at a minimum, make full disclosure of material conflicts of interest. However, other service providers, such as insurance company representatives, may not be subject to ERISA fiduciary duty or certain SEC regulations and thus may not be required to make recommendations in the best interest of their clients, or to disclose all conflicts of interest. Furthermore, plan sponsors may contract directly with a bundled service provider that offers its own investment funds and does not provide formal investment advice subject to ERISA or SEC regulations. No comprehensive data are available to determine how many service providers are ERISA fiduciaries for purposes of providing investment advice. Although plan sponsors are required to provide certain information about the plan and service providers in annual filings to EBSA, this information does not include which service providers are acting as ERISA fiduciaries. As we previously reported, ERISA requires that at least one fiduciary be named in the plan documents provided to participants, although others may be identified voluntarily. Consequently, determinations as to ERISA fiduciary status of service providers may not be made unless an investigation by EBSA is initiated or a lawsuit is filed claiming that the plan has been harmed. Misunderstanding can also occur because many large providers offer a range of services that a sponsor can choose from, including some that involve fiduciary duties and others that may not. Despite reports indicating that many service providers are not acting as ERISA fiduciaries in providing investment assistance, industry experts and EBSA field investigators told us that plan sponsors are often not aware when a service provider is not an ERISA fiduciary and often assume the advice they receive from them is subject to these standards. Consequently, plan sponsors may not be aware that service providers can have a financial incentive to recommend certain funds that would be prohibited if they were ERISA fiduciaries. As we previously reported, plan sponsors may also assume they have delegated all of their fiduciary duties to an outside professional hired to run the plan, even though the sponsor always retains some fiduciary obligation. Several industry experts we spoke with, including EBSA field investigators, indicated that there is a considerable amount of confusion among plan sponsors about whether or not they are receiving investment advice subject to ERISA fiduciary standards. For example, unless disclosed on the schedule A of the annual form 5500, they noted that, in their opinion, plan sponsors are generally not aware, when dealing with service providers who are broker-dealers or insurance company representatives, that the providers are not giving formal investment advice subject to ERISA fiduciary standards and thus may be earning sales-based compensation on fund sales. Contributing to the confusion, broker-dealers or insurance company representatives can refer to themselves as advisers even though they are not providing advice as ERISA fiduciaries and are receiving sales-based compensation. A service provider representative said that, from the plan sponsor’s perspective, investment assistance provided by a nonfiduciary service provider that may have conflicts of interest often looks very similar to investment advice provided by an independent service provider with no ties to investment funds. Smaller plans may be more exposed to conflicts of interest on the part of service providers because they are less likely than larger plans to receive investment assistance from a service provider that is acting as a fiduciary. Several industry experts we spoke with said that larger plans are much more likely to employ RIAs who are subject to fiduciary standards under the Advisers Act in providing investment advice. Larger plans may also have sufficient resources and in-house expertise to make investment decisions without assistance. Smaller plans, on the other hand, often lack the resources to perform these tasks in-house or to hire an independent adviser who will act as an ERISA fiduciary. Smaller plans also often receive investment assistance from insurance brokers or broker-dealers, who are not acting as ERISA fiduciaries and also may not be subject to fiduciary standards under the Advisers Act, which requires the adviser to act solely in the best interests of the client. The potential conflicts of interest described by industry experts we interviewed could cause problems for plan sponsors if appropriate action is not taken. Under ERISA, plan sponsors are obligated to take steps to identify and address service providers’ potential conflicts of interest and ensure that the plan is run in the best interest of participants. For example, an advisory opinion issued by EBSA describes conditions under which revenue-sharing payments received by a fiduciary are permissible under ERISA. Specifically, the advisory opinion states that, in order for a fiduciary to avoid a prohibited transaction, revenue-sharing payments should be fully disclosed to the plan and used either to offset fees the plan is obligated to pay, on a dollar-for-dollar basis, or else be rebated to the plan. In addition, EBSA and SEC developed a list of questions to assist plan sponsors with identifying and assessing service providers’ potential conflicts of interest that is available on SEC’s Web site. The questions include inquiries about a service provider’s compensation, affiliations, or other business relationships with money managers, and ERISA fiduciary status. Representatives of service providers and ERISA attorneys we spoke with also described steps plan sponsors could take to address service providers’ potential conflicts of interest. For example, plan sponsors could examine a service provider’s direct and indirect compensation, ensure that the investment options offered are diversified and not entirely composed of the service provider’s proprietary funds, negotiate for institutional fund share classes which do not have revenue- sharing payments so that fees are paid through direct charges to the plan, or specify in their contract that the service provider will not receive any compensation other than what is allowed for in the contract. Although plan sponsors may take steps to address potential conflicts of interest, several industry experts we spoke with said that the complexity of service providers’ business arrangements and insufficient disclosures pose challenges to plan sponsors who want to obtain information regarding potential conflicts. Some of these conflicts might rise to the level of a prohibited transaction, such as self-dealing. Even though revenue sharing is reported to be a widespread practice among 401(k) service providers, several industry experts we spoke with said that plan sponsors, especially of smaller plans, may not fully understand or even be aware of these payments. Further, some industry experts said that even if disclosures are provided, they are very complicated and difficult to understand. If not addressed, conflicts of interest could lead to 401(k) plans offering investment funds with higher fees or mediocre performance, which can substantially reduce the amount of savings available for retirement. A service provider with a conflict of interest may steer plan sponsors toward investment funds that increase the service provider’s compensation even if other funds with better performance are available at equal or lower cost. Several industry experts we interviewed said that the financial impact of conflicts of interest can be considerable. For example, representatives from one service provider we interviewed said fees for plans that have been managed by service providers with conflicts of interest can be reduced by 30 percent or more. Similarly, a representative from an advisory firm that does not accept payments from investment funds said that, in some cases, fees for the firm’s 401(k) plan clients are reduced by 180 bps or more. As we previously reported, however, a detailed financial audit would be necessary to precisely estimate the financial impact of a conflict of interest in a specific situation. While the financial harm from conflicted investment advice is difficult to estimate, several studies provide a general sense of the magnitude of the effect of an increase in fees for retirement savings over a worker’s career. Based on a 1 percentage point increase in fees, projections from EBSA, a prior GAO report, and an industry study range from a 17 to 28 percent decline in final account balances. The size of the impact varies based on the time horizon, the projected rate of return, and other assumptions made in the projection. Participants may be unaware that service providers, when furnishing education, may have financial interests in the investment options available to participants. For example, investment education, which may be provided to participants in brochures, other written materials, and computer models, can include asset allocation models that highlight specific investment options as examples of investments available under an asset class. In particular, funds in which the service provider has a financial interest can be highlighted and participants may perceive this information as investment advice. In one case, representatives from a service provider for many large 401(k) plans told us that because the company can highlight its own funds as examples of investment options under each asset class through investor education, it has no plans to offer investment advice. While investment advice is subject to ERISA fiduciary standards, which require that the advice must be in the participant’s best interest and prohibit the adviser from having a financial interest in the investment options recommended, investment education is not subject to these standards. Thus, a provider furnishing education may do so despite a conflict of interest, such as a financial stake in the outcome of participants’ investment decisions. EBSA requires providers who highlight proprietary funds as part of an asset allocation model to provide a statement that other investment options may be available under a plan; however, this statement may not sufficiently prevent participants from construing information on investment alternatives as advice. For example, the statement is not required to explain that the service provider is not providing advice as an ERISA fiduciary who is required to act in the participants’ best interests, and the provider may stand to profit from participants’ investment decisions. Consequently, without the benefit of an enhanced disclaimer that explicitly states that the highlighted funds are not advice and that the service provider may have a financial interest in the funds, participants may believe that providers are giving investment advice that is in participants’ best interests, even in situations where this may not be the case. In addition to furnishing asset allocation models, some service providers may highlight specific investment funds in communications with participants, as part of providing investment education, by using language such as “you may wish to consider [this investment fund]” instead of “I recommend,” which makes a subtle differentiation between investment education and advice that most participants will not understand. Moreover, agency field investigators said that service providers who avoid rendering formal investment advice subject to ERISA fiduciary standards may, nonetheless, refer to themselves as investment advisers to participants. Participants who confuse investment education for impartial advice may choose investments that do not meet their needs, pay higher fees than with other investment options, and have lower savings available for retirement. Although several industry professionals said that providing investment advice to participants through computer models, subject to ERISA standards, has advantages in addressing potential conflicts of interest, others said that these models could have biases that are difficult to detect. While investment advice—through a direct service arrangement—can be provided to participants through a computer model from a service provider that does not have any affiliations with the investment options offered, two other computer model arrangements are permitted, the SunAmerica and the Pension Protection Act (PPA) eligible investment advice arrangements, in cases where the service provider may have a conflict of interest (see table 6). See appendix II for more information regarding the common formats providers use to deliver investment education and advice. Several industry professionals we interviewed said these models ensure consistency in the content of the advice rendered to multiple participants. In addition, unlike a one-on-one consultation or group presentation, a computer model may be audited to determine whether it is generating impartial information. Despite these advantages of computer model- based advice, other industry professionals said that it is possible to build biases into these models that may be difficult to detect. For example, a computer model may be designed to exclude certain types of investment options, which results in situations in which participants are receiving advice that does not include all investment options available to participants. In particular, representatives from one service provider told us that a computer model’s exclusion of target date funds could allow a provider to steer participants toward investment options that charge higher fees, such as managed accounts. Although a number of studies have been conducted about the availability of investment assistance for participants, these studies do not always discern whether participants are provided investment education or advice. According to a poll of 401(k) plan sponsors and service providers that we conducted in coordination with the Society of Human Resource Management and the Society of Professional Asset-Managers and Record Keepers, investment education is more commonly offered to participants than investment advice, although many respondents offered both. Among respondents, brochures or other written materials were one of the most commonly used formats for delivering education and advice. Computer modeling, including Web-based tools, was also one of the most common methods of delivery reported. Several industry experts we spoke with said that conflicts of interest also arise for 401(k) service providers who sell nonplan products and services, such as IRA rollovers, to participants outside their 401(k) plan, a practice known as cross-selling, which can considerably increase the service provider’s compensation. While IRAs may serve participants’ retirement needs by assisting them in saving for retirement, industry professionals we spoke to had concerns about the manner in which providers cross-sell IRA rollovers and other products to participants. Cross-selling products outside of a plan to participants can substantially increase a service provider’s compensation, which creates an incentive for the service provider to steer participants toward the purchase of these products even though such purchases may not serve the participants’ best interests. For example, products offered outside a plan may not be well suited to participants’ needs or participants may be able to secure lower fees by choosing investment funds within their plans comparable with products offered outside their plans. Industry professionals we spoke with said that cross-selling IRA rollovers to participants, in particular, is an important source of income for service providers. For example, according to an industry professional, a service provider could earn $6,000 to $9,000 in fees from a participant’s purchase of an IRA, compared with $50 to $100 in fees if the same participant were to invest in a fund within a plan. Plan sponsors can take steps to preclude service providers from cross- selling nonplan products and services to plan participants. For example, some plan sponsors require their plans’ service providers to sign nonsolicitation agreements that prevent the service providers from marketing nonplan products and services to participants, but such agreements may not be widely used among plan sponsors. In addition, some service providers do not directly cross-sell products and services outside of a 401(k) plan to participants unless the service providers obtain permission from plan sponsors to do so, or unless participants initiate the discussion with service providers and inquire about products and services that are outside of their plans’ investment offerings. According to our poll of 401(k) plan sponsors and service providers, of the 475 SHRM respondents who sponsored a 401(k) plan, 30 respondents explicitly allowed providers to market, or cross-sell, nonplan products to participants. Among the 30 respondents who allowed providers to engage in cross-selling, IRA rollovers were the most common product marketed to participants. However, the extent of cross-selling may be greater than reflected by the poll responses because service providers may do so without explicit permission. An industry professional told us that many sponsors of small and midsized plans may not be aware that their providers are cross-selling nonplan products and services to plan participants; hence, sponsors would not know to ask their providers to stop cross-selling nonplan products to participants. Available data on IRA rollovers indicate that many participants choose to roll their assets into an IRA rather than keep their assets in an existing plan or roll them into a new employer’s plan. As shown in figure 5, from 1998 to 2007, more than 80 percent of funds flowing into IRAs came from rollovers of lump-sum payments or account balances from defined benefit and defined contribution plans. According to data collected in 2006 from the Survey of Income and Program Participation, a survey relating to income and related information conducted by the U.S. Census Bureau, approximately 69 percent—or approximately 4.87 million—survey respondents who received a lump-sum distribution from their retirement plans rolled their distributed funds into IRAs. Additionally, as shown in table 7, data from three large service providers indicate that, among participants who terminated their DC plan, between 42 and 48 percent of participants’ plan assets were rolled into IRAs in the observed time periods. An advisory opinion issued by EBSA states that ERISA fiduciary standards do not apply to a service provider cross-selling an IRA rollover to a participant unless the service provider is already servicing the plan as an ERISA fiduciary. Consequently, unless the service provider is already an ERISA fiduciary, the service provider may advise a participant to roll his or her account funds into an IRA, even if such a transaction may not be in a participant’s best interest. Without disclosures that indicate whether the service provider’s assistance is subject to ERISA fiduciary standards and whether the service provider has a financial interest in the investment products, participants may mistakenly assume that service providers are required to act in the participant’s best interest. Furthermore, while final regulations may require a service provider to furnish IRA fee disclosures—such as a disclosure statement or a fee schedule—to participants, ERISA does not impose similar disclosure requirements for IRAs. In particular, service providers are not required to provide fee disclosures that specifically alert participants to the difference in fees between comparable funds available in their plan and funds offered by the plan’s service provider. As we reported in 2009, owners of IRAs generally pay higher fees than participants in 401(k) plans because an individual IRA’s account balance is usually not big enough to purchase an amount of investments large enough to qualify for volume discounts on fees. Representatives from a 401(k) record- keeping firm said that, typically, IRA owners pay higher fees in the range of 25 to 30 bps and, in some cases, as high as 65 bps, which can be two to three times higher than fees paid by plan participants for in-plan investments. As a result of the lack of disclosure requirements on fees associated with IRAs, participants may be unaware of the higher fees associated with IRAs’ rollovers and may not understand that paying these higher fees can reduce their retirement savings over time. In March 2010, EBSA proposed a regulation that may improve fee disclosure to participants by requiring ERISA fiduciary advisers to disclose all fees or other compensation that they or their affiliates might receive in connection with an IRA rollover before providing investment advice on investment options for rollovers. However, the requirements would not apply to nonfiduciaries that are providing advice to participants about IRA rollovers or inform participants that fees for IRAs may actually be higher than fees for investments in a plan. The U.S. Department of the Treasury (Treasury) has proposed a separate regulation to require advisers to provide notice to plan participants about the consequences of taking money out of a retirement plan. Specifically, the disclosure would state that, among other things, investment options available in a plan may not be available for the same costs outside of a plan. However, without more explicit disclosure that IRAs typically have higher fees than investments in a plan, participants may not understand the difference in fees between IRAs and investments in a plan or the implication of higher fees on retirement savings over time. EBSA’s enforcement efforts regarding potential conflicts of interest related to investment advice have not addressed potential violations by non-ERISA fiduciary service providers. As we have previously reported, EBSA’s ability to recover losses related to conflicts of interest by a service provider through its enforcement program is largely limited by the extent to which the service provider functions as a fiduciary under ERISA. For EBSA to take action against an individual or entity, there generally must be a breach of that fiduciary duty. This can be an obstacle for EBSA given that many service providers structure their contracts with plans to attempt to avoid meeting one or more of the five parts of the current EBSA officials ERISA fiduciary definition reflected in EBSA regulations.noted that it was rare to find a pension consultant to an employee benefit plan who acknowledged ERISA fiduciary status. Moreover, EBSA officials told us that proving ERISA fiduciary status under the five-part test tends to be a difficult and complex task because it depends on the facts an circumstances of each case. These cases are usually very resource- intensive and involve interviewing plan sponsors and service providers and reviewing a significant amount of documentation, which may need to d be subpoenaed. If EBSA is unable to determine that the service provider was an ERISA fiduciary pursuant to the five-part test currently in effect, or was otherwise an ERISA fiduciary, EBSA officials told us that they have the authority to cite plan sponsors or other plan fiduciaries to take corrective action for not prudently selecting and monitoring their service providers. However, according to Labor’s OIG officials, EBSA does not focus its enforcement activities on plan sponsors or other plan fiduciaries that fail to detect conflicts of interest on the part of nonfiduciaries. Indeed, although EBSA has taken steps to address conflicted investment advice provided to plan sponsors or other plan fiduciaries by establishing the Consultant/Adviser Project (CAP), this effort is constrained by the current definition of an ERISA fiduciary investment adviser in its regulations. EBSA launched CAP, a national enforcement effort, at the beginning of fiscal year 2007 to investigate situations where ERISA fiduciary pension consultants or advisers may have used positions of trust with pension plans to generate improper, undisclosed fees for themselves or their affiliates. Since its launch, EBSA has designated 40 CAP cases and, as of August 2010, closed 16. Of these 16 cases, only 5 yielded results, including restoration of plan assets and actions taken by ERISA fiduciaries to ensure that the conflicts of interest did not occur again. However, EBSA was unable to take action in other closed cases because it was unable to prove that service providers were ERISA fiduciaries under the five-part test or acted otherwise as fiduciaries. For example, EBSA investigated 12 of the 13 pension consultants identified in a 2005 SEC staff report for failing to disclose significant ongoing conflicts of interest to their pension fund clients—all 13 of which were considered fiduciaries under the Advisers Act, which was used as a criterion in the SEC review—but EBSA told us that many of the 13 pension consultants were adept at avoiding fiduciary status under EBSA’s five-part test. As a result, Labor’s OIG recently reported that EBSA was only able to take action on 2 of these 13 consultants because only those 2 consultants were determined to be ERISA fiduciaries and were engaged in prohibited transactions. The OIG report noted that without establishing ERISA fiduciary status, EBSA was unable to enforce conflict of interest issues and did not take any further action on these cases. EBSA’s enforcement efforts through CAP may also miss violations by some ERISA fiduciaries because EBSA’s approach for detecting violations does not currently include routine compliance examinations, which could help identify these violations. We reported in 2007 that EBSA does not conduct routine compliance examinations to focus its enforcement efforts the way other agencies do, and as a result, EBSA is not positioned to focus its resources on key areas of noncompliance or have adequate measurable performance goals to evaluate its impact on improving industry compliance. For example, EBSA officials told us that they do not assess overall service provider compliance with the SunAmerica advisory opinion, which describes an appropriate method for providing one form of advice to participants, and that they do not plan to assess compliance with the Pension Protection Act’s eligible investment advice arrangement provisions after they are finalized. Instead of routine compliance examinations, CAP cases have been initiated based on a variety of sources, including referrals from other agencies, spin-offs from regular enforcement cases, tips, and media reports. According to EBSA, 18 of the 40 initiated CAP cases were based on referrals from external sources, including the SEC staff report. While these leads may be specific and detailed, EBSA may not be able to rely on consistent referrals from these external sources because they may not always review the same topics. For example, many of SEC’s referrals to EBSA, which resulted in CAP cases, stemmed from a onetime review by SEC of pension consultants in 2005. In addition, 9 CAP cases were initiated by EBSA investigators based on leads from the media and participant complaints. While these sources are important, such methods may not reveal violations that are more complex or hidden. For example, it may be difficult for participants to detect conflict of interest violations and submit complaints to EBSA, since service providers’ business arrangements may be complicated and their disclosures may be insufficient or difficult to understand. Finally, Labor’s OIG told us that EBSA does not have a formal process for looking at conflicts of interest regarding nonfiduciary service providers during EBSA’s regular enforcement investigations—neither at the front end, when a plan hires a service provider, nor later on during transactions of plan assets. If EBSA’s investigators come across a potential conflict of interest violation during their regular enforcement efforts, EBSA officials told us that the investigators refer the conflict of interest portion of the investigation to the CAP program. However, officials from Labor’s OIG told us that, even though there have been numerous cases referred to the CAP program in this manner, as of July 2010, none had progressed to a CAP case in which EBSA took action against a service provider. To address such limitations, we previously recommended EBSA consider conducting routine compliance examinations. Specifically, we recommended that EBSA evaluate the extent to which it could supplement its current enforcement practices with strategies used by similar agencies, such as routine compliance examinations and dedicating staff for risk management. EBSA officials told us that, starting in fiscal year 2011, they will implement routine compliance examinations. In addition to its enforcement efforts, EBSA has recently announced several regulatory initiatives that would address some potential conflicts of interest on the part of service providers. These efforts include (1) revising the definition of an ERISA fiduciary, (2) requiring enhanced disclosure of providers’ direct or indirect compensation and fiduciary status, and (3) establishing safeguards for PPA investment advice arrangements. If the requirements specified in these regulations are implemented as they are currently written, they may help EBSA and plan sponsors detect and deter conflicted investment advice, but plan sponsors and participants still would not have sufficient and comparable information to identify potential conflicts of interest because disclosures are not required to be provided in a consistent and summary format. Proposed regulations by EBSA to amend the definition of an ERISA fiduciary for purposes of investment advice, if implemented, would help address potential conflicts of interest on the part of service providers by encompassing a greater number of advisory relationships in which the plan sponsor relies on the service provider when making investment decisions. Existing regulations have been in effect for 35 years, and EBSA officials told us they need to be revised based on knowledge and experience EBSA has gained through its enforcement efforts, as well as the evolution of the 401(k) industry. In the preamble to the proposed regulations, EBSA acknowledges that the five-part test takes a narrow approach to fiduciary status that “sharply limits” its ability to protect plans and their participants and beneficiaries from conflicts of interest that may arise from the diverse and complex fee practices existing in today’s retirement plan services market and to devise effective remedies for misconduct when it occurs. Accordingly, the new proposed regulations are intended to more broadly define the circumstances under which a person is considered a fiduciary by reason of giving investment advice to a plan or its participants. 75 Fed. Reg. 65,263, 65,271. OIG noted that the five-part test is narrow and hampers EBSA’s enforcement efforts. In place of the five-part test, the proposed regulation would establish ERISA fiduciary status based on a broader standard. In particular, the proposed regulation makes the following key changes, among others: Acknowledgment or representation as an ERISA fiduciary is sufficient to result in ERISA fiduciary status. Advice does not need to be provided on a regular basis to be considered a fiduciary act. The parties do not need to have a mutual understanding that the advice will serve as a primary basis for plan investment decisions. Fulfilling any of the independent and alternative conditions specified in the proposal would be sufficient to result in ERISA fiduciary status for purposes of investment advice. By reducing the number of conditions that need to be met to be deemed an ERISA fiduciary, the proposed regulation would encompass a greater number of service providers assisting plan sponsors with selecting investment options. In addition, the revised standards more closely align with advisory relationships that industry experts and service providers told us plan sponsors rely on to make investment decisions. As a result, the proposed regulations should help reduce confusion on the part of plan sponsors, many of whom are reported to currently believe they are receiving impartial advice subject to ERISA fiduciary standards when this is not the case. Moreover, the regulation may aid EBSA’s enforcement efforts regarding conflicted investment advice by simplifying the method EBSA uses to determine who is an ERISA fiduciary. In addition to amending the five-part test, the proposed regulations also state that selling or marketing investment options to a plan sponsor does not constitute investment advice if it is disclosed in writing that the person is not undertaking to provide impartial investment advice. However, the proposed regulation does not specify the format for this disclosure. Given that industry experts told us there is a considerable amount of confusion among plan sponsors about whether or not they are receiving investment advice subject to ERISA fiduciary standards, some plan sponsors may continue to be unaware of the distinction between ERISA fiduciary advice and sales or marketing activities without a requirement that this disclosure be made in a consistent and prominent manner. While the proposed regulations should result in a greater number of advisory relationships being subject to ERISA fiduciary standards, the regulation has yet to be finalized. If EBSA does not finalize this regulation and replace the five-part test, many service providers may continue to act outside of ERISA fiduciary standards and EBSA’s enforcement efforts will remain limited. Interim final regulations released by EBSA in July 2010 require enhanced service provider disclosure of compensation and ERISA fiduciary status. These regulations, effective on July 16, 2011, for both new and existing arrangements between service providers and ERISA plans, specify that a contract between a covered plan and a covered service provider is not reasonable unless certain disclosures are made to the responsible plan fiduciary. Required disclosures include descriptions of the services to be provided to the plan and the compensation the provider expects to receive for those services. In addition, if service providers expect to provide ERISA fiduciary services to plans, they are required to make a statement to such effect. Industry experts indicated that this regulation should help plan sponsors identify conflicts of interest and assess whether they are causing harm to participants’ balances. In addition the new disclosure requirements will allow EBSA to exercise enforcement authority over service providers who refuse to disclose direct and indirect compensation. As shown in table 8, disclosures required by this regulation would provide plan sponsors with valuable information and could enhance their ability to evaluate compensation arrangements and potential conflicts of interest. While these disclosures may help plan sponsors and EBSA detect and deter conflicted investment advice, they may leave out important information that could help plan sponsors compare compensation arrangements and assess the potential for conflicts of interest. Specifically, the interim final regulations do not specify that these disclosures be made in any particular manner or format. As a result, the disclosures may be made through multiple documents, which could reduce their usefulness for plan sponsors and EBSA in detecting conflicts of interest given that, as industry experts told us, such disclosures can be very complicated and difficult to understand. As part of the comment process on these interim final regulations, EBSA solicited comments about the feasibility of requiring the disclosures to be reported in a consistent and summary format, such as taking the form of a summary document, limited to one or two pages, that would include key information intended to provide an overview for the responsible plan fiduciary of the information required to be disclosed. The summary also would be required to include a road map for the plan fiduciary describing where to find the more detailed elements of the disclosures required by the regulation. EBSA plans to examine the comments received before it includes this kind of requirement in the final regulations. Without being presented in a consistent summary format, the disclosure regulations may not be as effective as intended. Another limitation of these interim final regulations is that they do not require that service providers specifically disclose whether they have conflicts of interest. Since many conflicts result from the payment of money or other items of monetary value, EBSA and others have argued that the direct and indirect compensation disclosures required by this interim regulation will reveal some conflicts of interest. But, while these regulations may provide more compensation information to plan sponsors, Labor’s OIG told us that the regulations do not necessarily ensure that plan sponsors understand how the compensation translates into business arrangements with potential conflicts of interest. In a recent report, Labor’s OIG found that the disclosures required by EBSA’s interim final regulation would not require that conflicts from two of the cases identified in the 2005 SEC study be disclosed. They pointed to these two cases as examples to show how conflicts of interest could go undetected under the interim final regulations. As a result, OIG recommended that EBSA require the disclosure of all conflicts of interest. In response, EBSA stated that it felt that the interim final regulation may already provide this requirement through the detailed disclosures of direct and indirect compensation and that it was in the process of providing clarifying interpretations. Given that plan sponsors must assess conflicts of interest when selecting service providers, it is important that such conflicts be clearly disclosed. In addition, the interim final regulation requires service providers to disclose information to plan sponsors, but not participants. While some of these disclosures may make it to participants through various communications by plan sponsors, complete information on service provider compensation is not readily available to participants. As an attempt to remedy this, EBSA also published final regulations on October 20, 2010, designed to improve participant-level fee disclosure by requiring that plan sponsors provide participants core information about investments available under the plan, including performance and fee information, in a chart or similar format designed to facilitate investment comparisons. Many industry experts we interviewed said that investment advice arrangements permitted under the PPA should make investment advice more widely available to participants; however, some industry experts said the established safeguards may not sufficiently address potential conflicts of interests on the part of service providers. ERISA generally precludes service providers with conflicts of interest from furnishing investment advice. However, in an effort to expand the availability of investment advice to more participants, the PPA created two eligible investment advice arrangements that allow service providers who have a conflict of interest to furnish advice to plan participants. Specifically, under the PPA, an otherwise conflicted service provider may furnish investment advice using either a computer model arrangement or a level fee arrangement. EBSA proposed regulations in March 2010 to administer these requirements of the PPA and received comments from industry professionals and other interested parties. Several industry professionals and service providers submitted comments in support of EBSA’s efforts to increase participants’ access to unbiased investment advice and minimize the effects of service providers’ potential conflicts of interests. However, some industry professionals we interviewed expressed concerns about whether the PPA advice arrangements sufficiently minimize the risks posed by service providers’ conflicts of interest since it is possible to embed investment biases into computer models, which may be difficult to detect even when computer models are audited. For example, an industry representative said that adequate monitoring and auditing of computer models may be costly and that auditors may not be aware of the various ways in which computer models could be manipulated. In addition, computer models may be designed to exclude certain types of investment options, such as target date funds. If basic investment options offered in a plan are excluded from the computer model, the advice provided will be based on an incomplete analysis of investment options or holdings the participant may have in his or her 401(k) account. The exclusion of certain investment options from computer models may have the effect of steering participants toward options that may involve higher fees. Furthermore, even in the situation where a service provider’s profits do not vary depending on participants’ investment decisions, the service provider may nonetheless exhibit a natural bias toward its proprietary funds when furnishing fund recommendations to participants. While there are no comprehensive data on the prevalence or impact of service providers’ conflicts of interest, available evidence suggests that there are a broad range of potential conflicts of interests that may harm participants and beneficiaries. Numerous industry experts we spoke with identified a wide variety of arrangements, often, but not always, complex, where conflicts of interest can occur to the possible detriment of plans and their participants. The arrangements are often designed in a way that makes it difficult for conscientious plan sponsors to detect them. Participants rely on the plan and its fiduciaries to review the investment options and services provided through the plan. Given the potential for financial harm to participants, it is important to ensure that plan sponsors, as fiduciaries, are aware of whether a conflict of interest exists and that the actions of service providers are appropriate. Conflicts of interest related to the plan’s investment options can negatively affect 401(k) participants through higher fees and lower investment returns, which, ultimately, reduce their income in retirement. When service providers stand to gain from a plan sponsor or participant’s selection of investment options, it is important to ensure that those providers do not have an undue influence over the plan sponsor or participant’s selection process— or participants’ balances could suffer. However, the complexity of business arrangements with service providers presents significant challenges for plan sponsors to fulfill their obligation to identify and mitigate potential conflicts of interest and ensure that the plan is operated in the best interest of participants. This may be particularly problematic for smaller plans, which do not have the resources to hire an independent adviser to review their options. The presence of conflicts of interest and the potential for financial harm hinder participants’ retirement security and call into question the integrity of the 401(k) system, and may undermine participants’ trust and willingness to save for retirement. EBSA has a pivotal role in helping plan sponsors ensure that plans are operated in participants’ best interests. In order to make prudent investment decisions, plan sponsors and participants need to understand when a service provider is acting in the role of a salesperson rather than a fiduciary adviser, required by law to act in the best interests of the plan and its participants. It is especially important for plan sponsors and participants to know if a service provider stands to gain from the selection of particular investment options. EBSA has recently taken several important steps to address the potential for conflicts of interest in investment advice. In particular, EBSA’s interim final regulations, which require service providers to give enhanced disclosure of compensation arrangements, could help plan sponsors more clearly identify potential conflicts of interest and the fiduciary status of service providers. These regulations should help address the challenges faced by plan sponsors and participants. However, unless the disclosures are presented in a format that allows for a consistent comparison across investment options, it will inhibit the effectiveness of these regulations. If changes are not made to current disclosures, plan sponsors will not be able to make meaningful comparisons among different funds and providers. In addition, given that EBSA’s enforcement efforts for conflicts of interest focus on service providers rather than plan sponsors, EBSA should finalize its proposed regulations to revise the current five-part test to better ensure that service providers that recommend investment options are subject to ERISA’s fiduciary standard, and enhance disclosure to plan sponsors when investment assistance is not impartial. If the five-part test is not changed, service providers may still make investment recommendations to plan sponsors without being subject to ERISA fiduciary standards, and EBSA’s ability to take enforcement actions will continue to be limited. Moreover, if disclosures to plan sponsors are not required to be made in a consistent and prominent manner, some plan sponsors may continue to be unaware of the distinction between ERISA fiduciary advice and sales or marketing activities. Additional measures are also needed to better ensure that participants are protected from the potential consequences of conflicted investment advice. To better ensure that participants are not improperly swayed by educational communications, requirements for guidance to participants on the difference between education and advice may need to be evaluated. Without a change in current standards, participants may continue to perceive education as advice and make decisions on the basis of information communicated by service providers with a financial interest in the investment funds. Improved disclosures may also be needed to help participants understand whether their service provider is acting as a salesperson rather than a fiduciary adviser when providing assistance to participants in acquiring financial products outside of the plan, such as an IRA rollover. Otherwise, participants will continue to be unaware if their plan’s service provider is not required to provide advice in the best interest of the participant and may be earning a commission from these product sales. Efforts for improved disclosure may be strengthened through coordination with the Department of the Treasury on proposed regulations designed to help participants understand the potential consequences of moving assets outside of their plan. If no action is taken and conflicts of interest persist, participants’ confidence and willingness to save in the 401(k) system may be weakened and an untold number of 401(k) participants may pay unnecessarily high costs, through investment fees and IRA rollovers; accrue lower investment returns; and have correspondingly less savings available for retirement. To better ensure that plan sponsors and participants can rely on impartial information in making investment decisions, we recommend that the Secretary of Labor direct the Assistant Secretary for EBSA to take the following actions: Amend and finalize proposed regulations to change the definition of a fiduciary for purposes of investment advice. Specifically, the Secretary should amend the proposed regulations to require that service providers’ written disclosures specifying that they are not undertaking to provide impartial investment advice be provided to the plan sponsor in a consistent and prominent manner. Amend and finalize interim final regulations regarding disclosure of service providers’ direct and indirect compensation from plan investments and fiduciary status to require that the information be provided in a consistent and summary format. Evaluate and revise Labor’s interpretive bulletin on investment education, which is important in helping participants and beneficiaries make investment decisions. Specifically, in light of current practices, the Secretary should revise current standards, which permit a service provider to highlight certain investment alternatives, such as proprietary funds, which may result in greater revenue to the service provider, in educational materials. Labor could consider a variety of steps to address this potential conflict of interest, such as requiring service providers to disclose that they may have a financial interest in the options highlighted or prohibiting them from using proprietary funds as examples. Require that service providers, when assisting participants with the purchase of investment products offered outside of their plan, disclose in a consistent and prominent manner, either before or at the point of sale, any financial interests they may have in the outcomes of such transactions and inform participants as to whether their assistance is subject to ERISA fiduciary standards. In addition, to better ensure that plan participants have sufficient information when deciding whether to move plan funds into investment alternatives outside their plan, we recommend that the Secretary of the Treasury amend the applicable requirements of its proposed disclosure rule to specifically require that service providers, when recommending the purchase of investment products outside retirement plans, inform plan participants that fees applicable outside their plans may be higher than fees applicable within their plans. We provided a draft of this report to the Department of Labor, SEC, and Treasury for their review. Treasury generally agreed with our recommendation to amend its proposed disclosure rule to specify that fees applicable for investment products outside of plans may be higher than fees applicable within plans. Treasury and SEC also provided technical comments, which we have incorporated where appropriate. Overall, Labor generally agreed with our findings and to consider our recommendations as it conducts a review of these issues and evaluates public comments received on pending regulations. Labor noted that the interim final regulation to require enhanced disclosure of service providers’ compensation arrangements represents significant progress and disagreed with our conclusion that these disclosures will not be effective unless they are presented in a format that allows for a consistent comparison across investment options. We concur that the disclosures required by this regulation would provide plan sponsors with valuable information and could enhance their ability to evaluate potential conflicts of interest. However, industry experts we spoke with noted that such disclosures can be very complicated and difficult to understand. Furthermore, as Labor has previously pointed out in the interim final rule regarding fee disclosure (75 Fed. Reg. 41,600), in the absence of a summary format, a service provider can fulfill this requirement by providing different documents from separate sources. Providing disclosures in multiple formats in different documents will inhibit the effectiveness of this regulation, particularly for plans that do not have the requisite expertise or the resources to hire an independent adviser to review their options. Additionally, Labor noted that GAO did not conduct a cost-benefit analysis of recommendations to address potential conflicts of interest. GAO conducts its work in response to congressional requests for information and employs a variety of qualitative and quantitative methodologies in carrying out our mission. We choose these methodologies based on a variety of factors and constraints, such as the scope of our research objectives, availability of reliable data, costs and time constraints, as well as other considerations. We acknowledge that there are a number of options Labor could consider for the format of a summary disclosure and we agree that this requirement should be implemented at minimal cost to service providers and sponsors. We support Labor’s following the appropriate administrative procedures in conducting its regulatory reviews and initiatives, including conducting a cost-benefit analysis. In this context, we wish to reiterate our past concerns about the harm plan participants can experience from undisclosed conflicts of interest. For example, as we reported in 2007, our analysis of available data on pension consultants and DB plans revealed a statistical association between inadequate disclosure of conflicts of interest and lower investment returns for ongoing plans. We also note that disclosing potential conflicts of interest in a manner that is readily apparent could benefit EBSA’s oversight and enforcement efforts. Further, if Labor found the cost to service providers in preparing a summary document to be significant, this would also point to the difficulty that plan sponsors would have in extracting this information from multiple documents to obtain consistent information to allow for comparisons across different investment options and providers. Labor also noted, regarding our recommendation to revise the interpretive bulletin on investment education, that current standards take a number of steps to limit the potential for abuse and Labor would need to evaluate several factors in considering any changes. While we concur that the interpretive bulletin includes several requirements to address the potential for conflicts of interest, it does not specifically alert participants when the service provider has a financial interest in investment options highlighted as examples, nor does it state that these examples do not constitute investment advice. Without an explicit disclaimer to this effect, participants may believe that providers are giving investment advice that is in participants’ best interests, even in situations where this may not be the case. We look forward to Labor’s evaluation of this issue and options to address it. Finally, Labor noted that it may not have the authority to act on our recommendation to require service providers to disclose financial interests they may have in the sale of financial products outside of the plan, such as IRA rollovers. In the recently proposed regulation to amend the definition of an ERISA fiduciary, Labor noted concerns that participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests and solicited comments on possible actions to take to address this issue. We look forward to Labor’s evaluation of whether or not it has the authority to address conflicts of interest related to the sale of financial products outside of the plan. If Labor determines that it does not have the authority to act in this area, it may be appropriate for Congress to consider possible legislative remedies. In the absence of any action to address this issue, participants may continue to be unaware when their plan’s service provider stands to gain from the sale of IRA rollovers and other financial products outside of the plan. Labor also provided technical comments on the draft report, which we have incorporated where 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 the date of this letter. At that time, we will send copies to the Secretary of Labor, Secretary of the Treasury, and Chairman of the Securities and Exchange Commission. If you or your staff have any questions concerning this report, please contact me at (202) 512-7215. Contact points for our Office of Congressional Relations and Office of Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix V. To determine the circumstances where conflicted investment advice may be provided to plan sponsors, we analyzed available research and documentation, including a report from the Securities and Exchange Commission (SEC), industry white papers, and documentation from the Department of Labor (Labor) and SEC cases pertaining to service provider conflicts of interest. We also interviewed industry professionals; pension consulting firms and other service providers; officials from Labor, SEC, the Department of the Treasury, the Financial Industry Regulatory Authority, and the Securities Industry and Financial Markets Association; and other relevant organizations. To determine how the fiduciary duty of the Employee Retirement Income Security Act of 1974 (ERISA) applies to investment advice provided to plan sponsors and the scope of ERISA’s prohibited transactions rule, we reviewed relevant laws, including ERISA securities laws, regulations, and Labor advisory opinions, and interviewed industry professionals. As part of our research, we reviewed available information, including a report from Labor’s Office of Inspector General, and conducted interviews with industry professionals and Labor officials to determine the extent to which advisers to plan sponsors are considered ERISA fiduciaries. To determine the circumstances where conflicted investment advice may be provided to plan participants, we reviewed available literature and interviewed industry professionals and plan service providers. Additionally, we reviewed relevant statutes, including ERISA and the Pension Protection Act of 2006 (PPA), as well as regulations promulgated by Labor to understand where applicable law draws the distinction between investment education and advice. To determine what is known about the extent to which plan participants have access to investment education and advice, and to identify the common formats for furnishing such information, we reviewed available data from industry studies and conducted a poll of plan sponsors and service providers, as described below: We reviewed data from the Profit Sharing/401(k) Council of America’s (PSCA) 2008 survey of retirement plans (published in 2009, but reflecting 2008 plan experience). The results of PSCA’s 2008 survey are based on the experiences of 908 plans—including 28 profit-sharing plans, 607 401(k) plans, and 273 combination profit-sharing/401(k) plans—with 7.4 million participants. The plans that participated in PSCA’s survey range in size from 1 participant to 5,000-plus participants. PSCA is a nonprofit association of 1,200 companies that sponsor defined contribution plans for 5 million employees. PSCA represents the interests of its members and offers assistance with profit-sharing and 401(k) plan design, administration, investment, compliance, and communication. In addition to reviewing industry data to assess the availability of investment education and advice for plan participants, we created an online questionnaire in coordination with the Society of Human Resource Management (SHRM) and the Society of Professional Asset-Managers and Record Keepers (SPARK). In the questionnaire, we asked plan sponsors that are members of SHRM and service providers that are members of SPARK whether investment education and advice are provided to plan participants, the format for delivering such information, and whether investment products and services unrelated to plans are marketed to participants. We implemented the Web-based questionnaire with SPARK members using our Web application, while SHRM implemented the questionnaire with its members using SHRM’s Web application. SHRM and SPARK officials solicited responses from their members by distributing, to their members, our e-mail introducing the study, describing the question topics, and directing members to an Internet address for the questions. SHRM and SPARK officials also sent out periodic reminders about the questionnaire over several weeks between July 2010 and August 2010. SHRM distributed the introductory e-mail among 2,698 of its members, and SPARK distributed the e-mail among its board members, which included representatives from every SPARK member organization (over 250 companies). In total, 700 members—627 from SHRM and 73 from SPARK—responded to the questionnaire. The survey results are not representative of the general plan sponsor and service provider populations because our respondent population excludes plan sponsors that are not members of SHRM and service providers that are not members of SPARK. Because of the methodological limitations associated with deploying these questions, information obtained represents only the views of the respondents, not the overall population of 401(k) plan sponsors and service providers. In addition, we took steps in the development of the questions to minimize the variability of survey results. Prior to administering the questionnaire, the questions were reviewed by an independent survey expert in our methodology group and officials from SHRM and SPARK. We made changes to the content and format of the questionnaire based on reviewers’ feedback. To analyze the incidence of IRA rollovers among plan participants, a circumstance in which conflicted investment assistance may be provided to plan participants, we collected and analyzed industry data from three sources to determine the frequency with which plan participants are rolling plan funds into IRAs: The Survey of Income and Program Participation (SIPP), which is a survey conducted by the U.S. Census Bureau. The main objective of the SIPP is to provide accurate and comprehensive information about the income and program participation of individuals and households in the United States. The SIPP is conducted on a continuous series of national panels, with durations from 2 ½ to 4 years, with sample size ranging from approximately 14,000 to 36,700 interviewed households. The SIPP sample is a multistage-stratified sample of the U.S. civilian, noninstitutionalized population. We used data from the 2004 topical module 7 survey and extracted survey responses to determine the percentage of survey respondents who took cash distributions from their retirement plans and rolled distributed funds into individual retirement accounts (IRA). In particular, we used variables EPREVLMP (for survey respondents who have ever received a lump-sum payment from a pension or retirement plan from a previous job, including any lump sums that may have been directly rolled over to another plan or to an IRA) and ELMPWHER, answer choice IRA (for survey respondents who rolled lump-sum payments into IRAs). The 2004 SIPP survey results are based on responses from people surveyed in different waves over a 2 ½-year period, with survey interviews lasting into 2006. Specifically, for wave 7, interviews were conducted from February 2006 to May 2006. Results are generalizable to the population at the time of survey. The Investment Company Institute (ICI) is the national association of U.S. investment companies, and it works to promote public understanding of mutual funds and other investment companies. ICI publishes statistics on the U.S. retirement market every quarter as an information resource for mutual fund companies, the media, policymakers, and researchers. ICI combines data from its own mutual fund survey database and from other trade associations with data from the U.S. Department of Labor, the Federal Reserve Board, and the Internal Revenue Service (IRS) to compile detailed IRA asset information, including the portions of funds flowing into IRAs from rollovers and contributions. Total IRA market assets are derived from tabulations of total IRA assets provided by the IRS Statistics of Income Division for tax years 1989, 1993, 1996-2002, and 2004; with preliminary data provided for 2006 and 2007. Tabulations are based on a sample of IRS returns. GAO did not conduct any direct analysis of ICI data. Three service providers that service defined contribution plans also compiled proprietary data on what happens to plan participants’ defined contribution plan funds when participants terminated their retirement plans. Results from service provider 1 were based on 976,600 terminated participants in the provider’s defined contribution retirement plan services from March 1, 2005, through May 31, 2010. Results from service provider 2 were based on 9,790 terminated participants in the provider’s retirement plan services 401(k) plans from January 1, 2008, through March 31, 2009. Results from service provider 3 were based on participants with termination dates in 2008. The universe consisted of more than 3 million participants from more than 2,200 plans. In addition, the proprietary data from plan service providers are not generalizable to the universe of retirement plan participants. However, the results are consistent with and corroborate each other. We assessed the reliability of the data we present and found the data to be sufficiently reliable as used in this report. To describe the steps that Labor has taken to address conflicts of interest, we reviewed documentation of Labor’s enforcement activities related to conflicted investment advice practices. We also reviewed past GAO and Labor Inspector General reports and interviewed Labor officials to evaluate the adequacy of Labor’s enforcement efforts to prevent conflicted investment advice. In addition, we reviewed documentation from Labor and industry participants related to three recent or soon-to-be-released Labor regulations: (1) a proposed rule amending the definition of ERISA fiduciary duty regarding investment advice (published in October 2010), which would amend the regulatory definition of the fiduciary duty for plan investment advisers to include pension consultants and other plan advisers who do not fall under the current regulatory definition; (2) an interim final rule regarding service provider disclosures of direct and indirect compensation to plan sponsors (issued in July 2010); and (3) PPA eligible investment advice arrangements (issued in March 2010), which fall under a statutory exemption to the ERISA prohibited transactions rule. Finally, we interviewed Labor officials to discuss the scope of each regulation and key features that may mitigate conflicts of interest. We conducted our review from January 2010 through January 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. Investment education and advice may be provided to participants in different formats, most commonly through brochures or other written materials and computer modeling. Other formats for providing education or advice include one-on-one sessions with service providers and seminars and workshops. A number of studies have been conducted about the availability of investment assistance for participants; however, these studies do not always discern whether participants are provided investment education or advice. According to a poll of 401(k) plan sponsors and service providers that we conducted in coordination with SHRM and SPARK, investment education is more commonly offered than investment advice, although many respondents offered both. As shown in figure 6, of the 475 SHRM respondents who sponsored a 401(k) plan, 380 provided investment education and 215 provided investment advice. Of these respondents, 202 provided both education and advice. Among respondents, brochures or other written materials were the most commonly used formats for delivering education and advice. Computer modeling, including Web-based tools, was the second most common method of delivery reported. Industry research by an organization of 401(k) and profit-sharing plans yielded similar results, with 51.8 percent of plans providing investment advice to plan participants and with 28.3 percent of participants using advice when it was offered. Among plans providing investment advice, the most common methods of delivery are one-on-one counseling sessions, Internet providers (including those with computer modeling programs), and telephone hotlines. Industry survey results also indicate that smaller plans with fewer than 50 participants are more likely to use one-on-one counseling sessions, while larger plans of 5,000-plus participants tend to use Internet providers. Computer models can be used to render investment advice to participants in three different arrangements: (1) the direct service arrangement, (2) the SunAmerica arrangement, and (3) the PPA computer model arrangements. As shown in figure 7, the direct service arrangement is utilized when a plan sponsor contracts directly with an independent advisory firm, which develops a computer model that renders advice to plan participants. The independent advisory firm should not be affiliated with any investment fund or accept payments from funds that its model recommends as investment options. Accordingly, the firm should operate without a vested interest in its recommendations and not incur any conflicts of interest. For advice arrangements where providers offer their own investment funds and thus have a conflict of interest, Labor has set forth specific requirements under which these providers may offer investment advice. As shown in figure 8, the SunAmerica arrangement allows the service provider to contract with an independent advisory firm to develop and administer a computer model to provide investment advice. Because the primary service provider may have a conflict of interest for certain investment options offered to participants, Labor requires that, among other things, the independent financial expert—who is not the primary service provider—develop and maintain the computer model that renders advice to participants solely in the interest of plan participants. As shown in figure 9, the PPA computer model arrangement, on the other hand, allows the service provider to develop the computer model in-house, subject to certain requirements the PPA has established to address the service provider’s conflict of interest. Labor has proposed regulations that would allow a primary service provider to develop and maintain the computer model that renders advice to participants if, among other things, the model has been certified by an independent financial expert and undergoes annual audits. Therefore, unlike the direct service or SunAmerica arrangements, where an independent advice provider is the creator of a computer model that renders advice to participants, the PPA computer model arrangement bypasses the independent advice provider and allows the primary service provider to create the computer model that renders advice to participants. In addition to permitting the use of the computer modeling advice arrangement, the PPA also permits a level fee advice arrangement, which allows a provider who may otherwise have a conflict of interest—such as a provider whose proprietary funds are part of a plan’s investment lineup— to furnish investment advice to participants. Specifically, Labor’s proposed regulations specify that a provider may furnish advice to participants if the provider’s fees do not vary depending on participants’ investment decisions. A Labor publication indicates that the level fee requirement applies to the service providers’ representatives and their employers, but not their affiliates. In addition to the contact named above, Tamara Cross, Assistant Director; Sharon Hermes, Analyst-in-Charge; Jessica Gray; and Kun-Fang Lee made important contributions throughout this report. Susan Baker, James Bennett, Susan Bernstein, Rachel DeMarcus, Cody Goebel, Ying Long, Sheila McCoy, Karen O’Conor, Roger Thomas, and Walter Vance also provided key support. Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees. GAO-07-21. Washington, D.C.: November 16, 2006. Employee Benefits Security Administration: Enforcement Improvements Made but Additional Actions Could Further Enhance Pension Plan Oversight. GAO-07-22. Washington, D.C.: January 18, 2007. Defined Benefit Pensions: Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges. GAO-07-703. Washington, D.C.: June 28, 2007. Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington, D.C.: July 16, 2008. Private Pensions: Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24, 2009. Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants. GAO-09-641. Washington, D.C.: September 4, 2009. Defined Contribution Plans: Key Information on Target Date Funds as Default Investments Should be Provided to Plan Sponsors and Participants. GAO-11-118. Washington, D.C.: January 25, 2011. | Recent volatility in financial markets highlights the need for prudent investment decisions if 401(k) plans are to provide an adequate source of retirement income. While plan sponsors and participants may receive help in assessing their investment choices, concerns have been raised about the impartiality of the advice provided. GAO was asked to describe circumstances where service providers may have conflicts of interest in providing assistance related to the selection of investment options for (1) plan sponsors and (2) plan participants, and (3) steps the Department of Labor (Labor) has taken to address conflicts of interest related to the selection of investment options. The sponsors of 401(k) plans face conflicts of interest from service providers assisting in the selection of investment options because of third-party payments and other business arrangements. For example, providers who help sponsors to establish and maintain their plans may receive third-party payments from investment fund companies. The payments, sometimes called revenue sharing, create a conflict of interest because the provider may receive greater compensation from certain funds. Moreover, providers are reported to commonly structure their relationships with sponsors in a manner that avoids being subject to fiduciary standards under the Employee Retirement Income Security Act (ERISA). According to several industry experts, many sponsors, particularly of smaller plans, do not understand whether or not providers to the plan are fiduciaries, nor are they aware that the provider's compensation may vary based on the investment options selected. Such conflicts could lead to higher costs for the plan, which are typically borne by participants. In certain situations, participants face conflicts of interest from providers that have a financial interest when providing investment assistance. For example, although investment education is defined as generalized investment information, providers may highlight their own funds as examples of investments available within asset classes even though they may have a financial interest in the funds. According to industry experts, participants perceive education as investment advice. Thus, participants may not understand that the provider is not a fiduciary adviser required to act solely in participants' best interests. Also, several industry experts expressed concerns that providers stand to gain higher profits from marketing investment products outside of plans to participants, a practice known as cross-selling. For example, if participants use their plan provider for Individual Retirement Account rollovers, they may not understand, because of insufficient disclosures, that fees are often higher for products offered outside the plan and that the provider may not be serving as a fiduciary adviser. Consequently, participants may choose funds that do not meet their needs and pay higher fees, which reduce their retirement savings. While Labor has taken steps to address the potential for conflicted investment advice provided to sponsors and participants, more can be done to ensure they receive impartial advice. In fiscal year 2007, the Employee Benefits Security Administration (EBSA) began a national enforcement project that focuses on the receipt of improper or undisclosed compensation by certain providers, but its enforcement efforts are constrained to fiduciary providers and limited by EBSA's approach for generating cases. In addition, EBSA issued regulations to revise the definition of an ERISA fiduciary and require enhanced disclosure of providers' compensation and fiduciary status. These regulations, as currently specified, would help EBSA and sponsors detect and deter conflicted investment advice. However, the regulations do not require that certain disclosures be made in consistent or summary formats, which may leave sponsors with information that is not sufficient or comparable. GAO recommends that Labor amend pending regulations to require that service providers disclose compensation and fiduciary status in a consistent, summary format and revise current standards, which permit a service provider to highlight investment options in which it has a financial interest. GAO also recommends that the Department of the Treasury amend proposed regulations to require disclosure that investment products outside a plan typically have higher fees than products available within a plan. Overall, Labor and Treasury generally agreed to consider our recommendations as they evaluate comments received on pending regulations. |
The Air Force and the Navy plan to replace many of their current fighter aircraft with the Joint Strike Fighter, also called the F-35. DOD plans to buy a total of 2,443 F-35s—1,763 for the Air Force and 680 for the Department of the Navy—between 2008 and 2037. However, we have reported on F-35 issues since 2005 and found that the F-35 is still in development and the program has experienced significant delays and cost increases. For example, we reported that the F-35 program has experienced numerous delays in development and production, including program restructuring, which has increased time for development. Further, we reported that the F-35 program costs have increased 42 percent from the 2007 baseline and unit costs have doubled since the start of development in 2001. In addition, the DOD Fiscal Year 2011 Annual Report on Operational Test and Evaluation stated that the F-35 is not on track to meet operational effectiveness or operational suitability requirements and that testing identified structural and maintenance issues.first few production lots will need a significant number of modifications and upgrades in order to attain planned service life and capabilities. Due to delays in the F-35 program, the services have decided to extend the service life of some existing aircraft in order to maintain desired inventory levels. Further, the DOD report also stated that aircraft produced in the The upgrade and service-life extension programs will likely be costly and may be subject to further changes. Our prior work has found that a high- quality cost estimate is critical to the success of any program because it can provide the basis for informed investment decision making, realistic budget formulation, and proactive course correction when warranted. The March 2009 GAO Cost Estimating and Assessment Guide is a compilation of best practices that federal cost-estimating organizations and industry use to develop and maintain reliable cost estimates throughout the life of a program. The GAO cost guide reported that a high-quality cost estimate has four characteristics including comprehensive when it accounts for all life-cycle costs, is sufficiently detailed to ensure that costs are neither omitted nor double-counted, and identifies ground rules and assumptions; well-documented when supporting documentation explains the process, sources, and methods used to create the estimate; accurate when it is based on the assessment of the costs most likely to be incurred and adjusted for inflation; and credible when the level of confidence has been identified through a risk and uncertainty analysis, and a sensitivity analysis has been conducted that identified the effects on the estimate of changing key assumptions. Also, a cost estimate is credible when it has been cross- checked with an independent estimate. The GAO cost guide describes eight types of independent cost estimate reviews which vary in the depth of analysis, ranging from a document review— merely assessing the estimate’s documentation—to an independently developed cost estimate—conducted by an organization outside the acquisition or program office. The Air Force and Navy each have service cost-estimating agencies, which develop independent cost estimates for major acquisition programs and other programs when requested. The Air Force currently plans to upgrade and extend the service life of 300 F-16 aircraft at an estimated cost of $2.61 billion and the Navy plans to extend the service life of 150 F/A-18 aircraft at an estimated cost of $2.19 billion. Service officials have said that if the F-35 program experiences further delays, the services have the ability to expand the number of aircraft that are included in these programs. In 2009, DOD and the Air Force were directed by statute and a committee report to provide reports on force-structure plans including alternatives such as buying aircraft and upgrading and extending the service life of selected aircraft. The Air Force reported on assessments of seven alternatives, which included buying between 150 and 300 new F-15Es, F/A-18 E/Fs, and F-16s, and upgrading and extending the service life of selected F-16s. The Air Force concluded that the cost for upgrading and extending the service life of current F-16s by 2,000 hours each would be 10 to 15 percent of the cost of procuring new F-16s, F-15Es, or F/A-18s. Extending the life of existing aircraft would provide 6 to 8 years of additional service and, according to the Air Force, provide essentially the same capability over that period as buying new legacy aircraft. In reviewing these reports, GAO concluded in 2011 that the analyses done were limited in part by the absence of F-16 durability and viability data.Figure 1 below shows the Air Force’s estimated costs for the current plans for capability upgrades and the service-life extension. The Air Force estimates to upgrade capabilities and extend the service life of selected F-16 aircraft included research, development, test and evaluation, and procurement costs. The capability upgrades, Air Force officials explained, are needed to maintain mission effectiveness and will include, for example, an improved radar and data-link enhancements. The service-life extension will add 2,000 flight hours, or about 6 to 8 years, depending on flying conditions, to each aircraft. Most of the $2.61 billion to upgrade and extend the service life—$1.88 billion or 72 percent—is planned to be incurred in fiscal years 2018 through 2022. The remaining $722 million is programmed in the fiscal year 2013-2017 Future Years Defense Program. Since the 2010 reports to Congress were completed, the Air Force has stated that without the service-life extension it would have to start gradually grounding some F-16s beginning in 2017. The Air Force is conducting tests to clarify the extent of the work required to extend the service life, and plans to begin work in fiscal year 2016. Also, the Air Force plans a milestone program review for the service-life extension in the first quarter of fiscal year 2013 and a milestone program review for the capability-upgrade program in the fourth quarter of fiscal year 2013. The Air Force plans to complete all the upgrade and service-life extension work by the early 2020s. Finally, Air Force officials said that they could expand these programs to include up to 650 aircraft if needed to attain desired inventory levels. In response to a statutory requirement, in May 2011, the Navy submitted the results of a cost-benefit analysis comparing extending the service life of existing F/A-18 aircraft with procuring additional F/A-18 E/F aircraft. The Navy assessed six alternatives, which included various combinations of extending the service life of up to 280 F/A-18 A-D aircraft and procuring up to an additional 70 F/A-18 E/Fs. The Navy concluded that extending the service life of 150 F/A-18 A-D aircraft and buying 41 new F/A-18E/F aircraft would provide an acceptable inventory at a manageable level of risk.year 2018. Figure 2 below shows the Navy’s estimated cost for the service-life extension of selected F/A-18 aircraft. The Navy plans to complete the service-life extension work in fiscal The Navy’s estimate includes procurement costs for materials and installation to extend the service life of 150 F/A-18s for an additional 1,400 hours each or about 5 years depending on flying conditions. Almost all the Navy’s estimated $2.19 billion is programmed in the fiscal year 2013-2017 Future Years Defense Program. Finally, the Navy’s analysis showed that the 150 aircraft selected for the service-life extension will individually be evaluated for capability upgrades—such as adding the ability to integrate with newer aircraft—as well as upgrades of other critical components reaching the end of their service life and becoming obsolete. After evaluating the aircraft, the Navy will decide whether to do this additional work. Finally, Navy officials said that they could expand their program if needed, to include up to 280 aircraft. Navy officials explained that they will review the service-life extension effort annually as part of an overall review of the F/A-18 program. The Air Force’s and Navy’s cost estimates to upgrade and extend the service life of selected F-16 and F/A-18 aircraft exhibit many cost- estimating characteristics and best practices of a high-quality cost estimate, but do not reflect all the potential total costs that may occur. We assessed the Air Force estimate for capability upgrades and the Air Force estimate for the service-life extension of selected F-16 aircraft, which were prepared for the fiscal year 2013 budget request; and the Navy estimate for the service-life extension of selected F/A-18 aircraft. Overall, we found that the Air Force and Navy followed many of the best practices that support the four characteristics of a high-quality estimate. However, both the Air Force and Navy estimates were not fully credible due to two shortcomings—the estimates did not show the range of potential costs that are likely to be incurred and were not validated by comparison with an independently developed estimate. As a result, decision-makers do not have visibility of how much the total costs will be and how they may increase if program quantities increase or additional work is required on some aircraft, which could hinder their ability to assess budgets and affordability. The Air Force’s $1.79 billion estimate for capability upgrades and the $820 million estimate for service-life extension were well-documented, accurate, and mostly comprehensive. However, the estimates were not fully credible because the Air Force’s analysis did not clearly show the potential range of total costs that would occur if more aircraft are included in the programs and the estimates were not compared to an independently developed estimate. In assessing the extent to which the Air Force’s cost estimates exhibited the four characteristics of a high- quality estimate, we found the following: Comprehensive: The Air Force’s estimates were substantially comprehensive because they included all the work planned for 300 aircraft, identified key cost-estimating ground rules and assumptions, and included development and procurement costs. Well-documented: Both estimates were well-documented because they identified the source of the data, included the work that is planned, documented the cost-estimating methodologies, showed how the calculations were made, and were reviewed by management. Accurate: Both estimates were accurate because they were adjusted for inflation, based on an assessment of most likely costs for 300 aircraft, and used data from comparable programs where appropriate. Credible: For both estimates, the Air Force cross-checked major cost elements to determine whether results were similar and conducted a risk and uncertainty analysis that included a list of the risks assessed. For example, the analysis assessed the risk that more work may be required to extend the service life than currently planned. Also, the Air Force identified some cost drivers, which are the items that have the greatest effect on the estimated cost, such as labor rates. While the Air Force estimates exhibited many characteristics of a high-quality estimate, they had two shortcomings that lessened the estimates’ credibility. First, the analysis did not include an estimate of the total costs that may occur if more than 300 aircraft are included in the programs up to the potential maximum of 650 aircraft. Second, the estimates were not compared to an independently developed estimate. Regarding the first shortcoming, best practices state that a credible cost estimate should include an assessment of how the cost estimate may change in response to changes in key program assumptions. This is known as a sensitivity analysis. Such an analysis helps decision makers identify areas that could significantly affect a program’s cost, such as changes in program quantities. According to Air Force officials, the service may choose to upgrade and extend the service life of additional aircraft if there are further delays in F-35 production. For example, in a written statement, Air Force leaders testified in March 2012 that the intent is to include 350 F-16 aircraft in the upgrade and life extension programs—50 more aircraft than originally planned. Air Force officials explained that they did not assess the range of costs that may result from expanding the number of aircraft in the program up to the maximum of 650 since the program is currently approved for only 300 aircraft. However, without an assessment of how much the total cost may increase as the aircraft quantity increases, the estimate lacks transparency on the full range of possible costs, which could be significant. For example, we calculated that the cost to upgrade and extend the service life of all 650 aircraft could total $5.53 billion. The second major shortcoming is that the Air Force did not compare the estimates to independently developed cost estimates. Having an independent estimate is considered one of the best and most reliable estimate validation methods since an independent estimate is an objective assessment of whether the program office estimate is reasonable and can be achieved. Further, our past work has shown that an independent estimate tends to be higher and more accurate than a program office estimate. Air Force officials explained that it is likely the Air Force Cost Analysis Agency will be requested to develop a formal independent cost estimate for upcoming program reviews, but the decision to require an independent estimate has not yet been made. Further, the program review for the capability-upgrade program will not be held for a year—it is currently scheduled for the fourth quarter of fiscal year 2013. Until the Air Force obtains an independent cost estimate, decision makers will not have the assurance that the programs’ estimated cost can be relied upon for making budgeting and trade-off decisions. Furthermore, a program that has not been reconciled with an independent estimate has an increased risk of proceeding underfunded because an independent estimate provides an objective and unbiased assessment of whether the program estimate can be achieved. The Navy’s $2.19 billion cost estimate for the service-life extension of F/A-18s was comprehensive, well-documented, and accurate. However, the estimate was not fully credible because it did not include an assessment of the costs for additional work on the aircraft that may be done at the same time as the service-life extension and the estimate was not compared to an independently developed estimate. Since the Navy will assess on an aircraft-by-aircraft basis whether to do this additional work, the costs would be in addition to the $2.19 billion for the service-life extension and most of these costs are not included in the Navy’s spending plans through fiscal year 2017. In assessing the extent to which the Navy’s cost estimate exhibited the four characteristics of a high- quality estimate, we found the following: Comprehensive: The Navy’s estimate identified key cost-estimating ground rules and assumptions. Also, the Navy’s estimate included the costs to buy and install the materials needed to repair the airframe so that it can fly the additional 1,400 hours. Finally, the Navy’s analysis included assessing the costs for different quantities from 150 up to 280 aircraft. Well-documented: The estimate was well-documented since it described the methodology used and the calculations performed to develop the estimate so that a cost analyst unfamiliar with the program could replicate it. Also, the Navy’s documentation included steps to ensure data reliability, and the estimate was reviewed by management. Accurate: The Navy’s estimate was accurate since it was adjusted for inflation, not overly conservative or optimistic, and incorporated data from comparable programs where appropriate. Credible: Finally, the Navy’s estimate was partially credible because the Navy followed some, but not all, of the best practices for this characteristic. For example, the Navy conducted a sensitivity analysis which identified cost drivers, such as materiel and labor costs. Also, the Navy conducted a risk and uncertainty analysis which accounted for some risks, such as the risk that the service-life extension may require more work than currently planned. However, the Navy did not assess the potential range of costs for all work that might be done and focused only on the costs associated with extending the life of the airframe, which officials described as consistent with Navy guidance. Specifically, the Navy told us it will assess on an aircraft-by-aircraft basis whether the F/A-18s also need capability upgrades to maintain mission effectiveness, such as adding the ability to integrate with newer aircraft. According to the Navy, such capability upgrades could cost an average of about $1.76 million per aircraft, but uncertainty exists about how many aircraft the Navy will actually decide to upgrade and therefore the total cost associated with these upgrades is uncertain. In addition, the Navy has determined that some of the F/A-18 aircraft may also require life extension or replacement of nonstructural parts or systems that are becoming obsolete. The Navy estimated that this work could average $5.64 million per aircraft. Navy officials explained that they will decide on an aircraft-by-aircraft basis whether to do this work when the aircraft is inspected just prior to beginning service-life extension. Navy officials told us that if an aircraft needs a lot of this type of work, the Navy may decide not to extend the service life of that particular aircraft, but rather substitute another one in its place. Given the uncertainties, the costs associated with this additional work are not included in the Navy’s $2.19 billion estimate nor are they included in the Navy’s spending plans through fiscal year 2017. The purpose of a sensitivity analysis is to identify the effects on the estimate of changing key factors and to show a resulting range of possible costs. Further analysis could show the likelihood of the Navy incurring some or all of the additional costs. Without an assessment of the effect on the total costs that would be incurred if some of the 150 aircraft need additional work at an additional cost, decision makers will not know the full range of potential costs. Finally, the Navy did not compare the estimate to an independently developed cost estimate such as one that could have been requested from the Naval Center for Cost Analysis. Navy officials stated that the estimate was reviewed extensively within the Navy and that an independent estimate was not required because the service-life extension is a modification of an existing aircraft and is not a separate acquisition program. Even if not required, Navy officials said that they could have requested the Naval Center for Cost Analysis to develop an independent estimate for this program. In our prior work, we have found that an independent cost estimate is considered to be one of the most reliable validation methods. If the Navy’s estimate were validated by an independent cost estimate, decision-makers could place more credibility in the estimate. The Air Force and the Navy decided to upgrade and extend the service life of selected F-16 and F/A-18 aircraft to provide a capability and capacity “bridge” until the F-35 is available in sufficient numbers. The cost to do so is already estimated to total almost $5 billion and likely will increase due to slippage in the F-35 program and increases in program scope. In many respects, the Air Force and Navy cost estimates we evaluated were developed in accordance with some best practices. Specifically, we found the estimates to be well-documented and accurate and mostly comprehensive. However, the Air Force and Navy did not follow some important best practices and as a result did not clearly identify the potential total costs that may result as the programs evolve. For example, without an analysis that includes the potential for increases in the number of aircraft in the program or that clearly identifies the cost for additional work that may be required on some of the aircraft, decision makers are not aware of how much total costs could increase if these events occur. Further, unless the services reconcile the program cost estimate with an independent cost estimate, there is an increased risk that the actual costs will exceed the estimate. According to the GAO Cost Estimating and Assessment Guide, independent estimates are usually higher and more accurate than program estimates and therefore if a program estimate is close to an independently developed estimate, one can be more confident that the estimate is credible. The guide further explains that there are various types of independent cost estimate reviews that can be performed, including seeking an independent estimate. Since these are multibillion-dollar investments that are critical to maintaining fighter capacity, an independent review of service estimates or an independently-developed estimate—which could be performed by the respective service cost-estimating agencies—would provide assurance about the likely full costs. Without fully credible cost estimates, service and congressional decision-makers will not have reasonable confidence of knowing the potential range of costs to upgrade and extend the service life of selected F-16 and F/A-18 aircraft as they make resource and trade-off decisions, develop and review budget requests, and assess the programs’ affordability. To improve future updates of Air Force and Navy cost estimates for upgrading and extending the service life of selected F-16s and F/A-18s and to improve the ability of decision-makers to assess the potential total costs, we recommend that the Secretary of Defense take the following four actions: Direct the Secretary of the Air Force to update its cost estimates, and in doing so: include in its sensitivity analysis an assessment of the range of possible costs if the capability-upgrade and service-life extension programs are expanded to more than 300 aircraft including up to the maximum of 650 aircraft, and obtain an independent review of the updated cost estimates. Direct the Secretary of the Navy to update its cost estimates and in doing so: include in its sensitivity analysis an assessment of the range of possible costs for extending the service life of other nonstructural components that are becoming obsolete and capability upgrades that may be required for some of the 150 aircraft, and obtain an independent review of the updated cost estimates. We provided a draft of this report to DOD for comment. In written comments on the draft of this report, DOD agreed with all four recommendations. DOD’s comments are reprinted in their entirety in appendix III. DOD also provided technical comments, which we incorporated into the report as appropriate. Regarding the first recommendation for improving future updates of the Air Force cost estimates, DOD concurred, stating that the Air Force had updated planned force structure requirements to upgrade and extend the service life of 50 aircraft in addition to the original 300 aircraft and therefore estimated costs for 350 aircraft. Also, the department stated that while these programs could be expanded beyond 350 aircraft, further cost excursions are premature until F-35 production has matured. The department stated that it would update its cost estimates with another sensitivity analysis containing an assessment of the range of possible costs if force structure requirements change further. While we acknowledge that estimating costs for 350 aircraft is a step in the right direction, an assessment of how much the total cost may increase up to the maximum of 650 aircraft is needed to provide transparency on the full range of costs, which could be significant—potentially totaling up to $5.53 billion. DOD also noted that further cost excursions are premature until F- 16 structural testing is complete. However, Air Force officials explained during our review that data from testing are available throughout the testing period and that they could use this information to update cost estimates before testing is completed in 2016. Until the Air Force completes analyses to show the potential range of costs, decision makers will continue to lack crucial data on how much total costs could increase as they make resource and trade-off decisions. Regarding the second recommendation for improving future updates of the Air Force cost estimates by obtaining an independent review of the updated cost estimates, DOD agreed, stating that the Air Force Cost Analysis Agency had reviewed the estimates for the Air Force’s fiscal year 2014 budget development process and that, if further cost assessments are warranted, the Air Force would submit the estimates for an independent review. An independent review of cost estimates is important because a program that has not been reconciled with an independent estimate has an increased risk of proceeding underfunded since an independent estimate provides an objective and unbiased assessment of whether the program estimate can be achieved. As the Air Force updates its cost estimates for these $2.61 billion programs, up- to-date, independently validated cost estimates would provide decision- makers assurance that the programs’ estimated cost can be relied upon as they assess program affordability. Regarding the two recommendations for improving future updates of the Navy cost estimates, DOD concurred but did not explain when or what specific actions it intends to take to implement these recommendations. We are encouraged that the department agrees these are important, valid steps to take and further believe that it is important for the Navy to implement these recommendations in a timely manner to facilitate review and implementation of these programs since the programs are estimated to cost $2.19 billion and could increase an average of $5.64 million per aircraft. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of the Air Force, and the Secretary of the Navy. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (404) 679-1816 or pendletonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff members making key contributions to this report are listed in appendix IV. To describe the Air Force’s and the Navy’s plans to upgrade and extend the service life of selected F-16s and F/A-18s, we reviewed the services’ documentation of the programs’ purpose and scope including the underlying analysis of alternative approaches. To identify the Air Force’s and the Navy’s estimated costs to upgrade and extend the service life of F-16s and F/A-18s, we obtained the services’ cost estimates for these programs and obtained any updates to these estimates. The Air Force updated its initial estimate to support development of the fiscal year 2013 budget. The Navy’s cost estimate was reported to Congress in May 2011. All of the cost estimates from these sources were converted to fiscal year 2013 dollars using the indexes published by the Office of the Secretary of Defense (Comptroller) in the National Defense Budget Estimates for Fiscal Year 2013, commonly referred to as the “Green Book”. To assess the extent to which the cost estimates exhibited characteristics of a high-quality cost estimate, we compared how the estimates were developed to the cost estimating best practices outlined in the GAO Cost Estimating and Assessment Guide. The guide is a compilation of best practices that federal cost-estimating organizations and industry use to develop and maintain reliable cost estimates that management can use for making informed decisions. The guide describes 19 best practices for developing a comprehensive, well-documented, accurate, and credible cost estimate—the four characteristics of a high-quality cost estimate. We analyzed the extent to which the Air Force and Navy cost estimates met each of these four characteristics and assigned each a rating of not met, The overall rating minimally met, partially met, substantially met, or met.for each characteristic was based on the average rating of the best practices for each characteristic. We also held detailed discussions with service officials and reviewed program documentation to identify key factors that could affect the potential total costs such as changes in aircraft quantities or additional work to maintain aircraft mission effectiveness that may not have been included in the estimates. We shared with program officials our cost guide, the criteria against which we evaluated the program’s estimated cost, as well as our preliminary findings. When warranted, we updated our analyses on the basis of the agency response and additional documentation that was provided to us. Finally, we corroborated our analyses in interviews with service officials responsible for developing the cost estimates. We conducted our work at the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics; Office of the Chief of Staff of the Air Force, Directorate of Force Application; Ogden Air Logistics Center at Hill Air Force Base; F-16 System Program Office at Wright- Patterson Air Force Base; Air Combat Command; Air Force Cost Analysis Agency; Air Force Fleet Viability Board; Office of the Deputy Assistant Secretary of the Navy for Air Programs; Headquarters United States Marine Corps; Naval Air Systems Command; and the Naval Center for Cost Analysis. We conducted this performance audit from May 2011 to November 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings, and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Navy estimate was reported as a cost per aircraft in fiscal year 2011 dollars. Therefore, there is not comparable data for showing the Navy estimate in then-year dollars. In addition to the contact named above, the following staff members made key contributions to this report: Patricia W. Lentini, Assistant Director; Brenda M. Waterfield; Benjamin D. Thompson; Joseph M. Capuano; Ophelia Robinson; Karen A. Richey; Jennifer K. Echard; Charles W. Perdue; Michael D. Silver; Michael Shaughnessey; and Richard S. Powelson. | Fighter aircraft are important to achieve and maintain air dominance during combat operations as well as to protect the homeland. DOD plans to replace many of its current fighter fleet with the F-35; however, the F-35 program has experienced numerous delays and cost increases. To maintain fighter capabilities and capacity, the Air Force and Navy have decided to upgrade and extend the service life of selected F-16 and F/A-18 aircraft. In this context, two subcommittees of the House Armed Services Committee asked GAO to (1) describe the Air Force and Navy plans to upgrade and extend the service life of selected F-16 and F/A-18 aircraft; and (2) assess the extent to which cost estimates for these upgrades and life extensions exhibit characteristics of a high-quality cost estimate. GAO obtained documentation of the plans and estimates, compared the estimates to best practices outlined in the GAO Cost Estimating Guide, and assessed factors that could affect total costs. The Air Force plans to upgrade and extend the service life of 300 F-16 aircraft and the Navy 150 F/A-18 aircraft, at a combined cost estimated at almost $5 billion in fiscal year 2013 dollars. The Air Force plans to extend the service life of selected F-16s by 2,000 flying hours each as well as install capability upgrades such as an improved radar. The Air Force estimates that it will complete this work by 2022 at a cost of $2.61 billion. About 28 percent of the projected costs are included in the Air Force's spending plans through 2017, with the remainder expected to be incurred in 2018-2022. The Navy plans to extend the service life of selected F/A-18s by 1,400 flying hours each and may install capability upgrades on some of the 150 aircraft--such as adding the ability to integrate with newer aircraft. The Navy projects that it will complete the life extension by 2018 at a cost of $2.19 billion, with most of these costs included in its spending plans through 2017, but costs associated with any upgrades are not included in the Navy estimate or in its spending plans. Air Force and Navy officials told GAO that they could ultimately extend the service life of up to 650 F-16s and 280 F/A-18s if needed to attain desired inventory levels. The Air Force's and Navy's cost estimates to upgrade and extend the service life of selected fighter aircraft exhibit some characteristics of a high-quality cost estimate but do not reflect all potential costs. The estimates were: well-documented since they identified data sources and methodologies; accurate since they accounted for inflation and were checked for errors; and mostly comprehensive since they included the work planned and identified key assumptions. However, the estimates were not fully credible in part because they did not assess the extent to which the total costs could change if additional work is done or more aircraft are included in the programs. Another factor affecting the credibility of the estimates is that they have not been compared to an independently developed estimate. GAO's past work has shown that such an independent cost estimate is one of the best validation methods since an independent cost estimate tends to be higher and more accurate than a program office estimate. Air Force and Navy officials told GAO that they use Department of Defense and military department guidance that allows for some variation in how the estimates are developed depending on the dollar value and maturity of the program. However, these programs--which are critical to maintain fighter capability and capacity as current inventory ages--total almost $5 billion and the costs will increase if program quantities and scope increase. Without fully credible cost estimates, including an analysis of how much total costs may increase, decision makers will not have visibility into the range of potential costs, which could hinder their ability to formulate realistic budgets and make informed investment decisions. GAO recommends that the Air Force and Navy follow all best practices to enhance the credibility of the cost estimates for the F-16 and F/A-18 upgrades and life extensions including an assessment of the potential range of costs and seeking independent cost estimates. |
GSA’s Federal Technology Service is responsible for ensuring that federal agencies have access to the telecommunications services and solutions needed to meet mission requirements. Currently, GSA uses a series of contracts intended to meet agency needs for various services. Specifically, it awarded two large, governmentwide contracts for long-distance services—one to Sprint in December 1998 and one to MCI WorldCom in January 1999. Under the terms of these contracts, known together as FTS2001, each firm was guaranteed minimum revenues of $750 million over the life of the contracts, which run for four base years and have four 1-year extension options. If all contract options are exercised, those contracts will expire in December 2006 and January 2007, respectively. According to GSA, federal agencies spent approximately $614 million on FTS2001 services during fiscal year 2003. Related governmentwide telecommunications services are provided through other additional GSA contracts: the Federal Wireless Telecommunications Service contract and the FTS Satellite Service contracts. The wireless contract was awarded in 1996 to provide wireless telecommunications products and services to all federal agencies, authorized federal contractors, and other users. It is scheduled to expire in November of this year. Satellite services are provided through a series of contracts for a variety of commercial off-the-shelf satellite communications products and services, including mobile, fixed, and broadcast services. These contracts will expire in 2007. We have periodically reviewed the development and implementation of the FTS2001 program and assessed its progress. In March 2001 we reported to you on the delays encountered during the government’s efforts to transition from the previous FTS2000 to the FTS2001 contracts, the reasons for those delays, and the effects of the delays on meeting FTS2001 program goals of maximizing competition for services and ensuring best service and price. We recommended that GSA take numerous actions to facilitate those transition efforts. In April 2001 testimony before you, we reiterated those recommendations and noted that the process of planning and managing future telecommunications service acquisition would benefit from an accurate and robust inventory of existing telecommunications services. Ultimately, GSA acted on our recommendations and the transitions were successfully completed. GSA is now planning its Networx acquisition to replace the contracts that are expiring. GSA has worked with representatives of federal agencies, the telecommunications industry, and other interested parties to lay the groundwork for the new program. Agencies work directly with GSA and through the Interagency Management Council (IMC), a group of senior federal information resource officials who advise GSA on issues related to telecommunications contracts. GSA and the IMC proposed eight goals for the Networx program, including an emphasis on ongoing support and performance-based contracts. The table lists each of the program goals. Program Goals Proposed for Networx Service Continuity: Contracts should include all services currently available under FTS2001 to facilitate a smooth transition. Competitive prices: Prices should be better than those available elsewhere in the telecommunications marketplace. High quality services: Contracts should ensure a high quality of service throughout the life of the contracts. Full service vendors: Vendors should be capable of providing a broad array of services to avoid duplication of administrative and contracting costs. Alternate sources: Agencies should be able to choose from a greater number of vendors and have access to emerging technologies. Operations Support: GSA should provide fully integrated ordering, billing, and inventory management. Transition assistance and support: Contracts should include provisions for transition support. Performance-based contracts: Contracts should be performance based and include service level agreements where possible. In October 2003, GSA released a RFI describing its initial strategy for the Networx program. In the RFI, GSA proposed two acquisitions—Networx Universal and Networx Select. The Universal acquisition was expected to satisfy requirements for a full range of national and international network services. According to GSA, this acquisition was intended to ensure the continuity of services and prices found under expiring contracts that provide broad-ranging service with global geographic coverage. Universal offerors were to provide a full range of voice and data network services, managed networking services and solutions, and network access, wireless, and satellite communications services. In addition, offerors were to provide these services at all locations across the United States. Consequently, this acquisition was expected to result in multiple contract awards to relatively few offerors because few were expected to be able to satisfy the geographic coverage and comprehensive service requirements. By contrast, GSA planned to award multiple contracts for a more geographically limited set of services under the Select acquisition. These contracts were to provide agencies with leading edge services and solutions with less extensive geographic and service coverage than that required by Universal. Awards under the Universal and Select acquisitions were to be staggered; the Select contracts were to be awarded 9 months after the Universal contracts. In February 2004, we testified on GSA’s initial planning efforts in support of FTS Networx. After reviewing the RFI and the comments submitted in response, we identified four major challenges that GSA was likely to face as it proceeded: ● structuring and scheduling the Networx contracts to ensure that federal agencies have available to them the competitively priced telecommunications services they need to support their mission objectives; initiating the implementation planning actions needed to ensure a smooth transition from current contracts to Networx; ● ensuring that adequate inventory information is available to planners to provide an informed understanding of governmentwide requirements; and ● establishing measures of success to aid acquisition decision making and enable effective program management. We noted that addressing these challenges would take solid leadership from GSA and stakeholder commitment. Without such actions, we concluded, the potential of Networx may not be realized. We have also previously reported on billing difficulties in GSA’s telecommunications programs. For example, during the transition to FTS2001, we found that several agencies were billed at improper rates. Several agencies delayed their transition to the new contract because resources planned for the transition were redirected to deal with the billing errors. We recommended numerous actions to improve the transition process, which GSA successfully implemented. As we testified in February, the responses to the RFI identified a series of concerns about GSA’s proposed acquisition strategy. Some respondents commented that only the traditional long-distance companies would be able to meet the requirements of the larger contract. Others were concerned that the 9-month lag between contracts would complicate decision making by asking agencies to decide on a vendor for the more comprehensive contract before being able to review the options available under the more limited contracts. GSA recently revised its contracting strategy in response to these concerns. GSA still intends to meet the proposed program goals through two sets of contracts. The first, known as Networx Universal, requires offerors to provide 39 services everywhere a federal office is locate, as well as anywhere else the company offers those services commercially. Required services include toll-free telecommunications, Internet services, and cellular services. Ten other services, including satellite communications and paging services, can be offered but are not required. The second, now known as Networx Enterprise, requires offerors to provide nine mandatory services in nearly 300 locations nationwide specified by GSA; another 42 services can be offered at the option of the company. The services required under the Enterprise contracts focus on Internet-based offerings and related security and management services. GSA intends to structure the contracts so that the Universal offering meets the program goals of service continuity and full service vendors, while the Enterprise contracts meet the goal of providing alternative sources. Both sets of contracts are intended to meet the other five goals, and each is planned to run for 4 years with three 2-year options. The main difference between its current strategy and the plan outlined in the RFI is that the geographic coverage requirements for the Universal contracts are less stringent. Instead of having to offer services in the entire country, service providers need only offer service where federal offices are located (as well as where the provider offers the service commercially) to qualify to compete for the contracts. This change resulted in a 76 percent reduction in the locations carriers must serve to be eligible to compete for the contracts. In turn, this increased the percentage of the anticipated service area that carriers could reach with their own networks. According to program officials, they discussed the changes with industry representatives, who are satisfied with the changes. In addition, industry representatives did not raise any questions about the new structure at the August industry forum. GSA has also addressed the concern over the time between contracts, by changing the proposed 9-month lag between the two types of contracts. GSA currently plans to issue the requests for proposal (RFP) for both the Universal and the Enterprise contracts simultaneously. This table lists the key dates from the old and new contract schedules. Current schedule (both contracts) Factors contributing to delays in that transition included a lack of data needed to accurately measure and effectively manage the transitions, inadequate resources, and other process and procedural issues. In testimony before you in April 2001 we stated that the value of that critical program to customer agencies would be improved through the application of identified lessons learned. Those in industry who commented on the Networx RFI also noted the need for strong and comprehensive program management to ensure a successful transition, including issues such as the availability of accurate inventories and well-defined contractor and government responsibilities. The IMC has established various subgroups to assist it in carrying out its responsibilities. One of these subgroups—the Transition Working Group—looked at transition issues from past transitions, and in April 2003 identified 22 lessons learned. Some of the lessons identified include the need for accurate inventory information and the need to be flexible in transition planning. The group also drafted a document intended to clearly define the responsibilities of GSA and the agencies for transition-related costs, with the goal of eliminating some of the confusion experienced in the past transition. However, GSA has not yet developed procedures to ensure that lessons from past transitions are applied, nor has it established a timeline of actions needed during the transition process. GSA released a request for quotations on August 16 to solicit contract help with developing a transition plan, including procedures intended to prevent the types of errors that happened in the previous transition. GSA expects to award a contract to the selected contractor by October. According to program officials, GSA will be able to make more progress on this issue when the contractor begins. They also agree that a transition timeline is an important management tool, and that they will begin developing such a timeline soon. GSA believes that with almost 2 years until agencies are scheduled to choose carriers under the new contracts, there is still time to plan for an effective transition. However, until GSA completes these planned actions, it risks repeating the transition problems experienced in the past. To prevent such an occurrence, and to ensure that transition plans are developed with adequate time to be implemented, we are recommending that GSA develop a transition timeline and procedures to prevent the reoccurrence of identified difficulties from previous transitions. We testified in February that it is important that GSA and its customer agencies have a clear understanding of agency service requirements in order to make properly informed acquisition planning decisions. According to our ongoing research on best practices in telecommunications acquisition and management, clear understanding comes at least in part from having an accurate baseline inventory of existing services and assets. More specifically, an inventory allows planners to make informed judgments based on an accurate analysis of current requirements and capabilities, emerging needs that must be considered, and the current cost of services. In addition, the FTS2001 transition lessons learned document identified the lack of a good starting inventory as the cause of problems in a number of areas and a contributor to the slow start on the FTS2001 transition. Specifically, the IMC’s Transition Working Group identified accurate inventories as a requirement for conducting an efficient transition. GSA is addressing the need for inventory information in two ways. First, GSA developed an inventory of the services currently used by its customers by reviewing the existing contracts, modifications to them, and billing information. Agencies then verified this information to ensure the listed services meet their current and anticipated future needs. According to GSA officials, this inventory was used in acquisition planning, for example, to justify its decision on which services to include in the proposed Networx contracts and which to make mandatory. Second, GSA is planning to work with its customer agencies to develop more detailed inventories for transition purposes. For example, the transition inventory would not only identify which services are used, but it would also identify where those services are used and how much. According to program officials, GSA plans to provide agencies with initial information based on billing and ordering data in November. Agencies will then verify the GSA data using their own data sources. Because service changes are expected to continue to occur, GSA expects this process to continue until January 2006. Program officials also told us that once it is in place, the inventory process could be used as an ongoing management tool. Our research into recommended program and project measurement practices highlights the importance of establishing clear measures of success to aid acquisition decision making as well as to provide the foundation for accountable program management. As we testified earlier in the year, such internal measures define what must be done for a project to be acceptable to the stakeholders and users affected by it; these internal measures enable measurement of progress and effectiveness in meeting objectives. Further, in keeping with the principles of the Government Performance and Results Act (GPRA), programs can be more effectively measured if their goals and objectives are outcome-oriented (i.e., focused on results or impact) rather than output-oriented (i.e., focused on activities and processes). According to agency officials, GSA plans to measure its performance against each of the program’s goals. For some of these goals, GSA has already determined how it will measure progress. For example, GSA will measure progress towards the goal of competitive prices using the same process it currently uses—a direct comparison of contract rates to market rates. For other goals, GSA officials stated that performance will be evident from the contract selections. For example, the outcome of the goal of using full-service providers will be known when the providers are selected. However, for some goals, GSA has not yet determined how it will measure progress. For the goals of high quality service and operations support, GSA officials stated that specific metrics are still in development as part of their efforts to develop service level agreements for vendors. While the approach described by program officials seems reasonable, GSA has not determined when it will finalize the measures still under development. In addition, GSA has not developed a strategy outlining how it will use key measures to monitor ongoing program performance. Until GSA develops a firm strategy, it lacks assurance that the required program measures will be in place at the appropriate time. As a result, its measures may have limited effect as a program management tool. We therefore recommend that GSA finalize its efforts to identify measures to evaluate progress towards program goals and develop a strategy for using those measures for ongoing program management. Clear, accurate, and complete billing records are an important internal control: they record the detail of each telecommunications transaction for later verification and management oversight. However, bills and billing systems have been a problem in the current generation of FTS programs and thus continue to be a concern for their proposed replacement. In addition to the previous experiences discussed earlier, both the telecommunications carriers and GSA’s customer agencies have more recently raised concerns about billing. Carriers asked GSA to address inconsistent and sometimes conflicting billing requirements in different regions. Some also questioned whether the number of billing elements—the data fields tracked in the billing system—was excessive. Agencies commented that the way in which they currently receive billing information hampers their efforts to reconcile invoices and produces inaccurate and incomplete bills. A few agencies commented that billing difficulties have cost them hundreds of thousands of dollars. In response to industry’s concern about the number of billing elements, GSA reduced the number of elements required under the Networx contracts. In its RFI, GSA proposed the use of 513 billing elements. Working in collaboration with the IMC and the Industry Advisory Council, GSA reduced the number of billing data elements to 196 (a reduction of 62 percent), with 54 elements being government specific. In response to the concerns about the accuracy of billing information, GSA plans to introduce service level agreements with the carriers to hold the carriers accountable for the accuracy of the billing data they provide. GSA has also begun examining potential alternatives to the way it currently consolidates carrier billing data and provides it to some agencies. The study is considering several options, including the option of contracting out bill consolidation, and the potential costs and benefits of the options. According to program officials, one of the goals of the study is to identify potential savings in administrative costs. However, GSA has not undertaken any similar efforts to identify the causes of agency difficulties in billing and address them. GSA officials attributed part of the uncertainty over future billing procedures to a lack of consensus among industry on how to improve the process. Regardless of the plans of industry, if GSA does not develop a billing process that better meets the needs of its customers, the agencies are likely to continue to experience difficulties in managing their telecommunications costs. To better address this challenge, we are recommending that GSA develop and implement a strategy for addressing the billing data issues raised by its customer agencies. Should you have any questions about this testimony, please contact me by e-mail at koontzl@gao.gov or James Sweetman at sweetmanj@gao.gov. We can also be reached at (202) 512-6240 and (202) 512-3347, respectively. Other major contributors to this testimony were Jamey Collins, Samuel Garman, and Nancy Glover. | The General Services Administration (GSA) has begun planning for a governmentwide telecommunications program known as Networx. GSA issued a request for information in October 2003 that proposed two acquisitions: Networx Universal, which was to provide a full range of national and international network services across the United States, and Networx Select, which was to provide agencies with leading-edge services with less extensive geographic coverage. Contracts under the Select acquisition were to be awarded 9 months after the Universal In February, we testified on GSA's initial plans and identified four key challenges GSA faced in ensuring a successful outcome for the program: structure and scheduling, transition planning, service inventories, and performance measures. GAO assessed GSA's progress in addressing the challenges identified as well as GSA's efforts to address long-standing issues related to billing. GSA has addressed several of the significant challenges facing the Networx program. Work is either planned or underway on other challenges, but additional efforts will be necessary to fully address them. Specifically, GSA has addressed concerns about the structure and scheduling of the two acquisitions, now known as Universal and Enterprise. Instead of a 9-month lag between acquisitions that might complicate agency decision-making, GSA now plans to issue the requests for proposal (RFP) for the contracts simultaneously. In addition, the Universal contracts will now require that offerors provide services only where federal agencies are located, rather than in the entire country, to allow more potential industry participants to compete--a concern raised in prior comments. GSA has solicited for contractor support to assist with the development of plans to transition to the Networx contracts. However, GSA has not yet developed procedures to ensure that lessons from past transitions are applied, or established a transition strategy. GSA worked with agencies to develop a service-level inventory as input into the requirements for the new contracts. In addition, it plans to work with agencies to build a more detailed inventory of currently-used telecommunications services for use during transition. GSA plans to implement performance measures that evaluate progress against the program's goals. However, some of the measures are still under development, and it does not have a strategy for using the measures to monitor ongoing program performance. GSA has reduced the number of billing elements it will track and has begun a study designed to identify potential improvements in the billing process, but it lacks a strategy for addressing agency concerns about the usability of billing data. Until GSA develops and applies strategies for addressing the outstanding challenges facing Networx, it risks not being able to deliver all of the operations and cost improvements outlined in the program's goals. |
Since its creation in 1970, EPA has generally been responsible for ensuring the enforcement of the nation’s environmental laws. This responsibility has traditionally involved monitoring compliance by those in the regulated community (such as factories or businesses that release pollutants into the environment or use hazardous chemicals), ensuring that violations are properly identified and reported, and ensuring that timely and appropriate enforcement actions are taken against violators when necessary. Because states historically had primary responsibility for addressing environmental pollution, including taking the lead role in enforcement under federal environmental legislation of the 1950s and 1960s, many states were dissatisfied with the new enforcement powers Congress granted to EPA. Referring to his first term as EPA Administrator during the 1970s, William Ruckelshaus described relations between EPA and state governments as “terrible,” largely because EPA itself represented a repudiation of what the state regulators had been doing. The states felt, he believed, that in the face of very little public or political support, they had made considerable progress and were getting no credit for it. The very existence of EPA symbolized to state environmental agencies the lack of appreciation the public had for their efforts and accomplishments. Furthermore, because EPA was now responsible for ensuring the implementation and enforcement of environmental laws, states needed to demonstrate to EPA that they had acquired and were maintaining adequate authority to enforce program requirements consistent with federal law before EPA would “authorize” and continue to allow states to assume the day-to-day administration of new environmental programs. This federal oversight contributed to a very difficult period between EPA and the states. The states thought EPA dictated too much and was too intrusive. Difficulties in the EPA-state relationship manifested themselves from the 1970s through the 1990s and, to some degree, have continued to the present day. In 1980, we described the failings of the EPA-state partnership. In a 1988 comprehensive management review of EPA, we reported that while some progress had been made in improving the EPA/state relationship, the goal of a truly effective EPA-state partnership remained elusive. Many state officials expressed concerns about having limited flexibility, too much EPA control, and excessively detailed EPA oversight. In 2003, OECA officials said that environmental commissioners in several states and members of the Environmental Council of the States (ECOS) called for OECA to develop and implement a consistent and objective mechanism for measuring state performance. Specifically, ECOS wanted EPA’s oversight of state programs to be consistent between EPA regions and states in the same region. ECOS also wanted EPA oversight to be predictable, repeatable, and unbiased. In December 2003, OECA began jointly developing the SRF with input from EPA regions, associations representing state pollution control agencies, ECOS and state officials to evaluate the extent to which state performance in three major programs complies with specific legal requirements, policy and guidance. The SRF measures state performance using 12 required elements and an optional 13th element. The elements include five categories: (1) review of state inspection implementation; (2) review of state enforcement activity; (3) review of state enforcement commitments; (4) review of state data integrity; and (5) for the optional 13th element, a review of additional programs of the state’s choice to insure consideration of state activities that support the overall evaluation. Regions prepare a draft report of the findings and conclusions of each review, jointly discuss with the state how major recommendations will be addressed, and provide the draft reports to OECA headquarters. OECA reviews the draft reports and provides comments on the regions’ analyses and recommendations. A more detailed description of the SRF is included in appendix II. The relationship between EPA and state environmental agencies varies substantially from state to state and program to program. Staff in EPA’s regional offices operate programs in those states that have elected not to seek authorization and in those states that EPA has concluded are not prepared to manage the programs effectively. In some cases, where EPA has denied a state with program authorization, state personnel may do most of the work as if they had the authority to grant permits, with EPA employees handling only the final step of formally issuing the documents. In other states or programs, EPA may approve a “partial delegation” of authority, under which a state operates part of a program that can be delegated and EPA operates the remainder. Just as EPA can authorize a state to conduct day-to-day program management, environmental statutes may allow EPA to withdraw authorization if a state fails to meet certain conditions, including maintaining the capacity to effectively manage the program and adopting and properly exercising the legal authorities to enforce program compliance consistent with federal laws and regulations. In practical terms, however, EPA’s ability to directly manage state programs is limited because of its staffing levels and other resources. Overall funding to regions and authorized states increased from fiscal years 1997 through 2006. However, these increases did not keep pace with inflation and the growth in enforcement responsibilities. Both EPA and state officials told us they are finding it difficult to respond to new requirements while carrying out their previous responsibilities. However, EPA does not collect sufficient data on enforcement workload and staffing, which it needs to assess the capacity of the regions and states to effectively implement their responsibilities for enforcing environmental laws consistent with federal requirements. According to our analysis of EPA’s budget and workforce for fiscal years 1997 through 2006, EPA’s total budget increased from $7.3 billion to $7.7 billion—a decline of 13 percent in real terms. At the same time, total funding for EPA enforcement increased from $455 million to $522 million—a decline of 5 percent in real terms. For the regions, which command the bulk of enforcement resources, funding increased from $288 million to $322 million—a decline of 8 percent in real terms, while headquarters enforcement funding increased from $167 million to $200 million—a decline of 1 percent in real terms. Figure 1 shows the changes in EPA enforcement funding in real terms, in total, and by headquarters and regional offices. According to officials in OECA and EPA’s Office of the Chief Financial Officer, OECA headquarters absorbed decreases in OECA’s total enforcement funding in recent years to prevent further reductions to the regions. According to our analysis, enforcement funding for OECA headquarters increased from $197 million in fiscal year 2002 to $200 million in fiscal year 2006—a 9 percent decline in real terms. During the same time, regional enforcement funding increased from $279 million to $322 million—a 4 percent increase in real terms. EPA reduced the size of the regional enforcement workforce by about 5 percent over the 10 years, from 2,568 full-time equivalent (FTE) staff in fiscal year 1997 to 2,434 FTEs in fiscal year 2006. In comparison, the OECA headquarters workforce declined 1 percent, and the EPA total workforce increased 1 percent during the same period. Figure 2 shows the changes in headquarters and regional FTEs from fiscal years 1997 through 2006. As figure 3 shows, the change in FTEs was not uniform across the 10 regions over the period. For example: Two regions—Region 9 (San Francisco) and Region 10 (Seattle)— experienced increases in their workforce: Region 9 increased 5 percent, from 229 to 242 FTEs, and Region 10 increased 6 percent, from 161 to 170 FTEs. Two regions—Region 1 (Boston) and Region 2 (New York) experienced the largest declines: Region 1 experienced a 15 percent decline, from 195 to 166 FTEs, and Region 2 had a 13 percent decline, from 291 to 254 FTEs. As EPA’s real total funding declined, EPA’s real total grant funding to states and tribes declined, as shown in figure 4. States and tribes use these grant funds, combined with their own resources, to implement and enforce environmental programs consistent with federal requirements. EPA’s grants to authorized states and tribes increased from $2.9 billion to $3.2 billion from fiscal years 1997 through 2006—a decline of 9 percent in real terms. However, grant funding to states and tribes dropped substantially between fiscal years 2004 and 2006, from $3.9 billion to $3.2 billion—a 22 percent decline in real terms. For the programs we examined, EPA provides states with federal resources through grant programs. In addition, under the Clean Air Act, states must collect fees from permitted facilities to help fund the program. The following are some of the funding sources for the programs we examined: Clean Water Act Section 106 Grants. The Office of Water provides annual Water Pollution Control grant funds to the states under the Clean Water Act for, among other things, enforcement of point source pollution requirements. Clean Air Act Section 105 Grants. States finance enforcement of air quality laws with fees paid by permitted facilities (e.g., electric utilities and chemical manufacturers), in accordance with title V of the Clean Air Act. States assess fees based on tons of pollution emitted. The fee must be at least $25 per ton (as adjusted for inflation) of regulated pollutants (excluding carbon monoxide). EPA provides grants to states to help fund programs that prevent and control air pollution or to implement national ambient air quality standards, including programs that may address smaller sources that do not have to obtain permits (e.g., dry cleaners and gasoline stations). Resource Conservation and Recovery Act (RCRA) Section 3011 Grants. The Office of Solid Waste and Emergency Response provides annual grants to states under section 3011 of the Solid Waste Disposal Act to support, among other things, state enforcement of the RCRA Subtitle C Hazardous Waste Management programs. EPA’s financial assistance covers up to 75 percent of a state’s total costs for managing hazardous waste. Underground Storage Tank (UST) Grants. The Office of Underground Storage Tanks provides grants to states under subtitle I of RCRA to support state UST programs, including inspections and enforcement activities. Given the real reductions in funding and personnel, regional and state enforcement officials noted states are finding it difficult to respond to new enforcement requirements in the Clean Water Act, Clean Air Act, and RCRA, which have greatly increased the number of regulated pollutants and sources. However, as we reported in June 2006, EPA’s data collection system for state and regional enforcement activities does not provide consistent and complete data on the workload of the states or the regions, and on their capacity to meet their workload, including the enforcement of environmental programs consistent with federal requirements. Thus, we were not able to independently assess their capabilities to meet their responsibilities under environmental programs with their existing resources. In 1987 amendments to the Clean Water Act, Congress expanded the scope of the act by regulating storm water runoff from rain or snow as a discharge from point sources, such as industrial facilities and municipal separate storm sewer systems. We reported in 2005 that that the new storm water regulations increased the number of industrial and municipal facilities subject to regulation by an estimated 186,000 facilities. In that same year, the EPA Office of Inspector General reported that the new requirements added hundreds of thousands of construction projects to states’ and regions’ workloads related to storm water pollution sources. In 2005, EPA established storm water as a national enforcement priority. According to state water quality enforcement officials, it is difficult to meet these new requirements while still meeting older requirements to periodically inspect large municipal and industrial point sources. For example, Minnesota officials told us that there are a huge number of facilities and locations that require inspection and permits in that state. The Minnesota storm water officials provided us a performance report that indicated noncompliance with storm water requirements was so pervasive that the state’s water enforcement program was not meeting its timeliness targets for closing enforcement cases where it has the authority to issue a penalty. The report said that the situation threatened to undermine earlier success in implementing the state’s storm water permit program. According to the Arkansas director of the state’s water quality program, storm water enforcement work in the fast-growing northwestern corner of the state has overwhelmed the program. According to state data, the number of storm water permits issued grew by 512 percent—from 427 to 2,616—between 2003 and 2005. At the same time, the number of permits Arkansas officials issued to traditional point sources increased by 19 percent, from 190 to 227 facilities. However, the state is beginning to fall behind in issuing the traditional permits because it has had to redeploy inspectors to work on storm water enforcement. Regional officials told us they have provided assistance to some states to meet enforcement requirements for storm water, such as helping states complete a specified number or percentage of state inspections. For example, Region 8 (Denver) enforcement officials said they share the inspection workload with Montana officials because that state’s permit program is chronically underfunded, and this partnership enables state officials in Montana to focus on reducing their backlog of regulated facilities that require permit renewals. In 1990 amendments to the Clean Air Act, Congress created significant new enforcement requirements for both EPA regions and states. Title III of the 1990 amendments required EPA to control emissions of 189 air toxics by, among other things, developing technology-based emissions limits for major stationary sources. By 2006, there were an estimated 84,000 major stationary sources within 158 major source categories such as incinerators and chemical plants to which these standards applied. Title III of the amendments also directed EPA to develop a list of categories of small stationary sources, such as dry cleaners and gas stations—so-called “area sources”—sufficient to represent 90 percent of emissions from small stationary sources of listed hazardous air pollutants. EPA and authorized states were then to implement strategies to control toxic emissions from these sources. EPA developed a list of 70 categories, but, as we reported in 2006, it had issued standards for only 16. Under title V of the 1990 amendments, Congress directed EPA and authorized states to implement a comprehensive permit program for sources emitting regulated air pollutants. The new requirement significantly expanded an earlier permit program that applied only to major new construction or modifications of existing major sources of pollution. As of April 2001, EPA had authorized all 50 states and 63 local governmental units to act as clean air regulatory agencies and issue Title V operating permits. The 1990 amendments also required states to collect fees from regulated facilities sufficient to cover program costs. We reported in 2001 that 19,880 major sources had already received, or could be expected to obtain or comply with the conditions of, Title V permits; furthermore, federal and state regulators performed about 17,800 routine inspections each year in fiscal years 1998 and 1999. State air enforcement officials said that reductions in federal air quality grants and EPA restrictions on how states can use the permit fees limit their ability to meet new Clean Air Act requirements. For example, enforcement officials in Arizona and West Virginia told us that reductions in section 105 grants have made it difficult to meet EPA’s push for states to identify and regulate air toxic emissions from small stationary sources, such as dry cleaners. According to the director of West Virginia’s air quality program, while his office has identified these sources and provided this information to Region 3 (Philadelphia), it does not have the resources to regulate these sources. Title V rules restrict states from using permit fees for enforcement of air toxic emission standards for small stationary sources. Several state officials said they also face difficulties keeping up with Title V requirements to issue operating permits and inspect facilities. For example, according to West Virginia’s Director of Air Quality, the state program is spending more than it generates in revenues from Title V permit fees. Furthermore, the state is drawing down a reserve fund that it established in 1993, when it was operating a preliminary Title V program before it was authorized to administer this program. West Virginia’s Title V fee is around $21 per ton, which is below the national average fee of $28 per ton paid by major sources in 2001. The Director of Arizona’s Air Quality Division said that as a result of new standards and new types of performance testing, the Title V permitting workload has increased faster than staff levels. The 1984 amendments to RCRA required EPA and authorized states to regulate small-quantity hazardous waste generators—those producing between 100 and 1,000 kilograms of waste per month. Before the 1984 amendments, EPA only required generators who produce more than 1,000 kilograms of hazardous waste to comply with regulations concerning, among other things, record keeping and reporting. In addition, the 1984 amendments required EPA and authorized states to ensure that owners and operators of treatment, storage and disposal facilities comply with new prohibitions for disposing of untreated hazardous wastes on land. This expansion of responsibility, combined with a reduction in resources, has made it difficult to carry out responsibilities, according to state hazardous waste enforcement officials we spoke with. For example, data provided to us by New York State officials showed that the state’s grant for hazardous waste management dropped in real terms by 19 percent between fiscal years 1997 and 2006. As a result of this decline in funding, New York State officials said that the grant supports fewer full-time staff. The officials provided us data that showed New York State’s grant for hazardous waste management supported 38 percent fewer full-time staff in the state’s RCRA program in fiscal year 2006 than in fiscal year 1997. Furthermore, while it continues to focus on EPA’s national priorities for enforcement, the state has accumulated a backlog of permits that must be renewed. Renewing these hazardous waste permits is critical to protecting the environment and public health because EPA and authorized states can enforce new hazardous waste standards only when they are specified in a permit. According to these officials, EPA has issued new standards during the life of the old permit and these new standards are not enforceable until the permit is renewed. Several states identified an emerging challenge: verifying that owners and operators of hazardous waste facilities have the financial resources to clean up their sites, as RCRA requires, rather than leaving site cleanup to the taxpayer. As we reported in 2005, EPA’s Office of Inspector General concluded that required cleanups at some sites could exceed $50 million. EPA made enforcement of the financial assurance requirement a national enforcement priority in 2005. However, state officials told us, and EPA’s regional officials agreed, that they do not have the personnel with the necessary skills to evaluate the financial assurances provided. For example, New York State officials told us that they have only one person trained to review the adequacy of a facility’s financial assurance. The Energy Policy Act of 2005 also expanded states’ enforcement workload by requiring, among other things, (1) EPA and any state receiving federal funding to inspect by August 8, 2007, all regulated tanks that were not inspected since December 22, 1998, and (2) EPA or the state must generally inspect regulated tanks once every 3 years and complete the first 3-year inspection cycle within 3 years of completing inspections of underground storage tanks that had not been inspected by December 22, 1998. We reported in February 2007 that according to EPA data there were 645,990 active federally regulated underground storage tanks registered with state underground storage tank programs. To carry out these additional inspections, the act, as amended, allows states to use Leaking Underground Storage Tank Trust Fund appropriations, and authorizes substantial appropriations from the trust fund during fiscal years 2006 through 2011. These new appropriations were to be in addition to State and Tribal Grant funds EPA provides to states for underground storage tank programs, which historically have been about $187,000 annually. These additional funds were not appropriated in fiscal years 2006 and 2007. As a result, some state officials told us, they do not have sufficient resources to meet the new inspection requirements. For example, Minnesota officials said they have sufficient resources for inspecting underground storage tanks only once every 9 years. Regional officials acknowledged that many states need additional inspectors for meeting these new underground storage tank inspection requirements and said they provide support to states facing fiscal constraints. For example, the Region 3 Chief of RCRA enforcement and compliance said the region helped state officials in West Virginia by inspecting small and midrange gas stations in the state. Region 9 (San Francisco) has also been working with UST officials in Arizona to meet the new inspection requirements. EPA has made substantial progress in improving priority setting and enforcement planning with states through its system for setting national enforcement priorities and NEPPS, which have fostered a more cooperative relationship. For example, on states’ recommendation, OECA accepted as a priority ensuring that facilities handling hazardous substances, such as lead or mercury, have the financial resources to close their facilities, clean up contamination, and compensate communities and individuals affected by the contamination. EPA and states have also made some progress in using NEPPS for joint planning and resource allocation. State participation in the partnership grew from 6 pilot states in fiscal year 1996 to 41 states in fiscal year 2006. Since the late 1980s, EPA’s top agency executives have set priorities for improving agency management. To develop more collaborative relationships among EPA’s headquarters and regions, and the states, OECA created the Planning Council in 2003 to direct OECA’s strategic and planning processes, including selecting national enforcement priorities. The council includes both EPA headquarters and regional officials. In the summer of 2003, OECA asked officials representing state environmental agencies, tribal governments, and air, water, and solid waste pollution control associations to recommend priorities for consideration as national priorities for fiscal years 2005 through 2007. Considering these recommendations, as well as those from EPA’s media program managers, OECA developed a list of potential national priorities that it published in the Federal Register in December 2003. OECA asked for public comments on candidate priorities and suggestions for new national enforcement priorities. In January 2004, OECA hosted a meeting with headquarters and regional officials, and representatives from 10 state environmental agencies, four tribal governments, and three pollution control associations to discuss and rank their choices of potential priorities. OECA then selected the final national enforcement priorities for fiscal years 2005 through 2007 based on the following criteria: Significant environmental benefit. In what specific areas can the federal enforcement and compliance assurance programs make a significant positive impact on human health and/or the environment? What are the known or estimated public health or environmental risks? Noncompliance. Are there particular economic or industrial sectors, geographic areas, or facility operations where regulated entities have demonstrated serious patterns of noncompliance? EPA responsibility. What identified national problem areas or programs are better addressed through EPA’s federal capability in enforcement or compliance assistance? Table 1 shows the potential national priorities, and those that were selected. According to state and regional officials, OECA’s approach for selecting national priorities has fostered a more collaborative working relationship, and they pointed to the financial assurance national priority under RCRA as a case in point. This priority focuses on ensuring that owners and operators of facilities handling hazardous substances, such as lead or mercury, provide assurance that they have the financial resources necessary to close their facilities, clean up any contamination, and compensate communities and individuals affected by any contamination they cause. Stakeholders—EPA regions, states, pollution control associations, and the public—told OECA that financial assurance should be a national priority. EPA and state supporting investigations confirmed that (1) there are significant noncompliance issues relating to the financial assurance requirements; (2) the issues are of national importance and deal with several environmental laws and regulatory programs; and (3) areas of noncompliance were not isolated to a specific sector, industry, or geographic location. In selecting financial assurance as a national priority, OECA stated that an effective national enforcement and compliance strategy would help address many of the problems created by the regulated facilities’ failure to fulfill their financial responsibility obligations. In this regard, EPA is providing training to state inspectors— who often do not have expertise in financial management—on how to assess the adequacy of financial documentation provided by regulated facilities. While state and regional officials told us the priority setting process is more collaborative, some state officials raised a number of issues about how EPA considered their comments about national priorities. For example, Massachusetts and Oregon officials told us that they did not understand why OECA ranked some of their priorities lower than the national priorities that were selected and would like to have feedback on how their views were considered when selecting national enforcement priorities. In addition, while Minnesota, Utah, and Arizona officials agree that the planning and priority setting has improved, they would prefer earlier involvement in the decision-making process, that is, in developing the candidate list. On the other hand, New York and Arkansas said that they preferred to provide input on the national enforcement priorities through the pollution control associations and/or ECOS. They said, by doing so, OECA will receive states’ collective views on the candidate priorities in a more representative and compelling way. After OECA selects the national enforcement priorities, it uses the National Program Managers guidance to inform its stakeholders of the national priorities and required elements of all environmental laws. The managers establish overall national goals for their respective programs based on a variety of factors, including underlying statutory mandates, congressional directives, administration/administrator priorities, and their own view of programs and policies that the programs should focus on. EPA regions and states use this guidance to negotiate agreements based on (1) which environmental problems will receive priority attention within state programs, (2) what EPA’s and the states’ respective enforcement roles and responsibilities will be, and (3) how the states’ progress in achieving program objectives will be assessed. The results of these negotiations are documented primarily in PPAs and/or PPGs. According to EPA, NEPPS allows regions and states to negotiate agreements that vary in content and emphasis to reflect regional and state conditions and priorities. State participation in NEPPS grew from 6 pilot states in fiscal year 1996 to 41 states in fiscal year 2006. Of these 41 states participating in NEPPS in fiscal year 2006, 31 had both PPAs and PPGs; 2 had agreements only; and 8 had grants only. Twelve states did not participate at all in NEPPS. Regional officials and states participating in NEPPS said it contributed to improvements in their planning and priority setting process by helping identify enforcement priorities, roles, and responsibilities. The states we spoke with that had a PPA—Iowa, Massachusetts, Minnesota, Oregon, and Utah—also had a PPG and generally agreed that EPA’s planning and budget process fostered collaboration in setting joint priorities, roles, and accountability for each party. In addition, Minnesota and Massachusetts officials told us that they have been able to use grant resources to address other state priorities. However, these officials noted that EPA guidance continues to call for a specific number of enforcement activities, which does not allow for as much flexibility as envisioned. States without a PPA can still participate in NEPPS through a PPG, which allows them to combine individual categorical grant funds into a consolidated grant. Once the funds are consolidated, they lose their category-specific identity and can be used with greater flexibility. We found that states that had a PPG, but not a PPA, had mixed views on NEPPS. For example, according to the New York State Department of Environmental Conservation (NYSDEC), which currently has a performance grant only for water programs, it experimented with a performance agreement in the mid-1990s but dropped the endeavor because of difficulties in drafting an agreement that combined multiple agency divisions. NYSDEC officials said the amount of work involved outweighed the benefits to individual programs. Furthermore, even with a performance grant for water programs, NYSDEC officials told us, EPA still maintains requirements for how the money is used and attempts to steer the state toward EPA’s priorities, which are not necessarily NYSDEC’s priorities. In contrast, the Arizona Department of Environmental Quality, which has a performance grant but not a performance agreement, said it has a “fantastic relationship” with Region 9 that is characterized by extensive coordination and communication. Because of its grant, Arizona officials told us, the state has realized administrative efficiencies and has more flexibility to move money among programs. States that do not participate in NEPPS were generally satisfied with the amount of joint planning and coordination in their work plan agreements (i.e., memorandum of agreement and annual work plans). For example, West Virginia and Florida told us that their work plan agreements with their EPA regions provided them with much of the same opportunities for joint planning, flexibilities, and priority setting as NEPPS participants. Officials from the West Virginia Department of Environmental Protection said they did not participate in NEPPS because they did not wish to transfer grant funding among media programs. They said state programs rely heavily on revenue generated through fees and penalties; therefore, program managers are reluctant to share resources. According to officials from the Florida Department of Environmental Protection, they have not participated in NEPPS since 1999 because their work plan agreements provide the benefits of NEPPS—good dialogue with the region in planning and priority setting. Moreover, Florida officials said they cannot use the flexibility allowed under NEPPS to redirect resources between programs because state appropriation procedures place restrictions on their ability to shift resources among programs. With its implementation of the SRF, EPA has—for the first time—a consistent approach for overseeing authorized states’ compliance and enforcement programs and has identified several significant weaknesses in how states enforce their environmental laws in accordance with federal requirements. For example, the SRF reviews found that states are not properly documenting inspection findings or penalties, as directed by EPA’s enforcement policy and guidance. While recognizing that these findings are useful, EPA has not developed a plan for how it will uniformly address them in a timely manner. Nor has the agency identified the root causes of the weaknesses, although some EPA and state officials attribute the weaknesses to causes such as increased workloads concomitant with budgetary reductions. Until EPA addresses enforcement weaknesses and their causes, it faces limitations in determining whether states perform timely and appropriate enforcement, and whether they apply penalties to environmental violators in a fair and consistent manner within and among the states. Moreover, the SRF is still in its early stages of implementation and offers additional uses that EPA has not yet considered. In this regard, its structured approach provides consistent information that would be useful to (1) inform the public about how well the states are implementing their enforcement responsibilities and (2) serve as a basis for assessing the performance of EPA’s regions, which have been inconsistent in their enforcement and oversight efforts in the past. As of January 25, 2007, OECA had conducted SRF reviews in 33 states and expected to complete its assessment of remaining states by the end of fiscal year 2007. OECA reported good performance in most aspects of state compliance and enforcement programs. However, it also reported that the reviews found several weaknesses in state programs that will require focused attention to correct. EPA officials said the following four weaknesses were the most frequently identified: States are not adequately documenting the results of facility inspections in order to determine the significance of violations. EPA policy states that complete and accurate documentary evidence is needed to determine the nature and extent of violations, particularly the presence of significant violations, and to support timely and appropriate enforcement actions. EPA policy also states that a quality program should maintain accurate and up-to-date files and records, and report this information to EPA to support effective program evaluation and priority setting. EPA and state officials suggested that some of the causes of inadequate state documentation and reporting of facility inspections can be traced to a lack of staff expertise, inadequate training, increasing workload, and reductions in staff and budgetary resources in recent years. States are not adequately entering significant violations noted in their inspection reports into EPA databases. GAO, EPA’s Office of Inspector General, and OECA have reported that the lack of complete and accurate national enforcement data has been a long-term problem. OECA needs accurate and complete enforcement data to help it determine whether core enforcement requirements are being consistently implemented by regions and states and whether there are significant variations from these requirements that should be corrected. In addition, accurate and complete enforcement data helps OECA more efficiently and effectively oversee states and regions. According to EPA regional and state officials, the SRF is helping them recognize the reasons for discrepancies between state and EPA databases and improve the quality of data in these databases. States lack adequate or appropriate penalty authority or policies. Penalties play a key role in environmental enforcement by deterring potential violators and ensuring that members of the regulated community cannot gain a competitive advantage by violating enforcement regulations. To qualify as an authorized state for administering environmental programs, states must, among other things, acquire and maintain adequate authority to enforce program requirements consistent with federal requirements. For example, to obtain EPA’s approval to administer the Clean Air Act’s Title V permitting requirements for major air pollution sources, states must have, among other things, authority to recover civil penalties and provide appropriate criminal penalties. EPA’s policy provides that all penalties should include two components. First, penalties should include an “economic benefit” component that reflects the benefit achieved by avoiding compliance. This component is considered important to “leveling the playing field” among companies within an industry and eliminating any economic advantage violators gain through delayed or avoided compliance costs. The second component—the “gravity-based component”—reflects the seriousness of the violation, the actual or possible harm it causes, and the size of the violator. States are not documenting how they implement EPA’s policies for calculating and assessing penalties. According to EPA policy, states need to maintain sufficient documentation so that the regions can evaluate (1) the state’s rationale for obtaining a penalty and (2) where appropriate, the calculation of the economic benefit and gravity-based components. If a state has not assessed a penalty or other appropriate sanction against a violator, EPA may take direct enforcement action to recover a penalty. However, regional and state offices we interviewed said applying this policy places strains on the EPA/state working relationship because states generally prefer that EPA not take direct enforcement action against regulated entities in their states. For this reason, EPA generally does not take direct enforcement action solely to recover additional penalties unless a state penalty is determined to be grossly deficient. Regional and state officials said states vary as to whether their environmental program administrators have the authority to assess penalties. If program administrators lack this authority, they must pursue judicial remedies through their state attorney general. Judicial actions generally result in penalties and court orders requiring correction of the violation. However, this route is more time-consuming and resource- intensive than having the environmental program office assess the penalty and can significantly delay obtaining penalties and achieving a return to compliance. The initial SRF findings provide the basis for discussions between EPA and the states on how to address deficiencies in state compliance and enforcement programs, many of which have been well known and long- standing. According to OECA officials, EPA will have completed an SRF review in all states by the end of 2007 and will perform an evaluation of the SRF in fiscal year 2008. The proposed evaluation methodology states that EPA will address the effectiveness of implementing the SRF by surveying the state environmental agencies that participated in the reviews and the pollution control associations. However, this proposed evaluation may not yield the results EPA will need to better ensure more consistent state performance and more consistent state program oversight. In this regard, the proposed evaluation methodology does not specify how EPA plans to use the results of the SRF to begin determining the causes for cited deficiencies and to identify strategies for uniformly and expeditiously implementing potential corrective actions. While EPA’s proposed evaluation may prove to be useful in obtaining views on the success of the SRF and on areas needing improvement in performing the reviews, the proposal is still in its early stages of development, and specific details have not been laid out on whether and how certain potential issues will be addressed. EPA could better ensure more consistent state performance and more consistent oversight of state enforcement programs by (1) developing and implementing corrective actions for the major deficiencies identified through the SRF and (2) assessing the capacity of poorly performing state programs to determine whether they possess the staff, financial, and other resources to effectively implement enforcement programs consistent with federal requirements. Region 8’s experience in using the findings of its Uniform Enforcement Oversight System may prove to be useful for OECA in addressing the findings of the SRF on a nationwide basis. This oversight system was designated a “best practice” in the area of state agency oversight by EPA’s Office of Inspector General. The region evaluated states’ enforcement programs using uniform review criteria that had been previously agreed to by each state agency. The region then used the evaluation findings to develop an improvement strategy tailored to the particular weakness identified in each state’s enforcement program. In order to hold the states accountable for correcting the weaknesses identified, Region 8 also used the improvement strategy in arriving at annual agreements with the states. For example, because of the findings from its oversight review of Colorado’s hazardous waste program, Region 8 officials became concerned about the adequacy of the authorized program’s ability to protect human health and the environment or to take on new program responsibilities. On the basis of these concerns, the region conducted an in-depth “capability assessment” of Colorado’s hazardous waste program beginning in 1998, covering items such as the state’s levels of resources and staff skills; professional development and training programs; and the efforts to resolve legal and institutional limitations in its program. Over the next 4 years, regional and state officials worked with state government leaders to increase program funding, staff, and training, and to implement new penalty policies. Region 8 also directly implemented compliance monitoring and enforcement activities at selected Colorado hazardous waste facilities while the state program developed and implemented its enhanced capabilities. Region 8 conducted another capability assessment in 2001 and concluded that the state had made the improvements necessary to implement a fully authorized program. EPA could also use the SRF to inform the general public and others about the extent to which states effectively implement environmental enforcement programs consistent with federal requirements. EPA has not yet determined whether or how the results of the SRF reports will be made available to the general public, congressional committees, environmental interest groups, state environmental organizations, local community groups, and other interested groups and organizations. Many of these groups have expressed deep interest in and concern over the years about the consistency, fairness, and effectiveness of environmental enforcement. A common criticism has been that variation in environmental compliance and enforcement among the states has resulted in the lack of equitable public health and environmental protection and the lack of a “level playing field” for business from one state to another. EPA’s Office of Inspector General also recommended that regional evaluations of state programs should be made easily accessible to the public as an important means for holding states accountable for their environmental performance. ECOS and several states officials we interviewed expressed concern that public dissemination of the SRF reports would be used inappropriately to compare or rank state performance. However, the SRF reports have the potential to convey useful information to both EPA managers and to the public on the extent to which the enforcement program is being implemented consistently and fairly nationwide. In addition to the usefulness of the SRF in evaluating state enforcement programs, the SRF provides a model that OECA could use to evaluate progress being made by EPA’s regions in addressing inconsistencies in enforcement actions and oversight. Although we focused our review on EPA’s oversight of state enforcement programs, rather than on the enforcement programs of EPA’s 10 regional offices, we testified in June 2006 based on reviews on EPA’s enforcement program that the regions vary substantially in the actions they take to enforce environmental requirements, such as the number of inspections performed at regulated facilities and the amount of penalties assessed for noncompliance with environmental regulations. In addition, past EPA Inspector General and OECA evaluations found variations among regions regarding issues such as sufficiently encouraging states to consider economic benefit in calculating penalties, taking more direct federal actions where states were slow to act, and requiring states to report all significant violators. In our June 2006 testimony, we stated that broad agreement exists among EPA and state enforcement officials on the key factors contributing to variations among regions including (1) differences in philosophy among regional enforcement staff about how best to secure compliance with environmental requirements, (2) differences in state laws and enforcement authorities and the manner in which regions respond to these differences, (3) variations in resources available to both state and regional enforcement offices, (4) the flexibility afforded by EPA policies and guidance that allow states a degree of latitude in their enforcement programs, and (5) incomplete and inadequate enforcement data that hamper EPA’s ability to accurately characterize the extent to which variations occur. Although EPA has noted that some variation in environmental enforcement is necessary to take into account local environmental conditions and concerns, it has acknowledged that similar violations should be met with similar enforcement responses to ensure fair and consistent enforcement and equitable treatment for regulated businesses, regardless of geographic location. Our testimony noted that the SRF was among the initiatives that could make a positive contribution to EPA’s efforts to ensure consistent approaches in regional enforcement activities, although it is too early to tell whether the initiative will create a level playing field for the regulated community across the country. The SRF initiative provides EPA with a potential means to ensure consistent and effective enforcement among the states, thereby addressing a difficult and long-standing challenge to the agency. EPA’s plan to evaluate the SRF in 2008 will provide the agency with an opportunity to obtain information from the regions and the states regarding what does and does not work well in these SRF reviews and to make appropriate corrections to its review methodology. However, the proposed evaluation methodology does not describe how EPA will examine the causes of the significant deficiencies noted during the SRF reviews and develop a strategy for addressing them. If these deficiencies are not addressed in a uniform and timely manner, EPA and the states will not gain the full benefit of the SRF. Regardless of the extent and effectiveness of oversight reviews to determine the consistency and effectiveness of enforcement programs, corrective actions will not be feasible if states lack sufficient funding, staff levels, expertise, and other resources that are vital to carrying out their enforcement responsibilities. On the basis of the audits it has conducted, the EPA’s Office of Inspector General has endorsed the practice of having regions follow up on the deficiencies noted in their reviews of state programs and making their findings public. Likewise, Region 8 demonstrated the value of performing a capacity assessment to understand why deficiencies exist in a state program to demonstrate to decision makers and the public what needs to be improved. Such assessments would provide an improved basis for a truly collaborative approach between the regions and the states during their annual deliberations on partnership agreements and grants in order to address the root causes of problems identified in state enforcement programs. EPA has not determined whether or how it will share the results of the SRF reviews with the general public and others, including Members of Congress who over the years have raised questions and expressed concerns about the way the enforcement program has been implemented. If Members of Congress and the public fully understand the deficiencies and their significance, then they would be better informed about how to assist EPA and the states in ensuring that public health and the environment are protected and a level playing field is established for regulated facilities. Although the SRF thus far has been focused on reviewing state enforcement programs, the process could be extended to include the enforcement programs of EPA’s regions. As we have previously reported, the regions have long been inconsistent in their oversight of states within their jurisdiction and the enforcement actions they take in order to provide a level playing field for regulated facilities across the nation. To enhance EPA’s oversight of regional and state enforcement activities to implement environmental programs consistent with the requirements of federal statutes and regulations, we recommend that the Administrator of EPA take the following actions: include, in EPA’s fiscal year 2008 evaluation of the SRF, an assessment of lessons learned and an action plan for determining how significant problems identified in state programs will be uniformly and expeditiously addressed; evaluate the capacity of individual authorized state programs, where the SRF finds the state appears to lack sufficient resources (e.g., funding, staff, and expertise), to implement and enforce authorized programs and then develop an action plan to improve that state’s capacity; publish the SRF findings so that the public will know how well state regulators are enforcing authorized programs and protecting public health and the environmental conditions in their communities; and conduct a performance assessment similar to SRF for regional enforcement programs. In commenting on the draft report, EPA generally agreed with GAO’s recommendations and stated that the agency is taking action to address the issues we raised. With respect to our recommendation to publish the results of the SRF findings, EPA said that it had agreed with the Environmental Council of the States that the first round of state enforcement reviews would not be published. However, EPA said it would consider whether to publish future reviews when it evaluates the implementation of the SRF in fiscal year 2008. EPA also provided detailed technical and clarifying comments, which we incorporated as appropriate. EPA’s letter is included in appendix III. We are sending copies of this report to interested congressional committees; the Administrator of EPA; and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or stephensonj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To assess how the Environmental Protection Agency (EPA) and authorized state agencies work together to deploy resources, plan, set priorities, and define roles and responsibilities for enforcement of and compliance with environmental programs consistent with federal requirements, we (1) identified the federal resources provided to EPA regions and states for enforcement between 1997 and 2006, and obtained EPA regional and states’ views on the adequacy of these resources to implement their activities; (2) determined EPA’s progress in improving priority setting and enforcement planning with its regions and authorized states; and (3) examined EPA efforts to improve its oversight of states’ enforcement and compliance programs. For the purpose of this review, we conducted semistructured interviews with officials at the 10 EPA regions and at 10 authorized state agencies. To construct questions for the interviews, we analyzed policies, procedures, and guidance materials EPA has developed and implemented. We synthesized the findings, conclusions, and recommendations contained in reports by us, EPA’s Office of Inspector General (OIG), the National Academy of Public Administration (NAPA), and the Environmental Council of the States (ECOS). We also met with officials from EPA Region 4, the Georgia Department of Natural Resources, South Carolina Department of Health, and the New Jersey Department of Environmental Protection to obtain a more thorough understanding of how state agencies work together to plan, set priorities, define roles and responsibilities, and deploy resources for enforcement and compliance of environmental laws. We used a nonrandom sample of 10 states, which consisted of 1 state from each region: Five had a Performance Partnership Agreement (PPA) and Performance Partnership Grant (PPG) with EPA (Iowa, Massachusetts, Minnesota, Oregon, and Utah). These states incorporated an enforcement program into their PPA, along with other essential elements that EPA and state leaders considered important (e.g., jointly agreed priorities, defined roles/responsibilities, and processes for resource deployment). Five states did not have a PPA (Arizona, Arkansas, Florida, New York, and West Virginia), but had either a PPG or an alternative working relationship with EPA. Our evaluation of 10 selected states cannot be generalized to the other states with authorized programs. However, we met with EPA officials representing all 10 regions, who provided their perspectives about all state programs within their geographic region. In addition, we examined other sources of state involvement, such as information available from ECOS and pollution control associations (e.g., Association of State and Territorial Solid Waste Management Officials, Association of State and Interstate Water Pollution Control Administrators, State and Territorial Air Pollution Program Administrators, and the Association of Local Air Pollution Control Officials, now known as the National Association of Clean Air Agencies). We also limited our review to the environmental agencies within each selected state that implement the major EPA programs (Clean Water Act, Clean Air Act, Safe Drinking Water Act, and Resource Conservation and Recovery Act) and did not include state departments or agencies that implemented other programs, such as the Federal Insecticide, Fungicide, and Rodenticide Act. To determine if there were any trends in the federal resources provided to EPA regions and states for enforcement from 1997 to 2006, and assess EPA regional and state views on the adequacy of these resources to implement their activities, we reviewed the budgets for EPA and the Office of Enforcement and Compliance Assurance (OECA) for fiscal years 1997 through 2006. We also reviewed our prior reports and those from the Congressional Research Service (CRS), Congressional Budget Office (CBO), Office of Management and Budget (OMB), EPA, and the EPA OIG, for information on the distribution of federal resources. We met with officials from the EPA’s Office of the Chief Financial Officer and OECA, ECOS, and the Natural Resources Defense Council, and administered structured interviews to officials in all 10 EPA regions and the selected state in each region. In each region and state, we obtained perspectives on the deployment of resources. However, we were not able to assess the workload of the states and regions and their overall capability to meet federal enforcement requirements because EPA’s data collection system does not collect sufficient information needed to make such an assessment. In this regard, EPA lacks information on the capacity of both the states and EPA’s regions to effectively carry out their enforcement programs, because the agency has done little to assess the overall enforcement workload of the states and regions and the number and skills of people needed to implement enforcement tasks, duties, and responsibilities. Furthermore, the states’ capacity continues to evolve as they assume a greater role in the day-to-day management of enforcement activities, workload changes occur as a result of new environmental legislation, new technologies are introduced, and state populations shift. To determine EPA’s progress in improving priority setting and enforcement planning with its regions and authorized states, we reviewed EPA’s strategic plans and national strategy, its policy and guidance for planning and implementing its enforcement programs, the process for implementing National Environmental Performance Partnership agreements with authorized state agencies, and Federal Register notices. We also reviewed our prior reports and those from CRS, OMB, EPA, EPA OIG, and NAPA for information on the planning and priority setting process. We met with officials from EPA’s Office of Congressional and Intergovernmental Relations, OECA, ECOS, and the Natural Resources Defense Council, and administered structured interviews to all 10 EPA regions and the selected state in each region. In each region and state, we examined regional and state strategic plans and state-EPA enforcement agreements, such as memorandums of agreement, PPAs, and PPGs. At state agencies, we also discussed the states’ perspectives on how EPA administered state-EPA agreements, regional plans, and national priorities. To determine EPA efforts to improve its oversight of state enforcement and compliance programs, we reviewed EPA’s policy and guidance for overseeing state agencies. We met with officials from EPA’s Office of Congressional and Intergovernmental Relations, OECA, ECOS, and the Natural Resources Defense Council, and administered structured interviews to all 10 EPA regions, and the selected state in each region. In each region, we examined strategic plans, state-EPA agreements, and 33 state oversight reviews of the SRF. At state agencies, we reviewed policy and guidance and received perspectives on EPA’s oversight process. We performed our work from October 2005 through July 2007, in accordance with generally accepted government auditing standards, which included an assessment of data reliability and internal controls. EPA’s criteria for assessing the performance of compliance assurance and enforcement responsibilities in authorized states can be traced back to the mid-1980s. In August 1986, the EPA Deputy Administrator issued a policy guidance memorandum entitled “Revised Policy Framework for State/EPA Enforcement Agreements.” The policy memorandum was intended to provide a framework for gathering information and making judgments about the effectiveness of state compliance and enforcement performance and providing guidance on when and how EPA would become involved in enforcement actions in authorized states. Among other things, the 1986 policy guidance discussed (1) EPA oversight criteria and the measures that the agency would use to define good state performance, (2) oversight procedures and protocols, and (3) criteria for direct federal intervention— factors EPA would consider before taking direct enforcement action in a state and what states might reasonably expect of EPA in this regard. According to OECA officials, subsequent experience with the 1986 policy guidance revealed several implementation shortcomings that limited EPA’s ability to adequately and consistently oversee state compliance and enforcement programs. For example, the 1986 policy guidance did not clearly describe how EPA would oversee state enforcement programs, including what constituted “good program performance”. Moreover, EPA and authorized states did not agree on what uniform program information states needed to maintain and provide to EPA for performance measurement. This led to considerable inconsistency from region to region in overseeing state compliance and enforcement programs. By 2003, OECA officials said that environmental commissioners in several states and members of ECOS were in the forefront of the call for developing and implementing a more uniform and systematic process for EPA’s oversight and evaluation of state compliance and enforcement programs. Other factors also pointed to the need to develop a more consistent method of gauging state performance. These included EPA’s OIG audits of state programs, EPA’s internal assessments, and public petitions for withdrawal of program authorizations for some state programs. A common criticism was that variation in environmental compliance and enforcement among the states was directly attributable to the lack of uniform EPA oversight and performance measurement and that the result was the lack of equitable public health and environmental protection and lack of a level playing field for business from one state to another. At an ECOS meeting in 2003, OECA officials said the Chairman of the ECOS Compliance Committee proposed to EPA’s then Deputy Assistant Administrator for OECA a method for systematically and uniformly assessing state performance. The assessment method, called the SRF, was patterned after a review process originally developed by EPA’s Region 8 to assess the performance of state compliance and enforcement programs in that region (encompassing the states of Colorado, Utah, Wyoming, South Dakota, North Dakota, and Montana and 27 sovereign tribal nations). The SRF was formally agreed to by EPA, ECOS, state media organizations, and state environmental agency officials in December 2003. The 12-point evaluation model used in Region 8, called the Uniform Enforcement Oversight System, became the basis for a review framework for evaluating state compliance and enforcement performance. These 12 required elements for evaluation of state performance include the following: 1. the degree to which a state program has completed the universe of planned inspections (addressing core requirements and federal, state and regional priorities); 2. the degree to which inspection reports and compliance reviews document inspection findings, including accurate descriptions of what was observed to sufficiently identify violations; 3. the degree to which inspection reports are completed in a timely manner, including timely identification of violations; 4. the degree to which significant violations (e.g., significant noncompliance and high priority violations) and supporting information are accurately identified and reported to EPA national databases in a timely manner; 5. the degree to which state enforcement actions include required corrective or complying actions (e.g., injunctive relief) that will return facilities to compliance in a specific time frame; 6. the degree to which a state takes timely and appropriate enforcement actions, in accordance with policy relating to specific media; 7. the degree to which a state includes both gravity and economic benefit calculations for all penalties, appropriately using the economic benefit calculation model (BEN) or similar state model (where in use and consistent with national policy); 8. the degree to which final enforcement actions collect appropriate economic benefit and gravity penalties in accordance with applicable penalty policies; 9. the degree to which enforcement commitments in the PPA, PPG, and/or other written agreements to deliver a product/project at a specified time, if they exist, are met and any products or projects are completed; 10. the degree to which the minimum data requirements are timely; 11. the degree to which the minimum data requirements are accurate; and 12. the degree to which the minimum data requirements are complete, unless otherwise negotiated by the region and state or prescribed by a national initiative. The SRF also includes a 13th “optional” element that is open for negotiation between regions and states. EPA and ECOS encourage the use of the 13th element to ensure the review takes a measure of the full range of program activities and results. These components can add meaningful input into a state’s overall performance and program. Topics could include program areas such as compliance assistance, pollution prevention, innovation, incentive or self-disclosure programs, relationships with state attorneys general, and outcome measures or environmental indicators that go beyond the core program activities covered in elements 1 through 12. The SRF was also seen by the parties as being consistent with the principles of the National Environmental Performance Partnership System, which provides a mechanism for joint planning and program management that takes advantage of the unique capabilities of each party in addressing pressing environmental problems. Also, the SRF considers commitments negotiated between EPA regions and states contained in PPAs, PPGs, and/or other agreements that may differ from national policy and guidance and evaluates state performance in terms of those commitments. In cases where states and regions have negotiated different state commitments (e.g., number of inspections) or other activities, states are held accountable for those commitments, although the SRF reviewers may provide feedback that those commitments need to be increased in the future to fully demonstrate an adequate enforcement program. After a review is completed, the regions prepare a draft report of the findings and conclusions, jointly discuss with the state how major recommendations will be addressed, and provide the draft report to OECA headquarters. OECA reviews the draft reports and provides comments on the regions’ analyses and recommendations. OECA expects regions to incorporate these recommendations into the next round of negotiated agreements, where OECA will track and manage the recommendations to conclusion. Additional anticipated benefits of applying the SRF’s elements in a uniform manner included, among others, (1) more strategic resource allocation, (2) reduction of duplicative work, (3) consistent and predictable baseline oversight across states and regions with agreed-upon thresholds for corrective action, (4) differential oversight of state programs based on performance, (5) a level playing field for states in competition for business, and (6) improved public confidence in federal and state compliance and enforcement programs. In addition, the SRF is viewed as providing a basis to establish a dialogue on performance that will lead to improved program management and environmental results. OECA pilot-tested the SRF during fiscal year 2004 in at least one state in each of EPA’s 10 regions. The states that participated in the pilot were all volunteers. The pilot states included Alaska, Arizona, Colorado, Rhode Island, New Jersey, Maryland, Michigan, Missouri, Nebraska, Oklahoma, and South Carolina. OECA also piloted the SRF in one EPA region, Region 10 (Seattle), to test the approach on EPA’s direct implementation of the Resource Conservation and Recovery Act (RCRA) and the Clean Water Act National Pollution Discharge Elimination System (NPDES) program in Alaska. EPA used the SRF to evaluate the enforcement performance of three media programs (both the pilot reviews and subsequent reviews): the Clean Air Act Stationary Sources program, the Clean Water Act NPDES program, and (RCRA) Subtitle C hazardous waste program. For each program, the SRF defined the essential elements and then, in a companion Framework Implementation Guide more fully defined how each element is to be applied and measured. In February 2005, OECA contracted for an evaluation of the pilot review process to determine whether the SRF provides an accurate assessment of state compliance and enforcement activities. The evaluation sought to obtain answers to questions, such as the following: (1) Are the 12 review elements the right ones? (2) Are the right data metrics being used? (3) What barriers were encountered? The evaluation also addressed such implementation issues as whether the reviews could be streamlined and made more efficient; what barriers were encountered in conducting the reviews and how they could be reduced or eliminated; and the consistency of application across the country, specifically any need for and ways to improve consistency; problems with objectivity; and apparent gaps in capability or expertise that need to be addressed. The pilots were also evaluated to determine what they indicated about the performance of the states, whether corrective actions or differential oversight agreements get codified in grant agreements, and the best way to summarize and communicate the results of the review. The evaluation used the results of the pilots as well as discussions with key stakeholders to support recommendations aimed at helping OECA improve the SRF before implementing it more broadly. For example, while OECA had allowed regions considerable discretion/flexibility on procedures for file selection, the evaluation identified a number of weaknesses in the file selection process and highlighted potential improvements to OECA’s file selection protocol. The consultant developed an improved sampling model that would yield representative file reviews across states and provide a more representative picture of enforcement and compliance assurance across states with varying levels of enforcement activity. In addition to the individual named above, Ed Kratzer, Assistant Director; Charles W. Bausell, Jr.; Kevin S. Bray; Brian M. Freidman; Carol M. Henn; Tom M. James; Ralph L. Lowry; Lynn M. Musser; Carol H. Shulman; John C. Smith; and Ignacio J. Yanes made key contributions to this report. | The Environmental Protection Agency (EPA) enforces the nation's environmental laws through its Office of Enforcement and Compliance Assurance (OECA). OECA sets overall enforcement policies and through its 10 regions oversees state agencies authorized to implement environmental programs consistent with federal requirements. GAO was asked to (1) identify trends in federal resources to regions and states for enforcement between 1997 and 2006, and determine regions' and states' views on the adequacy of these resources; (2) determine EPA's progress in improving priority setting and enforcement planning with states; and (3) examine EPA's efforts to improve oversight of states' enforcement programs and identify additional actions EPA could take to ensure more consistent state performance and oversight. GAO examined information from all 10 regions and 10 authorized states, among other things. Overall funding to regions and authorized states increased from 1997 through 2006, but these increases did not keep pace with inflation and the growth in enforcement responsibilities. Over the 10-year period, EPA's enforcement funding to the regions decreased 8 percent in inflation-adjusted terms. Regional officials said they reduced the number of enforcement staff by about 5 percent. EPA's grants to states to implement federal environmental programs also declined by 9 percent in inflation-adjusted terms while enforcement and other environmental program responsibilities increased. According to state officials, reductions in grant funds have limited their ability to meet EPA's requests to implement new requirements. For example, according to New York State officials responsible for the hazardous waste program, a reduction in EPA grants between 1997 and 2006 has meant a 38 percent reduction in the full-time state staff supported by federal funding for this program. However, EPA information on the workload and staffing needs of its regions and the states is incomplete, and, thus, it is not possible with existing data to determine their overall capacity to meet their enforcement responsibilities. EPA has made substantial progress in improving priority setting and enforcement planning with states through its system for setting national enforcement priorities and the EPA/state National Environmental Partnership System (NEPPS), which have fostered a more cooperative relationship. For example, on states' recommendation, OECA accepted as a priority ensuring that facilities handling hazardous substances, such as lead or mercury, have the financial resources to close their facilities, clean up contamination, and compensate communities and individuals affected by the contamination. EPA and states have also made some progress in using NEPPS for joint planning and resource allocation. State participation in the partnership grew from 6 pilot states in fiscal year 1996 to 41 states in fiscal year 2006. EPA has improved its oversight of state enforcement programs by implementing the State Review Framework (SRF) as a means to perform a consistent approach for overseeing the programs. Moreover, EPA can make additional progress by addressing weaknesses that the SRF reviews identified and by implementing other improvements to ensure oversight that is more consistent. For example, the SRF reviews show that EPA has limited ability to determine whether the states are performing timely, appropriate enforcement and whether penalties are applied to environmental violators in a fair and consistent manner within and among the states. In addition, GAO noted that EPA could make further use of the SRF to (1) determine the root causes of poorly performing programs; (2) inform the public about how well the states are implementing their enforcement responsibilities; and (3) extend the use of the SRF methodology to assess the performance of EPA's regions, which have been inconsistent in their enforcement and oversight efforts. |
Prior to the September 11, 2001, terrorist attacks, only those Navy ships and air squadrons at peak readiness were deployed overseas, usually for 6 months at a time. Most of the Navy’s remaining units were not available because they were in the early stages of their maintenance or training cycles, or because the Navy did not have good visibility of the readiness of these units. This prompted the Chief of Naval Operations in March 2003 to task the Commander of Fleet Forces Command to develop the FRP concept to enhance the Navy’s surge capability. The Chief of Naval Operations approved the concept and directed the Commander of Fleet Forces Command to be responsible and accountable for effectively implementing the plan. The Commander of Fleet Forces Command is responsible for overall coordination, establishment, and implementation of integrated requirements and policies for manning, equipping, and training both Atlantic and Pacific fleet units throughout the training cycle and is responsible for articulating all fleet warfighting and readiness requirements to the Chief of Naval Operations. Carrier strike groups are typically centered around an aircraft carrier and its airwing, and also include a guided missile cruiser; two guided missile destroyers; a frigate; an attack submarine; and one or more supply ships with ammunition, fuel, and supplies (such as food and spare parts). The Navy currently has 11 aircraft carriers in service, with two additional carriers under construction. (The carriers are listed in app. III.) Generally, three carrier strike groups are deployed at any given time. The three deployed carriers include the USS Kitty Hawk, which is home ported in Japan and is counted as being continuously deployed. This carrier provides most of the U.S. naval presence in the western Pacific Ocean region and some in the Indian Ocean/Arabian Sea region. Carriers originating from the eastern and western United States have traditionally provided presence in the Mediterranean Sea and Indian Ocean/Arabian Sea regions, respectively. There are also 10 carrier airwings, one of which accompanies each deployed carrier. While the composition of each airwing can be tailored to the carrier’s specific mission, each airwing typically includes a helicopter squadron as well as squadrons of aircraft for attack (composed of aircraft such as the F/A-18), electronic warfare (composed of aircraft such as the EA-6B), and reconnaissance (composed of aircraft such as the E-2C) missions. The Navy cites a variety of roles in which carrier strike groups may be employed, for example they (1) are deployed worldwide in support of U.S. interests and commitments; (2) respond to global crises from peacetime to full-scale war; (3) can operate as the cornerstone of joint/allied maritime expeditionary forces in times of crisis; and (4) can operate and support aircraft attacks on enemies, protect friendly forces, and engage in sustained independent operations of war. Expeditionary strike groups are typically centered on amphibious ships with a Marine Corps Marine Expeditionary Unit, aircraft, and landing craft. Each expeditionary strike group notionally includes one amphibious assault ship, one amphibious transport dock ship, and one dock landing ship. These amphibious ships together can embark a Marine Expeditionary Unit consisting of about 2,200 Marines, their aircraft, their landing craft, their combat equipment, and about 15 days worth of supplies. Like a carrier strike group, the expeditionary strike group may also include several surface combatants such as a cruiser, destroyer, and frigate; an attack submarine; and one or more P-3 long-range, land-based, maritime patrol aircraft. Expeditionary strike groups are designed to be independently deployable, strike-capable naval formations, but they can also operate in conjunction with carrier strike groups to form larger naval task forces. Generally, two or three expeditionary strike groups are forward-deployed at any given time. FRP represents a change in the way the Navy manages its forces. The plan changes the manner in which the Navy maintains, trains, mans, and deploys its ships to allow a greater number of ships to surge on short notice while at the same time meeting forward- presence requirements. Four phases within the FRP cycle serve as the framework to more rapidly prepare and sustain the readiness of ships, aircraft, and personnel. As depicted in figure 1, the four FRP phases are (1) basic, or unit-level training; (2) integrated training; (3) sustainment (which may include one or more extended periods of deployment); and (4) maintenance. At the end of the basic phase, a unit is characterized as an “independent unit ready for tasking” and may be assigned independent operations in support of homeland security, counternarcotics missions, or assigned to provide disaster relief or humanitarian assistance. As the training progresses, the capabilities of the units increase accordingly as do the roles and missions assigned. Once the basic phase is completed and the integrated phase begins, training can be tailored to meet a combatant commander’s request for a specific capability, such as to support antipiracy operations, and the unit is characterized as “maritime security surge” capable. Upon completion of the integrated phase, a unit begins the sustainment phase and is characterized as “major combat operations surge” capable, meaning the unit is ready for operational employment, but is not necessarily able to lead combat force operations. Once a unit is certified through advanced integrated training and is fully capable of conducting all forward-deployed operations, it attains the status of “major combat operations ready.” Routine deployments occur during the sustainment phase. Finally, ships spend time in maintenance phase, when major shipyard or depot-level repairs, upgrades, and modernization occur. The Fleet Forces Command and Pacific Fleet commanders have delegated responsibility to their subordinate force commanders (such as air, submarine, and surface) for overseeing the FRP’s basic phase; and they have delegated their geographical fleet commanders (such as the Seventh Fleet, which operates in the Western Pacific) responsibility for overseeing the integrated and sustainment phases. The Navy has taken several positive steps toward implementing a sound management approach for FRP, but has not fully developed such an approach because the Navy’s implementation of FRP is still evolving. The Navy’s implementation of FRP has included some key elements of a sound management approach, such as defining clear missions and desired outcomes, developing some performance measures, and beginning to identify needed resources. However, the Navy has not fully incorporated certain key elements, such as fully developing implementation goals or performance measures and aligning activities with resources. The Navy has taken several positive steps toward implementing a sound management approach for FRP since our prior reports. Our prior work has shown that key elements of a sound management approach include defining clear missions and desired outcomes, establishing implementation goals, measuring performance, and aligning activities with resources. The Navy’s implementation of FRP has included some of these elements. For example, the Navy has issued two FRP instructions, one in August 2006 and another in August 2007. The August 2007 instruction defined the FRP mission as providing ready Navy forces to meet combatant commanders’ requests for forces in support of the nation’s maritime security. These forces consist of forward operating and U.S.- based assets that may rotationally deploy or surge. Both instructions also defined the four FRP phases, defined notional lengths for each phase, and established responsibility for oversight and execution of the plan with Fleet Forces and Pacific Fleet commanders and their subordinate force and geographic fleet commanders. The Navy has also updated instructions in the areas of personnel, maintenance, and training to reflect desired outcomes under FRP. For example, in January 2007, the Navy revised its personnel instruction that provided guidelines on personnel deployment length under FRP. The new instruction sets limits on the length of deployments, dwell times between deployments, and requirements for time spent in home port. The Chief of Naval Operations must grant a waiver if those limits are exceeded. In the absence of a waiver, deployments are limited to 7 months for units with a single deployment and 6 months for units with multiple deployments within the same FRP cycle. In addition, units must spend at least as much time between any two deployments as they did on their most recent deployment; and units must spend a minimum of 50 percent of the time in their home port over an FRP cycle. With regard to maintenance, the Navy has revised notional depot maintenance schedules to reflect the FRP cycle, and developed guidelines on out-of-depot continuous maintenance. With regard to training, the Navy revised surface, carrier, and air squadron training readiness instructions to reflect changes in training phases and to show the exercises that are expected to be completed in each phase. In addition, the Navy established a 6+1 implementation goal for carrier strike groups, meaning that it aims to have six carrier strike groups available to deploy within 30 days and one more within 90 days. In its August 2007 instruction, the Navy modified this goal to 3+3+1 and linked the goal to the FRP phases. As that instruction noted, 3+3+1 means that the Navy’s goal is to have three carrier strike groups deployed, three ready to deploy within 30 days of being ordered to do so (in the FRP sustainment or integrated phases), and one prepared to deploy within 90 days (in the FRP basic phase). The Navy plans to use this same framework, which took the form X+Y+Z, to set implementation goals for all forces. The first variable (X) refers to the number of ships or aircraft deployed, the second (Y) refers to the number that will be in a surge status, and (Z) refers to the number that will be in a Ready for Tasking status. Furthermore, the Navy has developed some performance measures to use in evaluating its performance under FRP. In its August 2007 instruction, the Navy established some performance measures for each FRP phase. For example, two principal measures will be used to assess performance in the maintenance phase: on-time completion of maintenance periods and assessment scores for the level of maintenance completed. The instruction also delineates performance measures for training in FRP phases. The array of performance measures spelled out in the instruction broke new ground by reaching across the entire FRP cycle with measures that can be associated with a numeric goal and evaluated over time. For example, one measure of maintenance efficiency was “on-time completion of maintenance,” and the Navy associated the measure with a numeric goal of delivering ships within 30 days of the scheduled completion date. Lastly, the Navy’s aviation community has developed the Aviation Readiness Integrated Improvement Program training and readiness funding profiles. That program has developed a matrix that sets out expected readiness levels for aircraft squadrons, expressed in terms of the current readiness reporting system’s 5-point scale (with 1 being the highest and 5 the lowest), by squadron type and month of the FRP cycle. Available resources are allocated based on a tiered readiness profile, with the highest priority given to deployed units and units in pre-deployment sustainment. For example, an F-18 A/B/C/D squadron could expect 50 percent of required funding in the first month of its maintenance phase in order to achieve a training readiness level of 2.9, compared to 80 percent of required funding in the fifth month of sustainment phase (which corresponds to the first month of a typical deployment) in order to achieve a training readiness level of 1.9. The Navy has also been working on other initiatives that include identifying and validating the cost of the fleet response training plans, calculating the notional training costs of a carrier strike group through the FRP phases, and developing metrics to link operations and maintenance costs for current and future years to FRP implementation goals. The Navy has not developed comprehensive implementation goals for all Navy assets, finished developing performance measures, or fully identified all the resources required to achieve FRP goals– which are all key elements of a sound management approach. Specifically, the Navy has not yet established a specific implementation goal for expeditionary strike groups and other forces that is analogous to the 3+3+1 goal for carrier strike groups. In addition, the Navy has not fully developed performance measures because it has not established required readiness levels that would enable it to measure whether the carrier strike groups can meet the 3+3+1 goal, and existing performance measures also lack some details about acceptable levels of performance and scope. Furthermore, the Navy has not shown that it has identified all resources required to achieve FRP goals or fully aligned needed resources with FRP activities. The Navy has not yet established implementation goals for expeditionary strike groups and other forces. While the Navy began extending FRP to expeditionary strike groups in June 2007, it has not developed an implementation goal for expeditionary strike groups that would be analogous to the 3+3+1 goal for carrier strike groups because it has only recently begun to apply FRP to expeditionary strike groups. Marine Corps officials view FRP’s goal of promoting increased readiness of amphibious ships as promising, so long as it does not have the effect of reducing the forward presence of the Marine Expeditionary Units that embark on those ships. The Navy has also applied the FRP concept to ship configurations that operate outside the umbrella of either type of strike group, for both missions related to the Global War on Terrorism and relief efforts, such as Hurricane Katrina. However, the Navy has not established specific FRP implementation goals for these other forces, other than a general goal to have some forces deployed, some preparing for deployment, and some in the basic phase of FRP. Navy officials agree that specific FRP goals for these other forces are needed, and officials at Fleet Forces Command said that preliminary goals have been developed for submarines, surface ships, and other types of forces. However, these goals had not been finalized at the time of our review and are not yet being used to guide FRP implementation. Moreover, the preliminary goal for surface ships was expressed in a single aggregated figure that included destroyers, cruisers, frigates, amphibious ships, and minesweepers. An aggregate figure may not provide a meaningful goal, though, as some ships, such as destroyers, may be used in a variety of roles: as components of carrier or expeditionary strike groups or as part of smaller task forces. Until the Navy develops implementation goals for all force configurations, it will not know whether it has enough ships to be distributed among all possible roles. Furthermore, without goals that establish how many expeditionary strike groups and other forces are needed to be ready to deploy, the Navy may not be able to determine whether it can provide all desired capabilities under FRP. Although the Navy has developed some performance measures in its 2007 FRP instruction and linked these measures to the four FRP phases, its performance measures are not fully developed for two reasons. First, the Navy has not established required readiness levels in its current readiness system that would enable it to measure whether the carrier strike groups are ready to deploy in support of the 3+3+1 goal. The Navy currently reports unit readiness in terms of the Status of Resources and Training System (SORTS), but DOD plans to transition to a new system in 2009. SORTS uses a 5-point scale to assess units’ ability to meet the full range of their wartime missions, including major combat operations. Overall SORTS scores, as well as individual scores in each of five subcategories, are presented to the Chief of Naval Operations in weekly and monthly readiness briefings, and readiness is also reported to Congress quarterly, as required by law. However, the Navy has not defined what overall readiness levels are required to move ships from one FRP phase to another. The Navy has established one phase-specific overall readiness measure. Units must reach an overall readiness level of C-2, which is the next-to-highest level, by the end of the integrated phase of FRP. The Navy has also specified that units must achieve a certain training readiness level by the end of the basic phase of FRP, but an overall readiness level has not been specified. Moreover, although units are supposed to be able to perform major combat operations while in the sustainment phase, the Navy has not established a readiness level that would enable it to measure when a unit was ready to transition from surge- to deployment-ready status. While some Navy officials have said that they believe that the requirement for deploying beyond the continental United States— regardless of mission or FRP phase—is C-2, they were unaware of any formal guidance to that effect. The Navy relies on institutional knowledge and the commanders’ judgment to make the determination of when a unit such as a carrier strike group is ready to deploy. Further, the Navy has not fully defined required readiness levels because Navy officials are reluctant to invest in developing measures based on SORTS, a legacy system that DOD will discontinue as it introduces the new Defense Readiness Reporting System by the middle of fiscal year 2009. Officials plan to continue to report readiness information to Congress using SORTS until the new system is fully in place. Under the new system, the Secretary of the Navy is charged with defining the mission-essential tasks that will be used to assess units’ readiness for a range of potential missions. However, these tasks have not yet been fully defined. Without a clear requirement, senior leadership may not be able to determine whether implementation goals are being met, and might instead use imprecise proxy measures—such as the raw number of carriers that are not in depot maintenance—as a way of estimating how many carrier strike groups are available for deployment. Moreover, planners may not know what required readiness level to use as a standard when developing budget requests and making resource allocation decisions. Second, the August 2007 FRP instruction outlined several performance measures for specific tasks, but some of these measures lacked details about acceptable levels of performance and scope. Navy guidance directs that each complete standard for determining whether a task can be accomplished should consist of one or more measures as well as a criterion, or quantitative description of the acceptable level of performance, for each measure. For example, a measure might be “on-time maintenance,” and its associated criterion might be “within 30 days of promised completion date.” However, in some cases the measures described in the FRP instruction lacked criteria. For example, the instruction contained five measures of basic phase performance, but none of these measures specified criteria about how well units must perform. Although information for one of the measures (the M-rating— required training readiness under the current readiness reporting system) could be inferred from Navy training manuals, the other four measures lacked quantitative descriptions. For example, the “cost performance” measure did not provide a quantitative description (e.g., percentage of budgeted funds expended) or a numeric goal (e.g., 95 percent). The FRP instruction also did not fully address the scope of some of the performance measures. For example, the maintenance phase performance measure dealing with on-time maintenance completion did not indicate whether it was applicable to aircraft as well as ships; nor did four of the five basic phase performance measures. In addition, while FRP changes the manner in which the Navy maintains, trains, mans, and deploys its ships, the instruction outlines performance measures pertaining to maintenance, training, and deployment, but it did not contain performance measures pertaining to manning. Navy officials have said that they believe there is a goal of fully manning all ships and aircraft at all times. Although this goal has appeared in various Navy briefings, it is not documented in official Navy guidance. Navy officials observed that FRP is still an evolving construct, and stated that the Fleet Readiness Enterprise, which includes representatives from training and readiness directorates, is developing appropriate criteria that will delineate acceptable levels of performance. Moreover, a Navy official noted that work that will provide further details for the established performance measures is underway at lower levels of command. However, until the FRP performance measures are fully linked to quantified levels of acceptable performance, encompass ships and aircraft, as applicable, and provide measures to assess appropriate manning levels, decision makers may be unable to determine the extent to which FRP is achieving its goals. The Navy also has not fully identified all resources required to achieve FRP goals or aligned needed resources with FRP activities. In the past, the Navy sponsored several studies to identify FRP costs, but these are of limited utility to the Navy’s understanding of links between resources and FRP activities because they included a goal that FRP would be cost- neutral, relied on assumptions that are now outdated, and lacked other details. The Navy’s principal studies consequently did not reflect a bottom-up assessment of the resources needed to implement FRP and achieve certain required readiness levels. Additionally, these studies used assumptions that are now outdated, such as a 12-carrier fleet, the former “6+2” carrier strike group implementation goal, and a 27-month carrier strike group operational cycle. These assumptions affect the proportion of time that carriers spend in maintenance over their life cycles and the urgency with which any single carrier might have to be readied to surge, either of which would have resource implications. In addition, the studies did not analyze the cost impact of relying more heavily on pier-side continuous maintenance rather than depot maintenance, deploying for more than 6 months at a time or more than once in the same operational cycle, or preparing for an actual surge. In case of a surge, for example, several ships might need to be readied within the same 30-day period, imposing additional costs on shipyards, and aircraft might need to be transferred from one airwing to another, raising transportation costs. More recently, the Navy established several task forces and initiatives to help identify training requirements and costs, and to link costs to expected readiness levels. However, these efforts are ongoing and have not yet produced a comprehensive approach for aligning activities with resources. For example, the Navy has established at least two bodies, the Fleet Training Board of Directors and a Task Force on Readiness, whose work should help the Navy align its FRP activities with its resources and funding needs. The Fleet Training Board is tasked with establishing a process for calculating and tracking fleet training costs, which involves validating all costs associated with training as well as identifying excesses and gaps in the training process. Although the Fleet Training Board has defined time frames for presenting briefings to senior Navy leadership, its charter was still in draft as of September 2007. The Navy’s Task Force on Readiness, whose charter was approved in April 2007, aims to develop a comprehensive set of metrics linked to cost in order to inform current- year execution of readiness objectives and future-year planning, programming, and budgeting of readiness requirements. This linkage will allow the Navy to identify the operations and maintenance funding needed to execute various FRP implementation goals, such as the carrier strike group’s goal of 3+3+1, at specific readiness levels. However, the task force has not yet shown how the three variables–funding, implementation goals, and readiness levels–would interact and how a change in one variable would affect the outcomes for the other two. The task force on readiness has set a goal of having its results incorporated into the development of the fiscal year 2010 budget. However, it is not clear how the results of this task force will be disseminated or whether they will be used to develop formal guidance that could be used to develop future budgets. While the groups are taking steps in the right direction, without a thorough analysis of the costs of FRP that is based on updated information about force structure, goals, and operations and maintenance cycles and that links resource inputs to expected readiness outputs, the Navy may be unable to identify what resources would be needed to achieve the intended benefits under FRP and to develop its budget requests to reflect those needs. The Navy has not fully considered the long-term risks and tradeoffs associated with the changes it has made in areas such as carrier operational and maintenance cycles and force structure. Specifically, the Navy has made several changes in its maintenance and operational cycles to facilitate FRP; however, the Navy has not performed an integrated assessment of how the changes would, taken as a whole, affect its ability to meet FRP goals and perform its full range of missions. Moreover, although the Navy has developed plans to show how it would continue to meet FRP goals during two upcoming periods when the number of available aircraft carriers temporarily drops from 11 to 10, these plans do not consider several issues. The Navy has made several changes to maintenance and operational cycles to facilitate FRP, but it has not fully assessed the implications of these changes. Specifically, the Navy has extended the intervals between carrier dry-dock maintenance periods from 6 years to 8 years and begun a test program that will extend some carrier dry-dock intervals to as much as 12 years, or only three times during their life cycles. It has also lengthened operational cycles for carriers and their airwings to 32 months. We have previously advocated that DOD adopt a comprehensive risk management approach to aid in its decision making that includes, among other things, assessing the risks of various courses of action for both near- and long-term challenges. Prior to making changes to its maintenance cycle in the past, the Navy has conducted assessments of the potential effects of the changes. For example, when the Navy altered its previous system for scheduling depot maintenance about a decade ago, the engineering community conducted a formal study to determine which types of maintenance could be performed at greater intervals without having a negative impact on the integrity of the carrier or its expected total service life. A similar study was completed in 2005 and used as the basis for revising the notional depot maintenance schedule the following year to extend the dry-docking cycle from 6 to 8 years. At that time, officials concluded that the proposed extension was technically acceptable and contained a manageable level of risk. Since then, the Navy has again extended the dry-docking cycle, with a 12-year cycle planned for the Nimitz as a test case and possible further extensions for other carriers on a case by case basis. However, the Nimitz, which is the oldest ship in its class, has spent more time in depot maintenance during the first half of its service life than is planned for newer ships and therefore might be an atypical example of the class. Officials have stated that, while they will not conduct a comprehensive study of the entire class of ships, they are confident that their test study of the Nimitz will suffice to collect the data they need to inform their decision as to whether to extend the cycle for other ships. The Navy has also extended the carrier operational cycle from the pre-FRP 27 months to 32 months. Operational cycles were extended to 32 months in tandem with the extension of carrier dry-docking cycles, and the technical studies that were performed at the time to determine the effect on carriers applied to both operational and maintenance cycles. However, these studies did not examine the full impact on carriers’ accompanying airwings, even though an effect of the extension of the operational cycle is a corresponding increase in the air squadron operational cycle. As a result of the extension of the operational cycle, which may now last as long as 32 months, a Navy official stated that one capstone pilot training exercise is conducted less frequently than in the past. Pilots participate in this exercise, at Naval Air Station Fallon, once per training cycle, normally shortly after they complete the basic phase. During the air squadron training cycle that existed prior to FRP, pilots participated once every 2 years; now they are only required to do so once per FRP cycle, which is every 27 to 32 months. While Navy officials have told us that they were unsure what effect less frequent Fallon exercises would have on pilot skills and are reviewing the extent to which Fallon exercises may need to be repeated during a multiple-deployment FRP cycle, they did not provide us with documentation of their review or evidence that they had studied the issue at the time the decision to extend the operational cycle was made. The Navy has not fully considered the long-term risks and tradeoffs of these changes to its maintenance and operational cycles because it has not performed a comprehensive assessment of how the changes, interacting with one another, might affect its ability to meet FRP goals and perform its full range of missions. As a combined result of increases to both maintenance and operational cycles, carriers have fewer opportunities to be inspected in dry dock. In addition, they spend about 22 percent less time in any type of depot maintenance period compared to the pre-FRP 24- month cycle. Since the oldest Nimitz-class carrier was commissioned about 32 years ago and the newest is still under construction, neither we nor the Navy can know, based on experience, all the effects that maintenance or operational cycle increases could have on the carriers. Two possibilities have arisen in discussions with Navy officials: extensions could have an impact on total service life, and extending dry docking cycles beyond 8 years or operational cycles beyond 32 months could limit the maintenance community’s ability to respond to problems quickly. However, there was no consensus about the likelihood or possible severity of either of these outcomes. Some evidence suggests that lengthening intervals between depot maintenance periods may be associated with a reduction in total carrier service life. For example, the 2006 guidance from the Chief of Naval Operations on maintenance intervals projected that the service life for Nimitz-class nuclear carriers would be slightly reduced compared to past estimates. Moreover, FRP was developed to enable carriers to be deployed for more time than before and under conditions—such as short-notice surges with a premium on providing a quick response—that tend to use up reactor fuel in nuclear carriers more rapidly than would be the case with longer deployments with longer transit time at slower speeds. In Nimitz- class carriers, reactor fuel is replenished only once, at the midpoint of a carrier’s life cycle, at about the 23-year mark. Therefore, if reactor fuel is used up in less than the scheduled time, the carrier may reach both the midpoint and end of its service life earlier than planned. In addition, the Navy’s analysis leading to the operational cycle extension from 27 to 32 months assumed that operating tempo would not increase and carriers would not make multiple deployments in a single FRP cycle. If the Navy did have to replace carriers sooner than planned, there could potentially be significant effects on long-term Navy budget requirements. Without assessing the short- and long-term risks and trade-offs associated with the changes in maintenance and operational cycles, it will be difficult for the Navy to determine the extent to which these changes could affect its ability to meet FRP goals and perform its full range of missions. The Navy has reported that FRP is supportable with 11 carriers and has developed plans to show how it would continue to meet FRP goals during two upcoming periods when the number of available aircraft carriers temporarily drops from 11 to 10. However, these plans have not fully analyzed the risks that could arise because they may make optimistic assumptions about the length of the gaps and lack some details about how the Navy would mitigate these gaps. The first period is expected to begin in fall 2008, after the Kitty Hawk’s scheduled November 2008 decommissioning, and will last until the Bush is prepared for its first deployment in the summer of 2010, a gap of nearly 2 years. According to the Navy, the second period is scheduled to begin in fall 2012 when the Enterprise is decommissioned, and will last for 33 months until the Ford is commissioned in fiscal year 2015. The Navy’s plans may have presented optimistic assumptions about the total length of the gap. For example, the first plan projected that the Bush would be operationally ready in the summer of 2010, which is about a year after its scheduled commissioning date, but the second plan did not address the time between the Ford’s projected commissioning date and its operational readiness date. According to a December 2006 DOD report on the Ford’s progress, the carrier is scheduled to reach initial operational capability in September 2016, for a total gap of 45 months, as opposed to the gap of 33 months in the Navy’s report. In addition, we have recently reported that the Ford is encountering delays in technology development that could affect its delivery schedule. In both cases, there may even be additional time between operational readiness and actual first deployment. The average interval between commissioning and deployment for all Nimitz-class carriers was nearly 2 years, and no carrier since the Vinson (which first deployed in 1983) has deployed within 1 year of its commissioning date. Both of the Navy’s plans lack some details about how the Navy would mitigate these gaps. The first plan reported that there would be 5 months between the scheduled decommissioning date of the Kitty Hawk and the projected operational readiness date of the Bush when carrier readiness status would fall below 6+1, and noted that these could be mitigated with adjustments to scheduled maintenance periods or by accelerating scheduled training. The first plan lacked specific information about the carriers and their projected FRP phases for each month of the gap period, so we could not validate the plan’s assumptions about how many carriers would be surge-ready during any particular month. In addition, the plan did not link specific mitigations, such as extending a carrier’s maintenance interval or accelerating unit-level training, to specific months in which surge-ready availability fell below 6+1. Without such information, we could not evaluate whether the Navy had weighed the possibilities and determined the most appropriate way of mitigating a potential shortfall. Moreover, applying the expected durations of basic and integrated phases of FRP that the Navy formalized in the August 2007 FRP instruction, we identified at least 6 months in the first gap period after the Kitty Hawk retires when there will not be enough carriers in the right FRP phases to meet the 6+1 or 3+3+1 implementation goals, a difference that could affect the Navy’s mitigation planning. The second plan showed the baseline depot maintenance schedule, and presented several alternative ways in which identified gaps in the Navy’s ability to deploy 6+1 carriers between the scheduled decommissioning date of the Enterprise and the projected commissioning date of the Ford could be filled. These included: extending the carrier depot maintenance cycle or operational schedules, deferring some global presence deployments, or delaying the decommissioning date of the Kitty Hawk. Applying the same expected durations of basic and integrated phases of FRP to the second gap period, we identified at least 13 months when there will not be enough carriers to meet the 6+1 or 3+3+1 implementation goals. The second plan did not address how the Navy could simultaneously have enough carriers available to surge to meet FRP goals without stretching out some maintenance intervals beyond currently approved limits. The Navy’s decision to lengthen intervals between depot maintenance periods, as discussed, was based on the assumption that there would be 11 carriers at all times. Therefore, during these periods the Navy may have to choose among not meeting FRP carrier strike group goals, further extending carrier maintenance cycles, shortening training, or some combination of these tradeoffs. Until the Navy develops plans that use realistic schedule assumptions and that can depict the likely challenges to implementation goals during these gap periods, senior Navy leadership may not have the information it needs to make informed trade-off decisions. As a result, the Navy may not be able to achieve an optimal balance between maximizing carrier strike groups’ ability to surge on short notice in support of FRP and performing the full range of Navy missions. The Navy considers FRP to be a critical enabler in meeting challenges of the twenty-first century security environment. Although the Navy has taken several important steps toward fully developing a sound management approach for FRP, such as establishing oversight and execution responsibility, developing implementation goals for carrier strike groups, and identifying some key performance measures, this process is incomplete. Without implementation goals for extending FRP to expeditionary strike groups and other ship configurations; performance measures that identify readiness levels and are fully linked to acceptable levels of performance for FRP phases; and a completed analysis that links needed resources to FRP phases, goals, and readiness levels, the Navy may not be able to develop budget requests based on the resources needed to achieve required readiness levels or demonstrate to senior DOD officials and Congress whether it can achieve the intended benefits under FRP. The Navy has studied the effects of some aspects of changes it has made during FRP’s first years, such as extensions of operational and maintenance cycles, and has begun to pursue other studies. However, until the Navy performs a comprehensive risk assessment that addresses the cumulative impact of changes to operational and maintenance cycles, and the possible effects of having fewer carriers in the force structure in the future, it will be unable to weigh the trade offs associated with meeting FRP goals within projected budgets. Further, assessing risk becomes increasingly important as the Navy expands FRP to include other forces and as its force structure faces periods with 10 instead of 11 available carriers. To improve the Navy’s management as FRP continues to evolve and as the Navy moves forward with implementation, we recommend that the Secretary of Defense direct the Secretary of the Navy to take the following four actions: establish implementation goals for the application of FRP to other establish required overall readiness levels for each FRP phase in its develop additional performance measures that identify acceptable levels of performance and scope; and identify how resources should be linked to the FRP phases, goals, and readiness levels and publish appropriate guidance. To improve the Navy’s ability to weigh the trade offs associated with meeting FRP goals within current resource and force structure plans, we recommend that the Secretary of Defense direct the Secretary of the Navy to take the following action: perform a risk assessment that integrates consideration of the effects of changes in carrier strike group operational and maintenance cycles under a range of force structure assumptions, and that identifies strategies to mitigate potential risks. Such a risk assessment should integrate plans to meet FRP goals during two upcoming periods when the number of available aircraft carriers temporarily drops from 11 to 10. In written comments on a draft of this report, DOD fully agreed with one recommendation, and partially agreed with four recommendations. DOD’s comments are reprinted in their entirety in appendix II. DOD partially agreed with our recommendation that the Navy establish implementation goals for the application of the Fleet Response Plan to other forces. DOD stated that the Navy has developed preliminary goals for submarines, surface combatants, and other types of forces, and will continue to include additional Navy forces beyond those of the carrier strike group. While we laud this progress, we urge the Navy to take steps to finalize these goals as soon as possible. In addition, we reiterate that the preliminary goal for surface ships was expressed in a single aggregated figure that included destroyers, cruisers, frigates, amphibious ships, and minesweepers. As discussed in the report, an aggregate figure may not provide a meaningful goal, because some ships, such as destroyers, may be used in a variety of roles: as components of carrier or expeditionary strike groups or as part of smaller task forces. Without implementation goals for all force configurations, the Navy may not know whether it has enough ships to be distributed among all possible roles and provide all desired capabilities under FRP. Furthermore, since the Navy’s system for aligning resource inputs with readiness outputs is linked to its implementation goals, identifying separate goals is a prerequisite to identifying appropriate levels of funding. DOD partially agreed with our recommendation that the Navy develop required overall readiness levels for each Fleet Response Plan phase in its readiness reporting system. DOD stated that, under the Defense Readiness Reporting System, the Navy will be able to rapidly and accurately assess a unit’s readiness and ability to conduct missions throughout the FRP continuum. While we hope that DOD can realize its expectations for this system, we note that it is not scheduled to be fully implemented for another year or more. Therefore, we urge DOD to direct the Navy to develop a readiness level requirement within existing systems so that it will have visibility over whether the Navy’s goals are being met up until the Defense Readiness Reporting System is fully implemented, and ensure that this new system allows DOD to assess units’ readiness for each FRP phase. DOD partially agreed with our recommendation that the Navy develop additional performance measures that identify acceptable levels of performance and scope. DOD stated that the Fleet Readiness Enterprise is developing criteria that will show acceptable levels of performance. While we support DOD’s efforts to develop criteria, we urge the Navy to take steps to finalize these criteria as soon as possible. DOD also stated that the Navy has Figures of Merit to guide the allocation of resources in specific areas, and furthermore trusts its unit commanders to accurately report their ability to meet FRP requirements. At the time of our review, these measures were still under development, so it is unclear whether they will be sufficient to provide the necessary information about the scope and acceptable levels of performance to enable consistent and accurate measurement of performance. We continue to believe that our recommendation merits further action and that DOD needs to direct the Navy to fully link the FRP performance measures to quantified levels of acceptable performance, encompass ships and aircraft as applicable, and provide measures to assess appropriate manning levels, so that decision makers will be able to determine the extent to which FRP is achieving its goals. DOD agreed with our recommendation to identify how resources should be linked to the Fleet Response Plan phases, goals, and readiness levels and publish appropriate guidance. DOD stated that the Navy is in the process of developing a comprehensive set of top-level metrics that will provide the Navy with the ability to link readiness outputs to required resource inputs. When development is complete, the Navy will have a set of quantifiable and traceable relationships between its financial system and Fleet readiness. We agree that the actions cited represent positive steps and urge the Navy to press forward with these efforts. We note that we also recommended that the Navy publish appropriate guidance upon completion. DOD partially agreed with our recommendation that the Navy perform a risk assessment that integrates consideration of the effects of changes in carrier strike group operational and maintenance cycles under a range of force structure assumptions and identify strategies to mitigate potential risks. DOD stated that it understands that modifications to existing plans will have numerous consequences and indicated that the Navy will continue to update its plans based on current risk assessments. DOD concluded that there was no need for further direction from the Secretary of Defense in this matter. We disagree, and continue to believe that the Navy should conduct an integrated risk assessment and identify strategies to mitigate potential risks. As discussed in the report, prior to making changes to its maintenance cycle in the past, the Navy has conducted assessments of the potential effects of the changes, and we emphasize the interrelated nature of the changes that the Navy has made to implement FRP. For example, as we discussed in our report, changing carrier operational cycles may have repercussions on the opportunities available for aircraft pilot training. In view of the possible impact on the Navy’s ability to perform its full range of missions and the potential financial implications of intensifying operational tempo or decreasing maintenance of the Navy’s carriers to the point where their planned service life could be jeopardized, we continue to believe that it is critical for the Navy to fully consider the long-term risks and trade offs of these changes through a comprehensive and integrated risk assessment. We are sending copies of this report to the Secretary of Defense, the Secretary of the Navy, and the Chief of Naval Operations. We will also make copies available to other interested parties upon request. In addition, this report will be made available at no charge on the GAO Web site at www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4402 or stlaurentj@gao.gov. Contact points for our Offices 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 IV. To assess the Navy’s progress in developing a sound management approach, we reviewed and analyzed guidance and instructions on manning, maintenance, and training; key studies, messages, and planning documents. We reviewed prior GAO products to identify best practices for managing and implementing major efforts and compared these best practices to the Navy documents we analyzed. We also interviewed officials in the offices of the Chief of Naval Operations and Chairman of the Joint Chiefs of Staff, Washington, D.C.; Fleet Forces Command; Commander, Air Forces Atlantic; Commander, Surface Forces Atlantic; Commander, Submarine Forces Atlantic, Norfolk, Virginia; Naval Air Systems Command, Patuxent River, Maryland; Naval Sea Systems Command, Washington, D.C.; and Marine Corps Forces Command, Norfolk, Virginia; about initiatives the Navy has undertaken. We also contacted officials at the office of the Commander, U.S. Pacific Fleet; Commander, Naval Air Forces, San Diego, California; and Carrier Planning Activity, Chesapeake, Virginia. We also analyzed data from the Navy’s current readiness reporting system. Readiness data include ships’ and airwings’ scores under the Status of Resources and Training System, which measures inputs such as numbers of personnel, amount and condition of equipment on-board, and completion of training exercises, and combines them under a five-point rating system. Status of Resources and Training System data are limited in that they only measure readiness against the standard of major combat operations and do not specifically show readiness at each FRP phase. DOD has recognized this limitation and has begun to develop a new, capabilities-based system called the Defense Readiness Reporting System, which was designed to measure units’ ability to perform specific tasks. The Navy has begun the transition to the Defense Readiness Reporting System, full implementation of which it believes will address the gaps in performance measures that we identified in our review. However, this transition was not yet complete at the time we conducted our review. The Navy continues to report Status of Resources and Training System data in the Type Commanders’ Readiness Management System, and to use Status of Resources and Training System data as the foundation of its weekly and monthly readiness reports to the Chief of Naval Operations. With these noted limitations, we determined that the data were sufficiently reliable for our purposes. To assess the extent to which the Navy has considered the long-term risks and trade offs of FRP-related changes, we interviewed Navy readiness officials in the offices of the Chief of Naval Operations, Arlington, Virginia; and program managers at Naval Sea Systems Command, Washington, D.C., and Chesapeake, Virginia; and Fleet Forces Command, Norfolk, Virginia. To assess whether the Navy had sufficiently taken into account the possibility of not having enough carriers available to meet either a 6+1 implementation goal or a 3+3+1 construct during the years in which 10 carriers will be available, we analyzed the quarterly long-range carrier maintenance schedule that was published in July 2007 and noted, based on the notional durations for each of the FRP phases that were published in the August 2007 FRP instruction, how many carriers would be in each phase during each month during fiscal years 2008 through 2010 and 2013 through 2016. For purposes of our analysis, we assumed that no carrier would remain in any FRP phase for longer than the planned time, and that the George Washington, which is scheduled to be at its home port in Japan in 2009, would be deployable at any time that it was not in depot maintenance. We also analyzed a Navy risk mitigation plan for the years following the decommissioning of the Enterprise and a less detailed plan that covered the years following the decommissioning of the Kitty Hawk, and discussed our observations with Navy readiness and carrier program officials. We performed our work from November 2006 through October 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Patricia W. Lentini, Assistant Director; Renee S. Brown; Janine Cantin; Alissa Czyz; Karen Nicole Harms; Matthew S. Lee; Sally Newman; Maria-Alaina Rambus; Rebecca Shea; and Nicole Volchko made key contributions to this report. | The Navy initiated its Fleet Response Plan (FRP) in March 2003 as a critical enabler to help meet the new demands of the twenty-first century security environment. FRP represents a major change in the way the Navy manages its forces, and is intended to more rapidly prepare and then sustain readiness in ships and squadrons. To achieve the desired capabilities under FRP, the Navy has altered its training, maintenance, and manning practices. The Navy expects this new readiness approach will enable its forces to provide presence and engagement in forward areas, as well as surge a greater number of ships on short notice. The Navy intends to achieve this goal without increasing its operations and maintenance budget of about $40 billion for each of the next 5 years. However, GAO previously reported that the Navy had not fully incorporated a sound management approach to guide and assess implementation of FRP. As a result, GAO was asked to examine the extent to which the Navy has (1) made progress in implementing a sound management approach for FRP and (2) evaluated the long-term risks and tradeoffs of FRP-related changes. The Navy has taken several positive steps toward implementing a sound management approach for FRP, but has not developed implementation goals, fully developed performance measures, or comprehensively assessed and identified the resources required to achieve FRP goals. GAO's prior work has shown that key elements of a sound management approach include: defining clear missions and desired outcomes, establishing implementation goals, measuring performance, and aligning activities with resources. The Navy has made progress in implementing FRP since GAO's prior reports. For example, it has established a goal of having three carrier strike groups deployed, three ready to deploy within 30 days of being ordered to do so, and one more within 90 days (referred to as 3+3+1). The Navy also has established a framework to set implementation goals for all forces, established some performance measures that are linked to the FRP phases, and begun efforts to identify needed resources. However, the Navy has not yet established a specific implementation goal for expeditionary strike groups and other forces. In addition, the Navy has not fully developed performance measures to enable it to assess whether carrier strike groups have achieved adequate readiness levels to deploy in support of the 3+3+1 goal. Moreover, the Navy has not fully identified the resources required to achieve FRP goals. Until the Navy's management approach fully incorporates the key elements, the Navy may not be able to measure how well FRP is achieving its goals or develop budget requests based on the resources needed to achieve expected readiness levels. The Navy has not fully considered the long-term risks and tradeoffs associated with the changes made as FRP has been implemented, such as carrier operational and maintenance cycles and force structure. The Navy has extended the intervals between carrier dry-dock maintenance periods from 6 years to 8 years and begun a test program that will extend some carrier dry-dock intervals to as much as 12 years, and it has lengthened operational cycles for carriers and their airwings to 32 months. GAO previously advocated that the Department of Defense adopt a risk management approach to aid in its decision making that includes assessing the risks of various courses of action. However, the Navy has not fully considered the long-term risks and tradeoffs of these recent changes because it has not performed a comprehensive assessment of how the changes, taken as a whole, might affect its ability to meet FRP goals and perform its missions. In addition, while the Navy has developed force structure plans that include two upcoming periods when the number of available aircraft carriers temporarily drops from 11 to 10, the plans included optimistic assumptions about the length of the gaps and the availability of existing carriers and did not fully analyze how the Navy would continue to meet FRP goals with fewer carriers. Until the Navy develops plans that use realistic assumptions and accurately identify the levels of risk the Navy is willing to accept during these gap periods, senior Navy leadership may not have the information it needs to make informed trade-off decisions. |
DOD conducts a number of homeland defense and civil support missions. Examples of DOD’s homeland defense missions include defending against threats to the homeland from, among other things, international terrorism, the proliferation of weapons of mass destruction, and cyber operations aimed at DOD computer networks. Examples of DOD’s civil support missions include responding to major disasters and emergencies (both natural and man-made); restoring public health and services and civil order, such as animal/plant disease eradication and counterdrug operations; and providing support for national special events, such as the political conventions and international summits. See figure 1. DOD is a supporting agency which provides assistance to the lead federal agency for a specific civil support mission. DOD provides support to DHS and other federal agencies for the defense portion of the federal response to a major disaster or emergency or special event when (1) state, local, and other federal resources are overwhelmed or unique defense capabilities are required; (2) assistance is requested by the lead federal agency; or (3) U.S. Northern Command is directed to do so by the President or the Secretary of Defense. The federal government’s response to major disasters and emergencies in the United States is guided by DHS’s National Response Framework, which involves a tiered series of responses, beginning with local authorities, state authorities, and outside assistance from other states. In accordance with the National Response Framework and applicable laws including the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), various federal agencies may play lead or supporting roles, based on their authorities and resources, and the nature of the threat or incident. For example, DHS manages the federal response to terrorist attacks and major disasters. In some instances, national defense assets may be needed to assist DHS or another agency in the national response to an incident. Defense resources are committed after DOD is directed to do so by the President or the Secretary of Defense. When deciding to commit defense resources to a request for assistance by a lead federal agency, DOD officials evaluate the request against 6 criteria: legality, lethality, risk, cost, military readiness, and appropriateness of the circumstances. If it is determined that defense assistance is appropriate, typically U.S. Northern Command and U.S. Pacific Command are responsible for leading DOD’s response within their designated areas of responsibility. In most cases, support will be localized, limited, and specific. Figure 2 illustrates relevant portions of the areas of responsibility for U.S. Northern Command and U.S. Pacific Command A number of DOD organizations have key roles and responsibilities in the homeland defense and civil support missions. The Office of the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs serves as the principal civilian advisor to the Secretary of Defense and the Office of the Under Secretary of Defense for Policy on homeland defense and civil support matters, among other things. The Assistant Secretary of Defense for Global Strategic Affairs is the principal advisor to the Under Secretary of Defense for Policy and the Secretary of Defense responsible for formulating and coordinating DOD strategy and policy on issues such as countering weapons of mass destruction, nuclear deterrence and missile defense, cyber security and space policy. The Joint Staff oversees joint doctrine development within DOD, including the joint publications for homeland defense and civil support. U.S. Northern Command and U.S. Pacific Command are the two DOD geographic combatant commands primarily responsible for carrying out DOD’s homeland defense and civil support missions. U.S. Strategic Command and U.S. Cyber Command, a sub-unified combatant command under U.S. Strategic Command, coordinate with U.S. Northern Command and DHS for domestic incidents with a cyber component. The military services typically provide the personnel and equipment to carry out homeland defense and civil support missions. Table 1 describes the DOD organizations that have key roles and responsibilities in homeland defense and civil support and the organizations’ roles for these missions. According to DOD officials, dual-status commanders—military officers who coordinate state and federal responses to events for civil support missions—have been used for select planned and special events since 2004. The National Defense Authorization Act for Fiscal Year 2012 provided that a dual-status commander should be the usual and customary command and control arrangement in situations when the armed forces and national guard are employed simultaneously in support of civil authorities, including missions involving major disasters and emergencies. The Act indicates that, when an officer is appointed as a dual-status commander, he or she serves on federal active duty, sometimes referred to as Title 10 status, as well as on duty in or with the National Guard of a state, sometimes referred to as Title 32 status. A dual-status commander can be appointed in one of two ways: 1) an active duty Army or Air Force officer may be detailed to the Army National Guard or Air National Guard respectively, or 2) an Army or Air National Guard Officer may be called to active duty. The Secretary of Defense must authorize, and the Governor must consent to, designation of an officer to serve as a dual-status commander. When operating in Title 32 status, National Guard personnel, including dual-status commanders, are under the command and control of the state governor. DOD and National Guard personnel operating in Title 10 status, including dual-status commanders, are under the command and control of the President and the Secretary of Defense. Dual-status commanders—whether Army National Guard, Air National Guard, Army or Air Force—exercise command on behalf of and receive orders from both the Federal and the state chains of command. The dual-status commander is the intermediate link between these two separate chains of command. The Council of Governors was established by Executive Order 13528 in January 2010. its property. The council when called upon, provides views, information, and advice on matters involving the National Guard of the various states, homeland defense, civil support, synchronization and integration of state and federal military activities in the United States, and other matters of mutual interest pertaining to National Guard, homeland defense, and civil support activities. DHS leads interagency efforts to identify and mitigate cyber vulnerabilities, and DOD provides support to DHS in carrying out its responsibilities. DHS developed the interim National Cyber Incident , which outlines domestic cyber incident response Response Plancoordination and execution among federal, state and territorial, and local governments, and the private sector. DOD has issued numerous policies and guidance related to its homeland defense and civil support missions; however some of it is outdated or incomplete, and no process exists to ensure updates are made to its primary homeland defense and civil support strategy. Specifically, DOD’s primary strategy for how it will respond to an attack on the homeland or provide support to civil authorities in the event of a major disaster or emergency has not been updated since 2005 and no process exists to require such updating. Further, DOD’s existing homeland defense and civil support guidance does not incorporate important details related to the dual-status commander construct and the department’s response to a domestic cyber incident, such as its roles and responsibilities. While gaps still exist with DOD’s strategy and guidance related to the dual-status command and domestic cyber, DOD has contributed to some national- level homeland defense and civil support guidance. Table 2 shows some of the key department and national level policies and guidance DOD uses to plan for its homeland defense and civil support missions, and when the guidance was last issued or updated. DOD has established processes to issue and regularly update its directives and joint publications for homeland defense and civil support missions, but the department has not updated its primary strategy for these missions—the Strategy for Homeland Defense and Civil Support— since it was initially issued in 2005, and it does not have a process similar While DOD plans to that for its directives and joint publications to do so.to issue an updated strategy in the fall of 2012 in response to a 2010 GAO recommendation and internal department discussions, it has not yet developed a process to assess the need for future updates. DOD Instruction 5025.01 DOD Directives Program, issued in 2007 (incorporating changes made in 2010), requires DOD organizations to review their directives, instructions, manuals, and administrative instructions prior to the 5th anniversary of their publication date to ensure that they are necessary, current, and consistent with DOD policy, existing law, and statutory authority. As a part of this process, the Office of the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs updated its guidance for defense support to civil authorities in December 2010 with the issuance of DOD Directive 3025.18. This directive replaced or supplemented several directives, one of which had not been updated since 1993. The Joint Staff has also established a process to update joint doctrine. Joint Staff officials stated that joint doctrine should not be more than 5 years old to maintain relevancy, and at the time of our review the Joint Staff had identified as a goal to have 100 percent of the joint publications updated within the last 5 years. According to DOD officials, this process includes requesting feedback across DOD regarding the currency of joint publications every 2 years. In August 2010, the Joint Staff determined that the joint publication on homeland defense, Joint Publication 3-27 needed a complete revision based on feedback they received from the joint doctrine development community. The joint publication on civil support, Joint Publication 3-28, is also being revised. U.S. Northern Command is leading efforts to update the 2007 joint publications on homeland defense and civil support in coordination with the Joint Staff and other members of the joint doctrine community. According to Joint Staff officials, the revised joint publications are expected to reflect changes in national and department priorities and incorporate lessons learned from exercises and events such as Hurricane Katrina in 2005. Chairman of the Joint Chiefs of Staff Instruction 5120.02C, Joint Doctrine Development System (Jan 2012). Joint Staff officials told us that the publications are scheduled to be issued in May 2013. In contrast, DOD’s primary strategy for homeland defense and civil support is 7 years old. According to DOD’s joint doctrine development instruction, national military strategies, such as DOD’s Strategy for Homeland Defense and Civil Support, and joint doctrine should be closely linked because strategies define the desired outcome for joint doctrine. Moreover, GAO’s Standards for Internal Control in the Federal Government and prior GAO audit work state that, to be effective, In the guidance—including strategies—should be current and complete.intervening years since the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs issued the Strategy for Homeland Defense and Civil Support, key national- and department-level guidance has been issued and significant civil support events have occurred that are not reflected in the department’s primary strategy. For example, the homeland defense and civil support strategy does not address U.S. Cyber Command’s role in domestic cyber incidents because the command was established in 2009, 4 years after the issuance of the strategy. Additionally, DOD’s homeland defense and civil support strategy does not incorporate the restructured Chemical, Biological, Radiological, and Nuclear Enterprise. DOD has issued some guidance on the dual-status commander construct; however, gaps remain concerning the use and availability of dual-status commanders. Dual-status commanders—military officers who serve as an intermediate link between the separate chains of command for state and federal forces—have authority over both National Guard forces under state control and active duty forces under federal control DOD has been using during a civil support incident or special event.dual-status commanders for select planned and special events since 2004. For example, DOD officials stated that dual-status commanders were appointed for the 2004 G-8 Summit in Atlanta, Georgia, the 2005 border security exercise Operation Winter Freeze along the U.S.- Canadian border, and the 2010 National Scout Jamboree at Fort A.P. Hill, Virginia. In addition to these planned events, DOD used the dual-status commander for the 2012 Colorado wildfire response. DOD has coordinated with stakeholders at the state and federal levels to issue guidance for the dual-status commander construct. For example, in 2010, DOD worked with DHS, the Federal Emergency Management Agency, and the Council of Governors to develop the Joint Action Plan for Developing Unity of Effort. The plan provides a framework for state and federal agencies to coordinate their response to domestic incidents and describes the general arrangement of the dual-status commander construct. Among other things, the plan discusses how dual-status commanders can respond to planned and unplanned events, and it identifies the need for specialized training and certification. In addition, according to DOD officials, from August 2011 to February 2012, DOD signed memoranda of agreement with 51 of 54 states and territoriesFurthermore, in February 2012, U.S. Northern Command issued a concept of operations which, among other things, establishes criteria for dual-status commander designation and training requirements. U.S. Northern Command has also worked with the National Guard Bureau to establish a curriculum that includes a sequenced schedule of classes for dual-status commander training and certification. . Nevertheless, gaps in guidance remain because DOD has not yet developed comprehensive policies and procedures regarding the use and availability of dual-status commanders. The National Defense Authorization Act for Fiscal Year 2012 states that the dual-status commander “should be the usual and customary command and control arrangement” when federal military forces and National Guard forces are employed simultaneously in support of civil authorities in the United States. However, DOD has not identified specific criteria and conditions for when the Secretary of Defense would agree with the governors of the affected states to appoint a dual-status commander. Some combatant command officials told us that the dual-status commander construct may not be appropriate for all scenarios and that other existing command and control arrangements can be used in responding to certain major disasters or emergencies. For example, U.S. Pacific Command officials stated that in 2011 when the tsunami warning resulting from the earthquake that struck Japan was issued in Hawaii, no dual-status commander was appointed; rather, U.S. Pacific Command coordinated its response in Hawaii directly with that state’s authorities. Additionally, gaps in guidance remain for the use of dual-status commanders for incidents affecting multiple states and territories, including complex catastrophes, because DOD has not yet developed policies and procedures for these scenarios. The Joint Action Plan cites the significant likelihood that DOD will be called on to support responses to major disasters and emergencies affecting multiple states and territories. The Joint Action Plan states that past multistate emergencies such as Hurricane Katrina demonstrate that a coordinated and expeditious state-federal response is crucial to saving and sustaining lives, and it indicates that DOD and the several states will address the use of the dual-status commanders for such scenarios. However, DOD’s concept of operations does not address how to use a dual-status commander in these scenarios. According to DOD, they are continuing to work with the Council of Governors to address the use of dual-status commanders in complex catastrophes affecting multiple states. GAO/AIMD-00-21.3.1. meeting, the council and federal officials agreed to a goal of at least 3 trained and certified dual-status commander candidates with at least one being a general officer for each of the 54 U.S. states and territories, thus providing primary and alternate dual-status commanders. As figure 4 shows, all 54 U.S. states and territories have at least one trained and certified dual-status commander, 70 percent (38 of 54) have two or more trained and certified commanders, and 13 percent (7 of 54) have three or more commanders. As of June 2012, all of the trained and certified dual- status commanders shown in Figure 3 were National Guard officers. According to Office of the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs and National Guard officials, maintaining a pipeline of trained and certified dual-status commanders drawn exclusively from the National Guard may be a challenge. The National Guard has a limited number of officers from which to select dual- status commanders, and these National Guard officers have other roles and responsibilities that may preclude them from being immediately available for an unplanned incident requiring a civil support response. For example, some individuals trained and certified to be dual-status commanders serve as airline pilots and may not be in the area when a dual-status commander is needed. During Hurricane Irene in 2011, the trained and certified dual-status commander from one of the affected states was at a training exercise and unavailable. While the National Defense Authorization Act for Fiscal Year 2012 made it clear that dual- status commanders could be appointed from among the National Guard or active duty federal officers, as of May 2012, no active duty dual-status commanders have been trained and certified thus far. Office of Secretary of Defense and military service officials told us that it may be helpful to have an active duty federal dual-status commander for incidents affecting multiple states, such as a complex catastrophe. They stated that an active duty federal dual-status commander might have greater flexibility moving between multiple states and territories affected by an incident and might offer a broader, national perspective consistent with the Secretary of Defense’s and the President’s priorities. Training and certifying active duty dual-status commanders would increase the number of dual-status commanders and increase the likelihood that a dual-status commander will be available to serve when needed. Without complete guidance on the use and availability of dual-status commanders, including when it is appropriate to deviate from the “usual and customary arrangement,” it remains unclear when a different command and control arrangement would be more appropriate to provide a unity of effort between state and federal forces in civil support events. Also, without guidance on a process to determine the appropriate mix of individuals trained and certified to be dual-status commanders from the National Guard and active duty federal officers for the 54 U.S. states and territories, DOD’s ability to adequately prepare for and effectively use dual-status commanders for a range of civil support events, including those affecting multiple states, may be hindered. DOD has issued some guidance on preparing for and responding to domestic cyber incidents. DOD relies on its broad civil support mission guidance, which is also used for incidents such as responding to hurricanes and forest fires, to prepare for and respond to domestic cyber incidents. DOD Directive 3025.18, Defense Support to Civil Authorities, issued in 2010, describes how the department generally responds to requests for civil support and includes a broad description of the department’s roles and responsibilities for civil support. DOD’s 2007 joint publication on civil support provides further details on the department’s civil support mission, including an operational framework of how DOD prepares and responds to requests for assistance, a decision matrix for evaluating requests, and a broad description of the department’s roles and responsibilities. In addition to the civil support directive and joint publication, in 2010 the Secretaries of Defense and Homeland Security signed a memorandum of agreement that outlines how the two agencies collaborate and coordinate cyberspace activities including those related to a domestic cyber incident.of Defense and DHS officials told us that the agreement has helped clarify the roles and responsibilities of the agencies. Although DOD has some civil support guidance and an agreement with DHS for preparing for and responding to domestic cyber incidents, these documents do not provide some aspects of how DOD will support a domestic cyber incident. First, DOD’s civil support mission guidance does not clearly define the department’s roles and responsibilities during a domestic cyber incident. According to GAO’s Standards for Internal Control in the Federal Government and prior GAO audit work, effective guidance should be current, complete, and establish roles and responsibilities necessary to achieve an organization’s missions and objectives. DOD’s 2010 Quadrennial Defense Review Report acknowledges that DOD needs more clearly defined roles and responsibilities for operating in cyberspace. While DOD’s guidance for its civil support mission broadly describes how the department can support other federal agencies during a civil support incident, DOD has not updated its civil support guidance to reflect current DOD cyber roles and responsibilities. For example, DOD’s joint publication on civil support was issued 2 years before U.S. Cyber Command was established in 2009. In addition, the chartering directives for the Offices of the Assistant Secretary of Defense for Global Strategic Affairs and the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs have assigned overlapping roles and responsibilities for preparing for and responding to domestic cyber incidents. Specifically, both DOD offices are responsible for coordinating and overseeing the department’s cyber policy. Additionally, DOD’s 2010 directive on civil support designates the Assistant Secretary of Homeland Defense and Americas’ Security Affairs as the appropriate lead for civil support missions in general to include domestic cyber incidents. However, DOD officials told us that the Assistant Secretary of Defense for Global Strategic Affairs was the appropriate department lead for domestic cyber incidents and that this office was created after DOD published its 2009 chartering directive for the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs. DOD officials said they plan to omit the overlap when they update the 2009 directive. DOD officials told us that current national-level exercises involving DOD, DHS, and other federal agencies should help DOD clarify its roles and responsibilities and subsequently update its guidance for domestic cyber incidents. Nonetheless, until DOD clearly defines roles and responsibilities, the department risks a delayed response while its officials determine which entities to involve in responding to potentially time critical domestic cyber incidents. Moreover, multiple DOD entities may be performing overlapping planning functions, since it is not clear which office has lead responsibility. Second, DOD has not taken adequate steps to ensure that its guidance aligns with national-level guidance and preparations for domestic cyber incidents. DOD has contributed to DHS national-level cyber response plans, including the National Cyber Incident Response Plan and the National Response Framework’s Cyber Annex. However, DOD has not updated its own civil support mission guidance to ensure that it is consistent with national plans and preparations for domestic cyber incidents. Without guidance that aligns with national level plans and preparations, DOD’s ability to support DHS during a domestic cyber incident could be hindered. In the absence of clear and current guidance on DOD’s critical and evolving homeland defense and civil support missions, DOD may continue to lack the ability to effectively plan and respond to incidents such as a domestic cyber attack or major disaster. While DOD has made some progress in issuing and updating relevant guidance to support its critical homeland defense and civil support missions, DOD still lacks the necessary framework for some of its most critical missions and a process to assess the currency of its strategy for these missions. Threats to the homeland and major disasters and emergencies, such as cyber attacks and earthquakes, frequently are unpredictable and occur with little or no notice. Maintaining up to date and comprehensive strategy and guidance will better position DOD to plan for and respond to myriad homeland defense threats and challenges. Without a strategy that accurately reflects the department’s current approach to homeland defense and civil support, such as the creation of U.S. Cyber Command, DOD officials lack essential information to prepare for these critical missions. Further, while DOD’s efforts to implement the dual-status commander construct could result in a more streamlined, comprehensive response to major disasters and emergencies, particularly those affecting multiple states and territories, until DOD clarifies how it plans to use dual-status commanders and develops a process for determining the appropriate mix of National Guard and active duty federal officers that it needs, the value of this construct will be diminished. Finally, without specific guidance on DOD’s response to domestic cyber incidents, including clearly defined roles and responsibilities, DOD may be unable to quickly and effectively support DHS during domestic cyber attacks. As a result, DHS’s ability to effectively respond to domestic cyber attacks and minimize their impact may be hindered. Enhancing DOD’s overall preparedness, including developing and maintaining current and complete guidance for its homeland defense and civil support missions, would contribute to a more efficient national response to major disasters and emergencies and a more cost-effective use of federal resources for these critical missions. The Secretary of Defense should direct the Under Secretary of Defense for Policy, acting through the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs, to develop a process to periodically assess the currency of its Strategy for Homeland Defense and Civil Support and to ensure that updates, when needed, are completed in a timely manner. The Secretary of Defense should direct the Under Secretary of Defense for Policy, acting through the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs and in collaboration with other appropriate stakeholders such as U.S. Northern Command, U.S. Pacific Command, and the National Guard Bureau, to develop implementation guidance on the dual-status commander construct that, at a minimum, includes: more specific criteria for determining when and how to use dual-status commanders, especially for civil support incidents affecting multiple states and territories and a process for determining the appropriate mix of National Guard and active duty federal officers to meet DOD’s anticipated needs. The Secretary of Defense should direct the Under Secretary of Defense for Policy to work with U.S. Strategic Command and its subordinate Cyber Command, DHS, and other relevant stakeholders to update guidance on preparing for and responding to domestic cyber incidents to align with national-level guidance. Such guidance should, at a minimum, include a description of DOD’s roles and responsibilities. We provided a draft of this report to DOD for review and comment. DOD concurred or partially concurred with all of our recommendations and stated that there are ongoing activities to address our recommendations. DOD’s comments are reprinted in their entirety in appendix II. In addition, DOD provided technical comments, which we have incorporated into the report as appropriate. DOD concurred with our recommendation that the Secretary of Defense direct the Under Secretary of Defense for Policy, through the Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs, to develop a process to periodically assess the currency of its Strategy for Homeland Defense and Civil Support and to ensure that updates, when needed, are completed in a timely manner. DOD stated that it recognizes the need to ensure that strategic guidance is clear and timely, and that going forward it will conduct an annual review to determine the currency of the homeland defense and civil support strategy. We believe that this review will better position DOD to plan for and respond to its critical homeland defense and civil support missions. DOD also concurred with our recommendation that the Secretary of Defense direct the Under Secretary of Defense for Policy, through the Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs and in collaboration with other appropriate stakeholders such as U.S. Northern Command, U.S. Pacific Command, and the National Guard Bureau, to develop implementation guidance on the dual- status commander construct. In its written response, DOD stated that the Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs has drafted a DOD instruction that, among other things, establishes specific criteria for determining how and when to use dual- status commanders, as well as whom to authorize as dual-status commanders. We believe this instruction, when it is issued, will fill existing gaps in guidance on the use and availability of dual-status commanders that should result in a more streamlined, comprehensive department response to major disasters and emergencies. DOD partially concurred with our recommendation that the Secretary of Defense direct the Under Secretary of Defense for Policy to work with U.S. Strategic Command and its subordinate Cyber Command, DHS, and other relevant stakeholders to update guidance on preparing for and responding to domestic cyber incidents to align with national-level guidance. In its written response, DOD agreed that some of its cyber guidance needs updating to ensure that the military services, combatant commands, and other DOD organizations are aware of their responsibilities relative to domestic cyber incidents. Although DOD acknowledged that there may be competing guidance within the chartering directives for the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs and the Assistant Secretary of Defense for Global Strategic Affairs, it stated that there is no confusion within the Office of the Secretary of Defense regarding who manages cyber policy. However, DOD did agree to further clarify cyber policy responsibilities when it next updates these two chartering directives. We believe that further clarification of DOD organizations’ roles and responsibilities in guidance will enhance the department’s ability to support DHS during significant domestic cyber incidents. We believe that DOD’s response meets the intent of our recommendation. We also provided a draft of this report to DHS for review and comment. DHS concurred with our recommendation that DOD coordinate with them to update guidance on preparing for and responding to a domestic cyber incident. DHS said it will coordinate with DOD as it updates its guidance. DHS’s comments are printed in their entirety in appendix III. As agreed with your offices, we plan no further distribution of this report until 1 day from the report date. At that time, we will distribute this report to the Secretary of Defense and other relevant DOD officials. We are also sending copies of this report to interested congressional committees. The report is also available on our Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4523 or at leporeb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in Appendix IV. To determine the extent to which the Department of Defense (DOD) has issued current and comprehensive guidance, we reviewed homeland defense and civil support doctrine, policy, and strategy and other relevant documentation, and met with officials from DOD and Department of Homeland Security (DHS) to discuss the currency of the department’s guidance and identify any potential gaps in the guidance that may exist. Specifically, we assessed national-level and DOD homeland defense and civil support guidance against emerging issues in our discussions with DOD, combatant command, and military service officials including the dual-status commander construct and domestic cyber. We also reviewed the assessments DOD received from the members of the joint doctrine community to determine which emerging issues prompted complete revisions of the joint publications on homeland defense and civil support and how these issues were addressed in other sources of guidance including directives, strategies, joint operating concepts, and national- level guidance. In addition, we reviewed recently issued GAO reports on homeland defense and civil support, and excluded potential gaps in guidance that were duplicative to those recently reported. Table 3 lists the offices we met with during this review. To determine potential gaps in DOD’s Strategy for Homeland Defense and Civil Support and the impact of any identified gaps, we compared the strategy against priorities articulated in current, overarching national- and department-level strategies and policies—including the National Response Framework, the National Security Strategy, the January 2012 Defense Strategic Guidance, and the Quadrennial Defense Review Report. We also met with DOD officials and assessed relevant documentation, such as the instructions on joint doctrine development and updating directives, to determine the extent that the department had established and utilized a process to maintain current guidance. We used our assessment and discussion with DOD officials to determine the impact these established processes had on DOD’s ability to maintain current doctrine and directives. Finally, we determined which key policy changes occurred since the strategy was released and the impact of not incorporating those changes in DOD’s Strategy for Homeland Defense and Civil Support. To assess gaps within the dual-status commander construct and domestic cyber, we identified best practices in prior GAO reports and high-level DOD guidance, and to determine the extent that DOD demonstrated these practices, we reviewed related documents, and we interviewed DOD and DHS officials. Specifically, we analyzed data provided by U.S. Northern Command, including the current number of individuals trained and certified as dual-status commanders and processes used to train and certify them. We used this data to determine how DOD was planning to use dual-status commanders and to what extent they determined the appropriate mix of active duty and National Guard dual-status commanders. We also assessed current guidance against information obtained in interviews with knowledgeable Joint Staff, Office of Secretary of Defense, combatant command, and military service officials to determine how DOD was planning to address identified gaps. To determine the currency and completeness of the department’s guidance for domestic cyber incidents, we reviewed relevant guidance and met with DOD and DHS officials to discuss gaps and the impact of gaps on civil support for cyber incident responses. We determined which offices in DOD had a role for domestic cyber, reviewed relevant DOD directives outlining those roles, and analyzed whether there was any overlap within those offices or additional clarification that was needed. We compared this assessment to discussions with knowledgeable DOD and DHS officials to determine how DOD was planning to address any identified gaps. We conducted this performance audit from November 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above Marc Schwartz, Assistant Director; Katherine Arnold; Tommy Baril; Jennifer Cheung; Susan Ditto; Gina Flacco; William Jenkins; Jennifer Neer; Michael Silver; Amie Steele; and Michael Willems made key contributions to this report. Homeland Defense: Continued Actions Needed to Improve Management of Air Sovereignty Alert Operations. GAO-12-311. Washington, D.C.: January 31, 2012. Homeland Defense and Weapons of Mass Destruction: Additional Steps Could Enhance the Effectiveness of the National Guard’s Life Saving Response Forces. GAO-12-114. Washington, D.C.: December 7, 2011. Homeland Defense: Actions Needed to Improve Planning and Coordination for Maritime Operations. GAO-11-661. Washington, D.C.: June 22, 2011. Intelligence, Surveillance, and Reconnaissance: DOD Needs a Strategic, Risk-Based Approach to Enhance Its Maritime Domain Awareness. GAO-11-621. Washington, D.C.: June 20, 2011. Homeland Defense: DOD Needs to Take Actions to Enhance Interagency Coordination for Its Homeland Defense and Civil Support Missions. GAO-10-364. Washington, D.C.: March 30, 2010. Homeland Defense: DOD Can Enhance Efforts to Identify Capabilities to Support Civil Authorities during Disasters. GAO-10-386. Washington, D.C.: March 30, 2010. Homeland Defense: Planning, Resourcing, and Training Issues Challenge DOD’s Response to Domestic Chemical, Biological, Radiological, Nuclear and High-Yield Explosive Incidents. GAO 10-123. Washington, D.C.: October 7, 2009. Homeland Defense: U.S. Northern Command Has a Strong Exercise Program, but Involvement of Interagency Partners and States Can Be Improved. GAO-09-849. Washington, D.C.: September 9, 2009. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369. Washington, D.C.: April 30, 2009. Emergency Management: Observations on DHS’s Preparedness for Catastrophic Disasters. GAO-08-868T. Washington, D.C.: June 11, 2008. National Response Framework: FEMA Needs Policies and Procedures to Better Integrate Non-Federal Stakeholders in the Revision Process. GAO-08-768. Washington, D.C.: June 11, 2008. Homeland Defense: Steps Have Been Taken to Improve U.S. Northern Command’s Coordination with States and the National Guards Bureau, but Gaps Remain. GAO-08-252. Washington, D.C.: April 16, 2008. Homeland Defense: U.S. Northern Command Has Made Progress but Needs to Address Force Allocation, Readiness Tracking Gaps, and Other Issues. GAO-08-251. Washington, D.C.: April 16, 2008. Continuity of Operations: Selected Agencies Tested Various Capabilities during 2006 Governmentwide Exercise. GAO-08-105. Washington, D.C.: November 19, 2007. Homeland Security: Preliminary Information on Federal Action to Address Challenges Faced by State and Local Information Fusion Centers. GAO-07-1241T. Washington, D.C.: September 27, 2007. Homeland Security: Observations on DHS and FEMA Efforts to Prepare for and Respond to Major and Catastrophic Disasters and Address Related Recommendations and Legislation. GAO-07-1142T. Washington, D.C.: July 31, 2007. Influenza Pandemic: DOD Combatant Commands’ Preparedness Efforts Could Benefit from More Clearly Defined Roles, Resources, and Risk Mitigation. GAO-07-696. Washington, D.C.: June 20, 2007. Homeland Security: Preparing for and Responding to Disasters. GAO-07-395T. Washington, D.C.: March 9, 2007. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-903. Washington, D.C.: September 6, 2006. Homeland Defense: National Guard Bureau Needs to Clarify Civil Support Teams’ Mission and Address Management Challenges. GAO-06-498. Washington, D.C.: May 31, 2006. Hurricane Katrina: Better Plans and Exercises Needed to Guide the Military’s Response to Catastrophic Natural Disasters. GAO-06-643. Washington, D.C.: May 15, 2006. Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006. Emergency Preparedness and Response: Some Issues and Challenges Associated with major Emergency Incidents. GAO-06-467T. Washington, D.C.: February 23, 2006. GAO’S Preliminary Observations Regarding Preparedness and Response to Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006. Homeland Security: DHS’ Efforts to Enhance First Responders’ All- Hazards Capabilities Continue to Evolve. GAO-05-652. Washington, D.C.: July 11, 2005. Homeland Security: Process for Reporting Lessons Learned from Seaport Exercises Needs Further Attention. GAO-05-170. Washington, D.C.: January 14, 2005. | Defending U.S. territory and citizens is the highest priority of DOD, and providing defense support of civil authorities is one of the department's primary missions. DOD is the federal agency with lead responsibility for homeland defense, whereas for civil support missions DOD provides assistance to the lead civilian federal agency, such as DHS, when requested by the agency or directed by the President for major disasters, emergencies, and special events. This report examines the extent to which DOD has issued current guidance, including doctrine, policy, and strategy, for its homeland defense and civil support missions. To do this, GAO analyzed DOD homeland defense and civil support guidance and plans and met with select DOD and National Guard officials. The Department of Defense (DOD) protects the U.S. homeland through two distinct but interrelated missions: (1) homeland defense, which defends against threats such as terrorism, weapons of mass destruction, and cyber incidents; and (2) civil support, which involves supporting other federal agencies in responding to major domestic disasters, emergencies, and special events. DOD has issued and updated several key pieces of doctrine, policy, and strategy for homeland defense and civil support, but it has not updated its primary Strategy for Homeland Defense and Civil Support since it was initially issued in 2005 and does not have a process--similar to that for its joint publications and directives-- to do so. The Joint Staff determined in August 2010 that joint publications on homeland defense needed a complete revision. The joint publication on civil support is also being revised. U.S. Northern Command, the combatant command responsible for homeland defense, is revising these publications to reflect changes in national and department priorities and to incorporate lessons learned from exercises and events such as Hurricane Katrina. Still, such key national and department-level strategies and significant events are not reflected in DOD's strategy, in part because the Office of the Assistant Secretary of Defense for Homeland Defense and Americas' Security Affairs does not have a process for periodically assessing the currency of its homeland defense and civil support strategy and ensuring that needed updates are completed in a timely manner. Reliance on an outdated strategy could hinder DOD's ability to effectively plan for and respond to major disasters and emergencies. DOD issued some guidance on the dual-status commander construct--through which, during a civil support incident or special event, a single military officer has authority over both National Guard and active-duty military personnel, serving as a link between state and federal forces. Nevertheless, gaps in guidance remain because DOD has not yet developed comprehensive policies and procedures regarding the use and availability of dual-status commanders, including specific criteria and conditions for when and how a state governor and the Secretary of Defense would mutually appoint a commander. As a result, DOD's ability to adequately prepare for and effectively use dual-status commanders for a range of civil support events, including those affecting multiple states, may be hindered. While a 2010 DOD Directive, a 2007 joint publication, and an agreement with the Department of Homeland Security (DHS) provide some details on how DOD should respond to requests for civil support in the event of a domestic cyber incident, they do not address some aspects of how DOD will provide support during a response. First, DOD has not clarified its roles and responsibilities, and chartering directives for DOD's Offices of the Assistant Secretaries for Global Strategic Affairs and for Homeland Defense and Americas' Security Affairs outline conflicting and overlapping roles and responsibilities. Second, DOD has not ensured that its civil support guidance is aligned with national plans and preparations for domestic cyber incidents. Consequently, it is unclear whether DOD will be adequately prepared to support DHS during a cyber incident. This report makes several recommendations to address gaps in DOD's guidance for homeland defense and civil support, including for DOD to assess and, when needed, update its primary strategy; develop implementation guidance on the dual status commander construct; and align guidance on preparing for and responding to domestic cyber incidents with national-level guidance to include roles and responsibilities. This report makes several recommendations to address gaps in DOD's guidance for homeland defense and civil support, including for DOD to assess and, when needed, update its primary strategy; develop implementation guidance on the dualstatus commander construct; and align guidance on preparing for and responding to domestic cyber incidents with national-level guidance to include roles and responsibilities. |
NBC-Denver is a service center operated by the Department of the Interior. NBC-Denver develops and operates administrative and financial systems (including payroll/personnel, administrative payments, accounts receivable, property management, and accounting) for the Department of the Interior as well as more than 30 other federal organizations, under cross-servicing agreements. During fiscal year 2000, NBC-Denver reported processing more than $9 billion in payroll payments for more than 200,000 employees from federal organizations, including the Department of Education, Social Security Administration, and Pension Benefit Guaranty Corporation. The center also provided accounting and financial reporting services to the department and other federal agencies. For fiscal year 2000, NBC-Denver reported processing more than 3 million nonpayroll financial transactions totaling more than $3 billion. At the time of our review, NBC was migrating several systems from its Reston, VA, service center to its Denver facility. NBC-Reston was responsible for operating the department’s standardized accounting system, which supports six Interior bureaus, seven other federal activities, and the department’s procurement system. As a result of this migration, completed in January 2001, NBC-Denver will be responsible for providing all centralized administrative and financial processing to department bureaus and offices. NBC-Reston will continue to be responsible for providing functional support for the department’s systems. NBC-Denver is operated by the Office of the Secretary. The center relies on a nationwide telecommunications network that links computer hardware at remote locations serving the Department of the Interior’s 14 bureaus and offices to the NBC-Denver mainframe computers. In addition, many of the other federal organizations that NBC-Denver supports have direct communications to link them with the center’s computers. At the time of our review, there were about 37,000 users with access to NBC-Denver systems. Our objective was to evaluate the design and test the effectiveness of information system general controls over the financial systems maintained and operated by the Department of Interior at its NBC-Denver data center. These information system general controls also affect the security and reliability of other sensitive data, including personnel information maintained on the same computer system as the department’s financial information. Specifically, we evaluated information system general controls intended to protect data and application programs from unauthorized access; prevent the introduction of unauthorized changes to application and provide segregation of duties involving application programming, system programming, computer operations, information security, and quality assurance; ensure recovery of computer processing operations in case of a disaster or other unexpected interruption; and ensure an adequate information security management program. To evaluate these controls, we identified and reviewed NBC-Denver policies and procedures, conducted tests and observations of controls in operation, and held discussions with NBC-Denver staff to determine whether information system general controls were in place, adequately designed, and operating effectively. In addition, we reviewed the Department of the Interior’s OIG reports on information system general controls performed in connection with the department’s annual financial statement audits for fiscal years 1996 through 1999. Our evaluation was based on (1) our Federal Information System Controls Audit Manual (FISCAM), which contains guidance for reviewing information system controls that affect the integrity, confidentiality, and availability of computerized data, and (2) our May 1998 report on security management best practices at leading organizations, which identifies key elements of an effective information security program. We did not perform a review of information system general controls at NBC-Reston because at the time of our review, the key systems maintained at this center were in the process of being migrated to NBC-Denver. We performed our work at NBC-Denver from October 2000 through February 2001. Our work was performed in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Department of the Interior. The department provided us with written comments, which are discussed in the “Agency Comments” section and reprinted in appendix I. In 1997 and again in 1998, Interior’s OIG, in connection with the department’s required annual financial statement audit, reported on computer security weaknesses at NBC-Denver. Among the specific weaknesses reported were those related to limiting access granted to authorized users, properly managing user IDs and passwords, adequately controlling changes to system and application software, and completely developing its business recovery plan. These weaknesses placed critical department operations, such as financial management, personnel, and other operations, at greater risk of misuse and disruption. NBC-Denver has made progress in correcting the weaknesses identified by the OIG and has taken other steps to improve security. Although NBC-Denver had addressed weaknesses found by the OIG, we identified additional control weaknesses in NBC’s information systems. Specifically, NBC-Denver had not adequately limited the access granted to all authorized users, controlled all aspects of the system software environment, or completely secured access to its network. The risks created by these access control weaknesses were heightened because the center had not established a comprehensive program for routinely monitoring access activity to identify and investigate unusual or suspicious access patterns that could indicate unauthorized access. Consequently, financial, payroll, and personnel programs and data maintained at NBC- Denver are at risk of inadvertent or deliberate misuse, fraudulent use, and unauthorized alteration or destruction, which may occur without detection. NBC-Denver had made progress in addressing computer security issues previously identified and reported on by Interior’s OIG in connection with the department’s 1997 and 1998 annual financial statement audits. For example, the center had limited access to certain sensitive access privileges to critical programs, software, and data; improved user ID and password management controls on its mainframe updated its service continuity plan and developed a business recovery performed a risk assessment of its major applications; established a computer security awareness program for its employees; developed and performed comprehensive tests of its computer security disaster recovery plans. In addition, during the past 3 years, NBC-Denver initiated other steps to improve computer security. These efforts included (1) review of system software; (2) improvements in physical security, including the addition of a guard service, installation of camera surveillance, and use of electronic access cards; (3) review of system user access; and (4) installation of intrusion detection software to monitor network access. A basic management control objective for any organization is to protect data supporting its critical operations from unauthorized access, which could lead to improper modifications, disclosure, or deletion. Organizations can protect this critical information by granting employees authority to read or modify only those programs and data that they need to perform their duties and by periodically reviewing access granted to ensure that it is appropriate. A key weakness in NBC-Denver’s controls was that the center had not sufficiently restricted user access. While NBC-Denver had restricted access to many users who previously had broad access to critical programs, software, and data, we found instances where the center had not sufficiently restricted access to only legitimate users, including those described below. About 400 users had access privileges to four sensitive system software libraries that are allowed to perform sensitive system functions that can be used to circumvent all security controls. Such access increased the risk that users could bypass security controls to alter or delete any computer data or programs on the system and should only be granted to system programmers. This risk was further heightened because the center had not established mitigating controls ,such as monitoring user access to these sensitive libraries. The acting assistant director of NBC- Denver acknowledged that many of these users did not require access. About 1,000 users were given broad access privileges to a system software resource that allows users to create and modify programs and read and copy any data set to which such users have been granted read access. Such access is generally used for program development and testing. About 500 of the users were using this resource to run a set of standard programs, a task that does not require this level of access. With broad access privileges, users with knowledge of the security system could create and modify computer programs and read and copy sensitive data. Seventeen system maintenance staff had access that allowed them to alter or update system software resources used to control the storage of system and data files. This control function is an automated process that does not require users to have this type of access. With this access, users could move sensitive files to unprotected areas and modify or delete financial or sensitive data or disrupt computer operations. About 80 application developers, both programmers and functional specialists, had update access to payroll and personnel data. An essential control for ensuring the integrity of a computer application is to prevent software developers from having access to application programs and data in the production environment. Developers with detailed knowledge of the system’s processing functions could improperly add, alter, or delete payroll and personnel data and programs without leaving evidence that the system had been compromised. One reason for NBC-Denver’s user access vulnerabilities was that access authority was not being reviewed on a periodic basis. Such reviews would have allowed the center to identify and correct inappropriate access. In February 2001, the acting assistant director of NBC-Denver told us that the center was reviewing staff access and would limit staff access to the level required to carry out job responsibilities. Further, he said that the center would develop and implement procedures by October 2001 to periodically review access lists to ensure that access remains appropriate. To protect the overall integrity and reliability of information systems, it is essential to control access to and modifications of system software. System software controls, which limit and monitor access to the powerful programs and sensitive files associated with computer operations, are important in providing reasonable assurance that access controls are not compromised and that the system will not be impaired. To protect system software, a standard computer control practice is to (1) configure system software to protect against security vulnerabilities, (2) periodically review programs in sensitive software libraries to identify potential security weaknesses, and (3) ensure that only authorized and fully tested system software is placed in operation. While NBC-Denver had performed reviews of its system software environment and corrected those security weaknesses identified, we identified other areas where the center was not adequately controlling system software. These system software control weaknesses could diminish the reliability of financial and other sensitive information maintained on this computer system. We found the following weaknesses: A weakness in the system software configuration could allow knowledgeable users with access privileges that permit them to execute programs to bypass access controls and gain unauthorized access to sensitive financial and personnel information. In this case, the operating system was set up so that programs in any of 34 libraries included in the normal search sequence could perform sensitive system functions and operate outside security software controls. This increases the risk that if unauthorized programs are introduced users could bypass other access controls and improperly access or modify financial, audit trail, or other sensitive information maintained on the computer system. About 8,200 programs in sensitive software libraries, which have the authority to perform sensitive functions that can circumvent security controls, did not have unique program names. While multiple versions of the same software are maintained by NBC-Denver to satisfy customer requirements, an undetermined number of programs do not have unique program names. Allowing more than one program in these libraries to have the same name could lead to inadvertent or deliberate execution of an unauthorized program that could compromise security controls. NBC-Denver had not established a process to periodically review programs in sensitive libraries for security weaknesses, such as programs with duplicate names. Until NBC-Denver begins to actively review programs in sensitive libraries, it will not have adequate assurance that other security controls cannot be bypassed. Although NBC-Denver had a process for making changes to system software, it had not established written procedures or guidance for system software changes and had not developed guidance for testing changes or documenting test results. An essential control in the system software change process is that written procedures are established that set forth requirements for requesting, authorizing, and approving these changes. These procedures should include requirements for testing, performing a technical review, and obtaining approval for each system software change before implementation. During fiscal year 2000, NBC- Denver made more than 200 system software changes. Our review of a random sample of 20 changes for this period found that changes did not include documentation for (1) tests on 13 changes, (2) technical reviews of 16 changes, or (3) supervisory approvals on 16 software changes. Consequently, NBC-Denver faces increased risks of unintended operational problems caused by programming errors or the deliberate execution of unauthorized programs. In February 2001, the acting assistant director of NBC-Denver told us that the center would implement additional policies and procedures, by October 2001, to (1) review system configuration settings periodically for security vulnerabilities, (2) evaluate programs in sensitive system libraries to identify and correct security exposures, and (3) document that system software changes are tested, technically reviewed, and approved before implementation. Network security controls are key to ensuring that only authorized individuals can gain access to sensitive and critical agency data. These controls include a variety of tools, such as user IDs and passwords, which are intended to authenticate authorized users who access the network from local and remote agency locations and through dial-in facilities. In addition, network controls provide for safeguards to ensure that the system software is adequately configured to prevent users from bypassing network access controls or causing network failures. The risks introduced by the weaknesses that we identified in access and system software controls were compounded by network security weaknesses: NBC-Denver was not adequately protecting access to its network or restricting access to the system that processes financial and other sensitive information. Specifically, the center had not adequately managed user IDs and passwords, controlled dial-in access, or adequately configured all its network servers. Thus, sensitive financial information processed on the network is at increased risk that unauthorized modification or disclosure could occur without detection. Because of NBC’s interconnected environment, these network control weaknesses also increase the risk of unauthorized access to financial and other sensitive information (such as payroll, personnel, and financial management information) maintained on the NBC-Denver mainframe computer. For example, The network had user ID and password management weaknesses that an intruder could exploit to gain unauthorized access to the NBC- Denver network. For example, on one network server, we identified easily guessed passwords and passwords that had not been used since 1998. On another network, network commands available to all users allowed access to a listing that included password information. An ID and password used for dial-in access to the centralized modem pool was easily guessed. We were able to guess a user ID and password that provided an access path into the network. With this access we were able to browse the internal network and collect information about the network, which could be used to identify and exploit network vulnerabilities. The lack of adequate dial-in access controls increases the risk that a hacker could obtain access to the network, from which an attack could be launched on the mainframe to gain access to critical financial and sensitive department information. NBC-Denver staff corrected this network vulnerability before we completed our fieldwork. The network had system software configuration weaknesses that could allow users to bypass access controls and gain unauthorized access to NBC-Denver networks or cause network system failures. For instance, certain network systems configuration settings allowed unauthorized users to connect to the network without entering a valid user ID and password combination. This could allow unauthorized individuals to obtain access to system information describing the network environment, including user IDs and password information. These network security weaknesses increased the risk that someone could gain unauthorized access to information on the network and that intruders or authorized users with malicious intent could exploit the network weaknesses to misuse, improperly disclose, or destroy financial and other sensitive information. In February 2001, the acting assistant director of NBC-Denver told us that all accounts that had not been used within the prior 90 days had been deleted. Also, the acting assistant director told us that all test accounts and other easily guessed passwords had been removed. In addition, he stated that network system software configurations were reviewed and changes made to limit security vulnerabilities. Further, he informed us that policies and procedures had been developed and implemented to periodically review network password settings, accounts, and network system software configurations. The risks created by the access control problems described above were heightened because NBC-Denver had not yet established a comprehensive program to monitor user access. Such a program would include routinely reviewing user access activity to identify and investigate failed attempts to access sensitive data and resources, as well as unusual and suspicious patterns of successful access to sensitive data and resources. Such a program is critical to ensuring that improper access to sensitive information is detected. The most effective monitoring efforts are those that selectively target unauthorized, unusual, and suspicious patterns of access to sensitive data and resources, such as security software, system software, application programs, and production data. While the center had begun to review failed attempts to access sensitive system resources (e.g., security software and sensitive system software), it had not established a program to monitor successful access to production resources, including application programs and data. Thus, there is an increased risk that application developers with access to production programs and data could add, alter, or delete payroll and personnel information (for example) without being detected, since these types of user activities were not being monitored. In addition, although NBC-Denver was reviewing access to certain system software, its process did not include logging all critical activities, such as access violations to or modifications made to all sensitive system libraries. While NBC-Denver had installed an intrusion detection system to monitor access to its network, it had not established procedures for managing this system. For example, it had not established procedures for (1) determining where on its network it will monitor access, (2) protecting intrusion data from tampering, and (3) classifying, storing, analyzing, and using intrusion data to identify agency network vulnerability patterns. Further, it had not established procedures for following up and reporting on system anomalies or computer misuse after initial alarms are triggered. Without procedures for addressing these types of activities, NBC-Denver reduces its ability to establish and maintain an effective intrusion detection program, which reduces the risk of unauthorized access of computer resources. In February 2001, the acting assistant director of NBC-Denver told us that by January 2002, the center would expand its user access monitoring program to include all sensitive system libraries and critical application production programs and data. Further, he stated that the center planned to develop and implement procedures for managing its intrusion detection program and reporting the results of unusual or suspicious access activities. In addition to the information system access controls discussed above, other important controls should be in place to ensure the integrity and reliability of an organization’s data. These information system controls include policies, procedures, and control techniques to physically protect computer resources and restrict access to sensitive information, provide appropriate segregation of duties of computer personnel, prevent unauthorized changes to application programs, and ensure the continuation of computer processing operations. We found weaknesses in each of these areas. 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 where they are housed and periodically reviewing access granted to ensure that it continues to be appropriate. At NBC-Denver, physical access control measures (such as locks, guards, badges, and alarms, used alone or in combination) are vital to safeguarding critical financial and sensitive personnel information and computer operations from internal and external threats. Although NBC-Denver policy requires a photo access card to gain access, via electronically controlled doors, to the building that contains the computer center, we observed on different occasions that several people entered the building by merely following one person with an authorized access card. While guards were posted at the entrance to the building, we observed that they were not checking each person entering the building for an appropriate NBC-Denver photo access card. Thus, individuals who did not have NBC-Denver photo access cards could pass unchallenged through the main entry doors and gain unauthorized access to the facility, increasing the risk that intruders with malicious intent might obtain access to sensitive computer resources or disrupt operations. Further, we identified 40 employees and contractors, including mail room, facility support, computer support, tape librarian, local-area network (LAN) support, and personnel/payroll staff, who had access to the electrical room. This room contains fiber optic boxes that could be used by a knowledgeable person to establish an unauthorized internal connection to the center’s computer system. While it is appropriate for facility and computer support staff to have access to the electrical room, care should be taken to limit access to only those staff who need access to perform their job responsibilities. NBC-Denver had not established policies and procedures for granting access to the electrical room. We also determined that the center had not restricted physical access to a console in the tape library with master console authority, which could be used to issue sensitive operator commands. Although at the time of our review this console had only recently been moved to its temporary location, the area was unprotected and provided an opportunity for unauthorized individuals entering the building to use the console to issue commands that could disable security access checking or cause the system to fail. Allowing unrestricted access to this console increased the risk of unauthorized access to NBC-Denver systems and disruption of services. In February 2001, the acting assistant director of NBC-Denver told us that a policy would be developed and implemented to ensure that photo identification access cards would be checked on all individuals entering the facility that houses the main computer. In addition, the acting assistant director told us that a policy for granting and periodically reviewing access to the electrical room would be developed. Further, the acting assistant director told us that the master console command capabilities were removed from the operator console in the tape library in December 2000. Another fundamental technique for safeguarding programs and data is to segregate the duties and responsibilities of computer personnel so as to reduce the risk that errors or fraud will occur and go undetected. Incompatible duties that should be separated include application and system programming, production control, database administration, computer operations, and data security. Once policies and job descriptions supporting the principles of segregation of duties have been developed, it is important to ensure that adequate supervision is provided and adequate access controls are in place to ensure that employees perform only compatible functions. Although computer duties were generally properly segregated at NBC- Denver, we identified instances where controls did not enforce segregation of duties principles. For example, two application support staff had access privileges that allowed them to modify financial production programs and data as well as security-related information. These staff were assigned responsibility for performing certain functions related to security administration and production program maintenance. Under normal circumstances, staff with security responsibilities should report to the security administrator and have no programming duties. However, because these individuals had both program and security administration access privileges, they had the ability to change programs and data and eliminate any evidence of their activity in the system. Compounding this risk, NBC- Denver was not monitoring the system activities of these individuals. Allowing staff the capability to modify financial programs and security information without compensating controls increases the risk of unauthorized modification of critical financial data. In addition, NBC-Denver did not provide supervisory oversight to its computer operators on selected weekend shifts, nor was it routinely reviewing the console activity logs for these shifts to ensure that only authorized operational activities were being conducted. Controls over personnel activities require active supervision and review of these activities. To aid in this oversight, all computer operator activities on the computer system should be recorded on an automated history log; this log should be reviewed routinely by supervisory staff and any abnormalities investigated. Because these controls were not implemented, NBC-Denver increased its risk that unauthorized activities could occur on these shifts without detection. In February 2001, the acting assistant director of NBC-Denver told us that the two application staff would be given access to a second user ID so that they could perform certain needed operational functions on an ad hoc basis. This ID will be tightly controlled, requiring management approval for its use and audit recording and review of all access activities. Further, the acting assistant director told us that lead operators were being added to those shifts where only one operator was assigned. The lead operator would also be responsible for reviewing all changes made at the system console. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are needed, 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. In addition, as part of the application change control process, library management software should be used to control program versions, and test procedures should be established to ensure that only authorized changes are made to program code. Changes to application programs at NBC-Denver were not adequately documented or controlled. Described below are several examples of application change control weaknesses. Although a change control board at NBC-Denver was responsible for authorizing all application changes, the authorizations for these changes were not formally documented. For example, in a random sample of 20 application changes made during fiscal year 2000, none of the changes had formal documentation to show that the software modifications had been authorized by the change control board. Documentation was not always maintained to provide evidence of the specific program modifications made or their approval. Specifically, the change control documentation for 13 of the 20 changes that we reviewed did not include a description of the specific modifications made to the program code or evidence of supervisory approval. NBC-Denver did not use automated library management software to ensure that program versions were not accidentally misidentified and to avoid simultaneous changes to the same program. Procedures were not in place to periodically test program code to ensure that only authorized changes had been made. Without a clearly defined and implemented application change control process, changes may be implemented that are not authorized, tested, documented, or approved. Further, NBC-Denver is at greater risk that software supporting its operations will not produce reliable data or effectively meet operational needs. In February 2001, the acting assistant director of NBC-Denver told us that a form would be developed and attached to each modification request to (1) document authorization for program changes, (2) record a description of the change made, (3) identify program modules modified, and (4) provide for the signature of the reviewing official. Also, he stated that NBC-Denver would perform program code reviews to ensure that only authorized program changes are made. An organization must take steps to ensure that it is adequately prepared to cope with a loss of operational capability due to earthquakes, fires, accidents, sabotage, or any other disruption. An essential element in preparing for such catastrophes is an up-to-date, detailed, and fully tested disaster recovery plan that covers all key computer operations and includes plans for business recovery. Such a plan is critical for helping to ensure that information system operations and data, such as financial processing and related records, can be promptly restored in the event of a disaster. To ensure that it is complete and fully understood by all key staff, the disaster recovery plan should be tested annually and the test plans and results documented to provide a basis for improvement. In addition, critical computer data and programs should be stored off site and periodically inventoried. While NBC-Denver had conducted comprehensive tests of its computer center disaster recovery plan, improvements are still needed in some areas of its overall plan, including the business recovery plan. Described below are examples of service continuity weaknesses identified at NBC-Denver. NBC-Denver had not conducted unannounced tests or walk-throughs of its disaster recovery plan. Instead, all tests had been planned with participants fully aware of the disaster recovery test scenario. In an actual disaster, there is usually little or no warning. Critical backup files for financial and sensitive agency personnel programs, data, and software stored off site were not inventoried. As a result, if a disaster befell the center’s main computer facility, there are no assurances that all critical and sensitive system resources would be available to fully restore all key systems. NBC-Denver had not tested its business recovery plan annually as required by the center’s plan. The plan has not been tested since October 1999. Conducting tests of the plan serves to reinforce staff roles and responsibilities in a disaster and in the process provides greater assurance that business operations will be restored if a disaster occurs. In February 2001, the acting assistant director of NBC-Denver told us that the center will begin performing periodic walk-throughs of its various disaster recovery plans by October 1, 2001. Also, policy and procedures will be developed that will require a semiannual inventory of programs, data, and software files stored off site. Further, he stated that center staff will ensure that the NBC-Denver business recovery plan is tested at least annually, as required by the existing NBC-Denver procedures. A key reason for NBC-Denver’s weaknesses in information system controls was that it had not yet fully developed and implemented a comprehensive entitywide security management program to ensure that effective controls were established and maintained and that computer security received adequate attention. Our May 1998 study of security management best practices found that a comprehensive computer security management program is essential to ensure that information system controls work effectively on a continuing basis. An effective computer security management program would include establishing a central security management staff that provides guidance and oversight for the computer security management program, performing periodic risk assessments, establishing appropriate policies and procedures, raising security awareness, and evaluating the effectiveness of established controls. NBC-Denver had taken action related to each of the key elements described above, including the implementation of a comprehensive security awareness program both for employees and contractors. However, aside from security awareness, the steps taken to address the other key elements of a comprehensive security management program were not sufficient to ensure the continuing success of the program. The first key element of effective computer security management is the establishment of a central security group. This function serves to provide overall security policy and guidance for the organization. In addition, it provides the oversight to ensure compliance with established policies and procedures and reviews the effectiveness of the security environment. NBC-Denver had not established a central computer security management staff. Instead, NBC-Denver relied on the IT security manager and certain staff assigned to the network, facilities, and application functions to perform security tasks. Although these staff had general department guidance on information security, NBC-Denver had not developed specific policies and procedures that clearly defined the security roles and responsibilities of these staff and the reporting lines between the security functions. In addition, there were no specific procedures requiring these staff to coordinate on security-related issues, such as policy development and implementation, risk assessment, monitoring compliance with established policies and procedures, and reviewing the effectiveness of controls. A second key aspect of computer security management is periodically assessing risk. Regular risk assessments assist management in making decisions on necessary controls by helping to ensure that security resources are effectively distributed to minimize potential loss. Also, by increasing the awareness of risks, these assessments generate support for the adopted policies and controls, which helps ensure that the policies and controls operate as intended. Although Department of the Interior policy requires that risk assessments be performed whenever significant changes are made to a facility or its computer systems, but at least every 5 years, NBC-Denver had not developed a framework for assessing and managing risk when significant changes occurred. During the past year, the center upgraded its mainframe operating system and added servers to its network. Each of these events was a significant change that warranted a separate risk assessment. However, while NBC-Denver had performed risk assessments for part of the key applications, it had not performed a risk assessment when these significant changes occurred. A third key element of effective security management is having established policies and procedures governing a complete computer security program. Such policies and procedures should integrate all security aspects of an organization’s interconnected environment, including local area network, wide area network, and mainframe security. The integration of network and mainframe security is particularly important as computer systems become more and more interconnected. NBC-Denver had not yet established comprehensive policies and procedures to govern a complete computer security program. While the center had made progress in developing policies and procedures for specific security areas, including remote dial-in access, the network firewall, incident response capability, and user ID and password management, it had not developed an overall policy on computer security. This policy would address security requirements for physical and logical access control, segregation of duties, application change control, service continuity, and security management covering both network and mainframe environments. In addition, NBC-Denver had not developed technical standards for implementing security software and maintaining operating system integrity on either its mainframe or network systems. Such standards would not only help ensure that appropriate computer controls are established consistently, but would also facilitate periodic reviews of these controls. A fourth key area of security program management is promoting security awareness. Computer attacks and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees who use computer systems in their day-to- day operations be aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality and integrity. In accepting responsibility for security, employees should, for example, devise effective passwords, change them frequently, and protect them from disclosure. In addition, employees should help maintain physical security over their assigned areas. NBC-Denver had established a security awareness program for all its employees and contractors. Specifically, NBC-Denver developed a computer-based security awareness program that all of its employees and contractor staff are required to complete annually. Further, NBC-Denver had established procedures to monitor compliance with this requirement. A final key area of an overall computer security management program is an ongoing security oversight program. Such a program includes processes for (1) monitoring compliance with established information system control policies and procedures, (2) testing the effectiveness of information system controls, and (3) improving information system controls based on the results of these activities. NBC-Denver had not established a program to routinely monitor and evaluate the effectiveness of information system controls. Such a program would allow NBC-Denver to ensure that policies remain appropriate and that controls accomplish their intended purpose. Weaknesses discussed in this report could have been identified and corrected if the center had been monitoring compliance with established procedures. For example, if NBC-Denver had periodically reviewed user access authority to ensure that it was limited to the minimum required access level based on job requirements, the center would have been able to discover and limit the access of application development staff to sensitive system resources. Likewise, routinely evaluating the technical implementation of its system software would have permitted the center to eliminate or mitigate the additional system software exposures discussed in this report. A program to regularly test information system controls would also have allowed NBC-Denver to detect additional network security weaknesses. For example, using network analysis software designed to detect network vulnerabilities, we identified user accounts and services that could provide hackers with information to exploit the network and launch an attack on NBC-Denver systems. Although NBC-Denver fixed this problem before our fieldwork was completed, center staff could have identified and corrected this exposure using similar network analysis software available to them. In February 2001, the acting assistant director of NBC-Denver told us that a security oversight team would be established to coordinate overall security at the center. In conjunction with this effort, he said that policies and procedures would be developed and implemented that define the roles and responsibilities of all NBC-Denver functions involved in security management. These policies and procedures will include requirements for coordinating security activities among the designated security functions. He added that NBC-Denver will develop a framework for risk assessments, including a policy and procedures for performing risk assessments for the physical facility, application, and computer center environments. In addition, the acting assistant director told us that his staff was currently developing a comprehensive site security policy that will include technical standards for each operating computer platform. He also said that the center will develop a security oversight program to monitor compliance with established information system control policies and procedures, test the effectiveness of information system controls, and improve information system controls based on the results of these activities. These computer security management elements are to be implemented no later than October 2001, according to the acting assistant director. Information system general controls are critical to NBC-Denver’s ability to ensure the reliability of Interior’s financial management information and maintain the confidentiality of sensitive personnel and other department information. While NBC-Denver has made progress in correcting the computer security weaknesses that Interior’s OIG identified and has taken other steps to improve security, additional weaknesses were identified in NBC-Denver’s information system control environment. Specifically, NBC- Denver had not adequately limited users access, controlled system software, secured network access, or established a program to comprehensively monitor access. Also, NBC-Denver was not providing adequate physical security, segregating computer functions, controlling changes to application programs, or ensuring that all aspects of its service continuity needs were addressed. These weaknesses placed sensitive NBC- Denver financial and personnel information at risk of disclosure, critical financial operations at risk of disruption, and assets at risk of loss. These weaknesses could also affect other agencies that depend on NBC-Denver’s computer processing services. A primary reason for NBC-Denver’s information system control weaknesses was that it had not yet fully developed and implemented a comprehensive computer security planning and management program. A comprehensive program for computer security management is essential for achieving an effective information system general control environment. Effective implementation of such a program provides for periodically assessing risks, implementing effective controls for restricting access based on job requirements and actively reviewing access activities, communicating the established policies and controls to those who are responsible for their implementation, and perhaps most important, evaluating the effectiveness of policies and controls to ensure that they remain appropriate and accomplish their intended purpose. The acting assistant director of NBC-Denver stated that he has recognized the seriousness of the weaknesses we identified and at the completion of our fieldwork provided us with a comprehensive corrective action plan to address each of them. To establish an effective information system general control environment, we recommend that you instruct the Director of the National Business Center and the acting assistant director of NBC-Denver, in coordination with the Interior Chief Information Officer (CIO), to ensure that the following actions are completed. NBC-Denver corrects the information system control weaknesses related to access authority, system software, network security, access monitoring, physical access, segregation of duties, program changes, and service continuity. These specific weaknesses are described in a separate report designated for “Limited Official Use,” also issued today. NBC-Denver develops and implements an effective computer security management program. Such a program would include (1) establishing a central security group to manage a cycle of security management activities, (2) assessing risk to determine computer security needs, (3) developing and implementing policies and controls that meet these needs, and (4) instituting an ongoing program of tests and evaluations to ensure that policies and controls are appropriate and effective. In addition, we recommend that you instruct the Interior CIO, as the department’s key official responsible for computer security, to report periodically to you, or your designee, on progress in implementing Interior’s corrective action plans. In commenting on a draft of this report, the Acting Assistant Secretary for Policy, Management, and Budget agreed with our recommendations. He reported that to date, approximately 50 percent of the recommendations made had been implemented, and that action on all of them would be completed by December 31, 2001. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform not later than 60 days after the date of this report. A written statement also must be sent to the House and Senate Committees on Appropriations with agency’s first request for appropriations made more than 60 days after the date of this report. We are sending copies of this report to Senator Conrad Burns, Senator Robert C. Byrd, Senator Joseph Lieberman, Senator Ted Stevens, Senator Fred Thompson, Representative Dan Burton, Representative Norman Dicks, Representative Joe Skeen, and Representative Henry A. Waxman in their capacities as Chairmen or Ranking Minority Members of the Senate and House Committees. We will also send copies to Mitchell E. Daniels, Jr., Director, Office of Management and Budget; Robert J. Lamb, Acting Assistant Secretary for Policy, Management and Budget, Department of the Interior; Daryl W. White, Chief Information Officer, Department of the Interior; Timothy G. Vigotsky, Director of the National Business Center; and Earl E. Devaney, Inspector General of the Department of the Interior. Copies will also be made available to others upon request and will be available on our home page at http://www.gao.gov. If you have any questions or wish to discuss this report, please contact me at (202) 512-3317 or Dave Irvin at (214) 777-5716. We can also be reached at daceyr@gao.gov and irvind@gao.gov. Key contributors to this report are listed in appendix II. In addition to the person named above, Edward Alexander, Lon Chin, Debra Conner, Denise Fitzpatrick, Edward Glagola, David Hayes, Sharon Kittrell, Jeffrey Knott, West Coile, Harold Lewis, Suzanne Lightman, Duc Ngo, Tracy Pierson, Norman Poage, and Charles Vrabel made key contributions to this report. 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Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system) | This report reviews information system general controls over the financial systems maintained by the Department of the Interior at its National Business Center (NBC) in Denver, Colorado. GAO found that although the Denver center has made progress in correcting previously cited computer security weaknesses, additional weaknesses affect the Denver center's information system control environment. These weaknesses affect the center's ability to prevent and detect unauthorized changes to financial information, control electronic access to sensitive personnel information, and restrict physical access to sensitive computing areas. The Denver center did not adequately limit access granted to authorized users, control all aspects of the system software controls, or secure access to its network. Also, the Denver center had not fully established a comprehensive program to routinely monitor access to its computer facilities and data and to identify and investigate unusual or suspicious access patterns that could indicate unauthorized access. The primary reason for these weaknesses was that the Denver center had not yet fully developed and implemented a comprehensive entitywide program to manage computer security. |
The HUBZone Act of 1997 (which established the HUBZone program) identified HUBZones as (1) qualified census tracts, which are determined generally by area poverty rate or household income; (2) qualified nonmetropolitan counties, which are determined generally by area unemployment rate or median household income; and (3) lands meeting certain criteria within the boundaries of an Indian reservation. Congress subsequently expanded the criteria for HUBZones to add former military bases and counties in difficult development areas outside the continental United States. The number of HUBZones increased from about 8,000 in 2000 to more than 14,000 in 2006. SBA generally updates HUBZone designations at least twice a year based on whether they meet statutory criteria (such as having certain income levels or poverty or unemployment rates). SBA generally uses data from other federal agencies to determine if areas still qualify for the HUBZone program. As a result of the updates, additional areas are designated for inclusion while other areas lose their designation. Census tracts and nonmetropolitan counties that lose their designation begin a 3- year “redesignation” period during which firms in those areas can continue to apply to and participate in the program and receive contracting preferences. For instance, about 3,400 HUBZones redesignated in 2012 lost their designations in 2015. Another approximately 2,500 census tracts and nonmetropolitan counties are scheduled to lose their designation by January 2020. After the 3 years, firms in these areas lose their certified status and the associated federal contracting award preferences. To be certified to participate in the HUBZone program, a firm must meet the following criteria: when combined with its affiliates, be small by SBA size standards; be at least 51 percent owned and controlled by U.S. citizens; have its principal office—the location where the greatest number of employees perform their work—in a HUBZone; and have at least 35 percent of its employees reside in a HUBZone. SBA recertifies firms (that is, determines that firms continue to meet HUBZone eligibility requirements to participate in the program) every 3 years. Since 2008, GAO has reported on weaknesses in the HUBZone program and SBA’s efforts to address those vulnerabilities. GAO made 11 recommendations intended to address identified problems associated with the program’s certification and recertification processes, communication with firms, and the program’s susceptibility to fraud and abuse (see app. I for a summary and status of our recommendations). The following sections discuss the weaknesses we previously identified and the program revisions and improvements SBA subsequently implemented in response to our recommendations. We reported in June 2008 that, for its certification process, SBA relied on data that firms entered in the online application system and performed limited verification of the self-reported information. Although agency staff had the discretion to request additional supporting documentation, SBA did not have specific guidance or criteria for such requests. Consequently we recommended that SBA develop and implement guidance to more routinely and consistently obtain supporting documentation upon application. In response to that recommendation, SBA revised its certification process, and since 2009 has required firms to provide documentation, which SBA officials review to determine the firms’ eligibility for the HUBZone program. SBA then performs a full-document review on all applications as part of its initial certification process to determine firms’ eligibility for the program. However, we also found in 2015 that the revised process SBA implemented resulted in delays in processing applications—81 percent of the 4,809 initial applications submitted between fiscal year 2009 and 2013 that we reviewed exceeded SBA’s processing goal of 90 days. Additional recommendations from our June 2008 report are discussed below. We previously found that SBA’s challenges with its certification process made the HUBZone program vulnerable to fraud and abuse. For example, in July 2008 we testified that 10 HUBZone firms in the Washington, D.C., area had made fraudulent or inaccurate representations to get into or remain in the HUBZone program, and in a March 2009 report we found that another 19 firms in four other metropolitan areas had made fraudulent representations. We also reported in June 2010 that although SBA had increased documentation requirements for the application process, SBA still was not adequately authenticating self-reported information. We demonstrated this by obtaining HUBZone certification for three bogus firms using the addresses of the Alamo in Texas, a public storage facility in Florida, and a city hall in Texas as principal office locations. When we revisited this issue in 2015, SBA officials told us that the agency conducted site visits on 10 percent of its portfolio of certified firms annually to help address these vulnerabilities. SBA selects the firms to receive site visits based on established criteria (such as the amount of HUBZone contract awards the firm has received) or on an as-needed basis in connection with the review of an initial certification application or after receipt of a protest. In 2008 and 2015, we identified a number of concerns with SBA’s HUBZone recertification process. Generally, SBA relied on self-reported information to make its recertification decisions and had a backlog of firms waiting to be recertified. As a result, SBA lacked reasonable assurance that only qualified firms were allowed to continue in the program and receive preferential contracting treatment. In February 2015, we reported that SBA relied on firms’ attestations of continued eligibility and generally did not request supporting documentation as part of the recertification process. SBA only required firms to submit a notarized recertification form stating that their eligibility information was accurate. SBA officials did not believe they needed to request supporting documentation from recertifying firms because all firms in the program had undergone a full document review, either at initial application or during SBA’s review of its legacy portfolio in fiscal years 2010–2012. However, as we found, the characteristics of firms and the status of HUBZone areas—the bases for program eligibility— often can change and need to be monitored. As a result, we concluded that SBA lacked reasonable assurance that only qualified firms were allowed to continue in the HUBZone program and receive preferential contracting treatment. We recommended that SBA reassess the recertification process and implement additional controls, such as developing criteria and guidance on using a risk-based approach to requesting and verifying firm information. In March 2016, we found that SBA had not yet implemented additional controls (such as guidance for when to request supporting documents) for the recertification process because SBA officials believed that any potential risk of fraud would be mitigated by site visits to firms. The officials also cited resource limitations. Based on data that SBA provided, the agency visited about 10 percent of certified firms each year during fiscal years 2013–2015. SBA’s reliance on site visits alone would not mitigate the recertification weaknesses that were the basis for our recommendation. In recognition of SBA’s resource constraints, we stated in our 2015 report and reiterated in 2016 that SBA could apply a risk- based approach to its recertification process to review and verify information from firms that appear to pose the most risk to the program. We concluded that a lack of risk-based criteria and guidance for staff to request and verify firm information during the recertification process increased the risk that ineligible firms could obtain HUBZone contracts. We also reiterated that the characteristics of firms and the status of HUBZone areas—the bases for program eligibility—often can change, and needed to be monitored. As of February 2017, SBA officials told us that the agency had begun implementing a technology-based solution to address some of the ongoing challenges with the recertification process. The officials expected that the new solution would help them better assess firms and implement risk-based controls by the end of calendar year 2017. In 2008 and again in 2015, we found that the recertification process was backlogged—that is, firms were not being recertified within the 3-year time frame. In 2015, we reported that as of September 2014, SBA was recertifying firms that had been first certified 4 years previously. While SBA initially eliminated the backlog following our 2008 report, according to SBA officials the backlog recurred due to limitations with the program’s computer system and resource constraints. Consequently, in 2015 we again recommended that SBA take steps to ensure that significant backlogs would not recur. In response to the recommendation, SBA made some changes to its recertification process. For example, instead of manually identifying firms for recertification twice a year, SBA automated the notification process, enabling notices to be sent daily to firms (to respond to and attest that they continued to meet the eligibility requirements for the program). According to SBA officials, as of February 2017 this change has not yet eliminated the backlog. In 2008 and 2015, we reported on challenges some firms had faced or might have faced in understanding their eligibility status for the program. Generally, SBA relied on information posted on its website to communicate with interested parties about the HUBZone program. SBA’s HUBZone website includes links to the HUBZone map, which firms can use to determine if an address or a particular area is designated as a HUBZone. In our June 2008 report, we found that SBA’s HUBZone map contained ineligible areas and had not been updated to include currently eligible areas. As a result, ineligible small businesses had participated in the program, and eligible businesses had not been able to participate. Consequently, we recommended that SBA take steps to correct and update the map used to identify HUBZone areas and implement procedures to help ensure that the map would be updated with the most recently available data on a more frequent basis. In response to our recommendation, SBA subsequently contracted with its mapping vendor in 2008 to enable more frequent updating of the HUBZone map (at least annually). According to SBA officials, the accuracy of the map is checked twice after each upgrade, first by the mapping vendor and then by an SBA employee. We subsequently reported in February 2015 that while HUBZone designations can change with some frequency, SBA’s communications to firms about programmatic changes (including redesignation) generally had not been targeted or specific to firms that would be affected by the changes. At that time SBA used a broadcast e-mail (which simultaneously sends the same message to multiple recipients) to distribute program information. In 2015, SBA’s e-mail addressee list had not been updated to include firms certified since the list was created in 2013. While firms could sign up through SBA’s website to receive the e- mails, not all certified firms may have done so. Consequently, we recommended that SBA establish a mechanism to better ensure that firms are notified of changes to HUBZone designations that may affect their participation in the program. This recommendation was intended to address communications to all certified firms, whether newly certified or in the program for years. In response to our recommendation, SBA improved its notifications to newly certified firms but not to other certified firms. For example, SBA’s certification letter to firms with principal offices in a redesignated area specifically states that the firm is in a redesignated area, explains the implications of the designation, and notes when the redesignated status will expire. However, we found in March 2016 that SBA had not yet implemented changes to better ensure that all currently certified firms would be notified of changes that could affect their program eligibility. It is important that all certified firms potentially affected by such changes receive information about the changes or are made aware in a timely fashion of any effects on their program eligibility. As of February 2017, SBA had begun to improve its notifications to all firms. According to SBA officials, the agency has started sending program notices to all the firms in its portfolio. They told us that for its most recent notice in February 2017, the agency copied all the e-mail addresses in its HUBZone database and placed them in the e-mail distribution system. According to SBA officials, SBA intends to repeat this effort with subsequent notices. We will continue to monitor SBA’s implementation of this activity. Our June 2008 and February 2015 reports demonstrated that economic distress (based on poverty and unemployment rate and median household income) has been more severe in designated HUBZone areas than in redesignated areas. For example, in June 2008, we found that approximately 60 percent of qualified metropolitan census tracts had a poverty rate of 30 percent or more, while approximately 4 percent of redesignated metropolitan census tracts had a poverty rate of 30 percent or more. Similarly, we found that about 46 percent of qualified nonmetropolitan counties had a poverty rate of 20 percent or more, while 21 percent of redesignated nonmetropolitan counties had a poverty rate of 20 percent or more. In our February 2015 report, we analyzed indicators (including poverty and unemployment rate and median household income as of 2012) to illustrate the differences in economic conditions among HUBZone areas (qualified and redesignated areas) and non-HUBZone areas (nonqualified tracts or areas). We found that indicators for redesignated areas on average fell below those of qualified areas, consistent with what we reported in June 2008. We also found that indicators for redesignated areas on average fell between those of qualified areas and nonqualified areas. For this statement, we updated our prior analysis of the economic conditions of such areas (to include not only data as of 2012 but also as of 2015, the most current available). Based on current analysis of poverty and unemployment rate data, indicators for redesignated areas on average again fell between those of qualified and non-qualified areas (see fig. 1). For example, for census tracts in 2015 qualified tracts had poverty and unemployment rates of 34 percent and 13 percent, respectively; redesignated tracts had rates of 23 percent and 11 percent, respectively; and nonqualified tracts had rates of 12 percent and 7 percent, respectively. A similar pattern existed for nonmetropolitan counties. Also, while the poverty and unemployment rates for qualified and non-HUBZone nonmetropolitan counties remained relatively unchanged between 2012 and 2015, the unemployment rate decreased in redesignated counties. We also updated our analysis that included indicators for household income and housing value for qualified, redesignated, and non-HUBZone areas (by census tract). As shown in table 1, in both 2012 and 2015 qualified areas on average, had higher poverty and unemployment rates and lower median household income and housing values then either redesignated or non-HUBZone areas. On average, redesignated areas had economic indicators between those of qualified and nonqualified areas. Between 2012 and 2015 the poverty rate increased in qualified census tracts while the average median housing income and housing values decreased. In contrast, the average median household income increased for both redesignated and non-HUBZone areas during that period. As we have stated since our June 2008 report, while allowing continued eligibility for firms located in redesignated areas can benefit firms and communities in such areas, allowing continued eligibility could also result in diffusion—decreased targeting of areas with greatest economic distress—by lessening the competitive advantage on which small businesses may rely to thrive in economically distressed communities. Therefore, while allowing redesignated areas to remain eligible can generate economic benefits for such areas, the inclusion of such areas in the HUBZone program could limit the benefits that qualified areas with more depressed economic conditions might realize. In taking into account the potential impacts of actions that can expand or reduce the number of HUBZones and redesignated areas, our June 2008 report included a recommendation to SBA to further develop measures and implement plans to assess the effectiveness of the HUBZone program that take into account factors such as the economic characteristics of the HUBZone area. Although SBA took initial steps to develop such an assessment, the agency has not implemented our recommendation. We plan to continue to evaluate elements of the HUBZone program. The Puerto Rico Oversight, Management, and Economic Stability Act contains a provision for us to evaluate the application and utilization of SBA contracting activities (including contracting activities relating to HUBZone firms) in Puerto Rico. Our work will include an analysis of the impact of SBA’s June 2016 decision to remove a statutory cap on the number of qualified census tracts in metropolitan statistical areas in Puerto Rico (as well as nationwide). According to SBA, the removal of the cap resulted nationally in 2,015 additional census tracts qualifying as HUBZones at that time. We anticipate issuing the report in June 2017. Chairman Knight, Ranking Member Murphy, and members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions you may have. If you or your staff have any questions about this testimony, please contact William B. Shear, Director, Financial Markets and Community Investment, at (202) 512-8678 or shearw@gao.gov. 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 Harry Medina (Assistant Director), Daniel Newman (Analyst in Charge), Pamela Davidson, John McGrail, John Mingus, and Barbara Roesmann. The following table summarizes the status of our recommendations from HUBZone performance audits and investigations as of February 2017. We classify each recommendation as partially implemented (the agency took steps to implement the recommendation but more work remains); open (the agency has not taken steps to implement the closed, not implemented (the agency decided not to take action to implement the recommendation). The recommendations are listed by report. GAO recommendations Small Business Contracting: Opportunities Exist to Further Improve HUBZone Oversight: GAO-15-234, February 12, 2015 Establish a mechanism to better ensure that firms are notified of changes to HUBZone designations that may affect their participation in the program, such as ensuring that all certified firms and newly certified firms are signed up for the broadcast e-mail system or including more specific information in certification letters about how location in a redesignated area can affect their participation in the program Conduct an assessment of the recertification process and implement additional controls, such as developing criteria and guidance on using a risk-based approach to requesting and verifying firm information, allowing firms to initiate the recertification process, and ensuring that sufficient staff will be dedicated to the effort so that a significant backlog in recertifications does not recur. HUBZONE Program: Fraud and Abuse Identified in Four Metropolitan Areas: GAO-09-440, March 25, 2009 Consider incorporating a risk-based mechanism for conducting unannounced site visits as part of the screening and monitoring process. Consider incorporating policies and procedures into SBA’s program examinations for evaluating if a HUBZone firm is expending at least 50 percent of the personnel costs of a contract using its own employees. Ensure appropriate policies and procedures are in place for the prompt reporting and referral of fraud and abuse to SBA’s Office of Inspector General as well as SBA’s Suspension and Debarment Official. Take appropriate enforcement actions on the 19 HUBZone firms we found to violate HUBZone program requirements to include, where applicable, immediate removal or decertification from the program, and coordination with SBA’s Office of Inspector General as well as SBA’s Suspension and Debarment Official. Closed-implemented GAO recommendations Small Business Administration: Additional Actions Are Needed to Certify and Monitor HUBZone Businesses and Assess Program Results: GAO-08-643, June 17, 2008 Take immediate steps to correct and update the map that is used to identify HUBZone areas and implement procedures to ensure that the map is updated with the most recently available data on a more frequent basis. Develop and implement guidance to more routinely and consistently obtain supporting documentation upon application and conduct more frequent site visits, as appropriate, to ensure that firms applying for certification are eligible. Establish a specific time frame for eliminating the backlog of recertifications and ensure that this goal is met, using either SBA or contract staff, and take the necessary steps to ensure that recertifications are completed in a more timely fashion in the future. Formalize and adhere to a specific time frame for processing firms proposed for decertification in the future. Closed-implemented Further develop measures and implement plans to assess the effectiveness of the HUBZone program that take into account factors such as (1) the economic characteristics of the HUBZone area and (2) contracts being counted under multiple socioeconomic subcategories. Closed - not Implemented 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 purpose of the HUBZone program is to stimulate economic development in economically distressed areas designated as HUBZones. SBA certifies small business firms located in HUBZones to participate in the HUBZone program—that is, determines they are eligible for federal contracting preferences under the program, such as awards of sole-source and set-aside contracts. HUBZone areas lose their designations when they no longer meet applicable criteria on economic conditions and enter a 3-year transitional period (“redesignation”) during which HUBZone firms can continue to apply to and participate in the program. HUBZone firms had almost $6.6 billion in obligations on active federal contracts for calendar year 2015. This testimony discusses, among other things, areas of weaknesses that GAO previously identified in reviews and fraud investigations of the program, related recommendations, and SBA's actions to address them. This statement is based on GAO's body of work issued between June 2008 and September 2016. GAO also met with SBA officials in February 2017 to discuss the status of open recommendations. Since 2008, GAO has made 11 recommendations to improve the HUBZone program. SBA has implemented seven of these recommendations, not implemented two and is in the process of implementing the other two. The Small Business Administration (SBA) designates economically distressed areas as Historically Underutilized Business Zones (HUBZones), based on data such as unemployment and poverty rates. Since 2008, GAO has issued several products that identified weaknesses in the HUBZone program and made recommendations to SBA to address them. While weaknesses remain, SBA has taken some steps to enhance program processes to varying extents. For example, Certification process. In 2008, GAO found that SBA performed limited verification of the information firms reported on applications. In response to GAO's recommendation to develop and implement guidance for the certification process, SBA has taken steps to improve its processes to verify the eligibility of firms applying to the program. Since fiscal year 2009, SBA has required firms to provide supporting documentation for applications that the agency then reviews. Susceptibility to fraud and abuse. In 2008 and 2009, GAO's investigations found 29 HUBZone firms in five metropolitan areas made fraudulent or inaccurate representations, which allowed them to get into or remain in the program. In response to GAO's recommendations to address potential fraud, SBA increased its documentation requirements. But in 2010, GAO still was able to obtain HUBZone certification using bogus addresses. Subsequently, according to SBA officials, in fiscal year 2010 SBA began conducting site visits to 10 percent of certified firms. Recertification process. Firms wishing to remain in the program must recertify their continued eligibility to SBA every 3 years. However, in 2015, GAO found that SBA had not required firms seeking recertification to submit any information to verify continued eligibility and instead simply relied on their attestations of continued eligibility. GAO recommended that SBA reassess its recertification process and add additional controls. As of February 2017, SBA had not yet implemented this recommendation. Communications with firms about designations. GAO found in 2015 that SBA's communications to firms about programmatic changes (including redesignation) generally were not specific to affected firms and thus some firms might not have been informed they would lose eligibility. GAO recommended that SBA establish a better notification mechanism. In response, SBA revised its letters to newly certified firms to inform them of the consequences of redesignation, and as of February 2017, SBA was implementing additional steps to ensure that all currently certified firms would be notified of changes that could affect their program eligibility. |
Unauthorized disclosure of sensitive information by government or contractor employees through negligence or misconduct can have a significant effect on the government’s ability to perform its primary functions, potentially resulting in financial loss, damaged reputation, and loss of public trust. Sensitive information may not always be explicitly designated or marked as such. For the purposes of this report, we use the term “sensitive information” to generally refer to information under an agency’s authority or control that has a degree of confidentiality such that its loss, misuse, unauthorized access, or modification could compromise that confidentiality and harm important interests, such as personal and medical privacy to which individuals are entitled under laws, national security, law enforcement, proprietary commercial rights, or the conduct of agency programs. The large but unquantifiable amount of sensitive information generated by the government makes understanding its scope more difficult and agencies’ safeguarding this information from unauthorized disclosure or inappropriate use by contractors a complex challenge. Table 1 shows examples of several types of sensitive information. Additional examples are listed in appendix II. All examples were drawn from a myriad of designations that agencies use to describe sensitive information. The federal government uses a variety of means, whether prescribed by statute, executive order, or other authority, to limit dissemination and protect against the inadvertent disclosure of certain types of sensitive information. For information the government considers critical to our national security, the government may take steps to protect such information by classifying it as Top Secret, Secret, or Confidential pursuant to criteria established by law and executive order. Information that does not meet the thresholds established for classification as national security information but that an agency nonetheless considers sufficiently sensitive to warrant restricted dissemination has generally been referred to as sensitive but unclassified (SBU). In designating information this way, agencies determine that the information they use must therefore be safeguarded from public release. Some, but not all, SBU designations used by agencies have a specific basis in statute. For example, some agencies use the provisions of the Freedom of Information Act (FOIA) as their basis for designating information as SBU. FOIA establishes that federal agencies must generally provide the public with access to government information, thus enabling them to learn about government operations and decisions. FOIA establishes a legal right of access to government records and information, on the basis of the principles of openness and accountability in government. But the act also prescribes nine specific categories of information that are exempt from disclosure: for example, trade secrets and certain privileged commercial or financial information, certain personnel and medical files, and certain law enforcement records or information. Thus the need to safeguard sensitive information from public disclosure while striking the appropriate balance with the goal of government transparency is another challenge agencies must continually address. Protecting legitimate security, law enforcement, and privacy interests also must be carefully balanced with protecting civil liberties. Of critical importance are providing clear rules to those who handle sensitive information and ensuring that the handling and dissemination of information is not restricted unless there is compelling need. Government ethics rules prohibit federal employees from using sensitive nonpublic information, defined below, for personal gain or to further the interests of another, whether by advice or recommendation or through knowing unauthorized disclosure. For federal employees, certain activities and acts that affect a personal financial interest may also result in violations of criminal law with potentially serious consequences, including dismissal, prosecution, fines, and imprisonment. Because not all government ethics rules and related statutes apply to contractors, many of these prohibitions do not extend to contractor employees working in the multisector workforce. Nonpublic Information as Defined in Government Ethics Rules Nonpublic information is information that the employee gains by reason of federal employment and that s/he knows or reasonably should know has not been made available to the general public. It includes information that s/he knows or reasonably should know: 1. Is routinely exempt from disclosure under the Freedom of Information Act, codified at 5 U.S.C. § 552, or otherwise protected from disclosure by statute, Executive order or regulation; 2. Is designated as confidential by an agency; or 3. Has not actually been disseminated to the general public and is not authorized to be made available to the public on request. Our analysis of guidance and contract actions at three agencies found areas where sensitive information is not fully safeguarded and thus may remain at risk of unauthorized disclosure or misuse. DHS, DOD, and HHS FAR supplements include some guidance and standard contract provisions—for example that address contractor safeguards for personal information. However, the policies and procedures available in DOD’s and HHS’s FAR guidance do not contain effective agency management controls for sensitive information needed to help ensure contractor compliance, prevent contractor disclosure and misuse, and promote contractor accountability. Such guidance could help contracting and program officials incorporate safeguards into their contract actions for protecting all types of relevant sensitive information contractors may access, such as agency sensitive information. At the contract level, almost half of the 42 contract actions reviewed did not include solicitation and contract provisions that safeguarded against unauthorized contractor disclosure and inappropriate use of sensitive information contractors may access in program offices during the course of contract performance. In cases where there was agency policy to include contract provisions to protect sensitive information on all contracts, such as regarding the medical privacy of individuals, it was not incorporated in 5 of the 42 contract actions that we reviewed. Additionally, DOD and HHS lack guidance on the use of nondisclosure agreements, while DHS has found that these help improve accountability by informing contractors of their responsibilities and the consequences that may result from their failure to meet those responsibilities. Contractor and subcontractor employees can be responsible for carrying out a range of mission-critical tasks—including studying ways to acquire desired capabilities, developing contract requirements, and advising or assisting on source selection, budget planning, financial management, and regulations development—potentially requiring access to many types of sensitive information. Agencies can use their FAR supplement authority to issue guidance, which may include contract provisions to establish contractor responsibility for safeguarding sensitive information. Review of agency practices and discussions with government security and contracting officials identified three key attributes for assessing the extent that agencies’ guidance or the FAR contain effective safeguards for sensitive information in acquisition guidance and contracts. On the basis of these sources, in order to have more effective safeguards in place, contracts should contain provisions that (1) describe the relevant scope of sensitive information under the agency’s authority or control that should be protected if contractors require access to it for contract purposes; (2) require the contractor to refrain from disclosing such sensitive information to anyone except as needed for contract performance; and (3) address conflicts of interest or other misuse by prohibiting the contractor from using such sensitive information for any purpose other than contract performance. Agency FAR guidance should help contracting and program officials incorporate effective safeguards for sensitive information into their contract actions by including certain management control practices. We identified a range of management control practices sometimes incorporated into acquisition guidance to help prevent contractor disclosure and misuse, and promote contractor accountability for sensitive information breaches that harm important interests. These control practices include requiring contractors to (1) train or inform employees on their obligations to maintain confidentiality and not misuse sensitive information; (2) obtain written consent from the agency to disclose sensitive information; (3) pass sensitive information provisions to subcontractors; (4) execute a nondisclosure agreement for each employee and subcontractor as a condition of access to sensitive information; (5) promptly notify key agency officials of the misuse or unauthorized disclosure of sensitive information; and (6) be informed of the consequences for violations. Our review found DOD, DHS, and HHS all have guidance that supplements the FAR and addresses requirements or standard contract provisions for contractor protection of certain categories of sensitive information. For example, DOD supplements the protection of individual privacy requirements contained in the FAR by incorporating references to the agency rules and regulations. HHS also supplements the FAR with detailed policy that establishes Privacy Act requirements and requires the inclusion of contract provisions to protect the confidentiality of records and the privacy of individuals in contracts where the Privacy Act is not applicable but the contract would involve the collection of individually identifiable personal information by the contractors. However, with respect to other key attributes available in agency FAR policies and procedures reviewed at DOD, DHS, and HHS, the agencies’ guidance differs in how well they help contracting and program officials incorporate necessary safeguards for sensitive information into their contract actions. Of the guidance analyzed at the three agencies, only DHS established effective management control practices through standard contract provisions in its FAR supplement and related guidance requiring contractors to safeguard sensitive information accessed by employees. In contrast, the FAR guidance of DOD and HHS does not contain effective agency management controls for sensitive information needed to help ensure contractor compliance, prevent contractor disclosure and misuse, and promote contractor accountability. (See app. III for the standard contract provisions we identified in DHS, DOD, and HHS FAR supplements.) As shown in table 2, our analysis of agency guidance included in the DHS FAR supplement found that it contained five of six effective management control practices consistent with key attributes for establishing safeguards for sensitive information. For example, the DHS FAR supplement and related guidance aims to (1) make contractors aware of their responsibilities for maintaining confidentiality of sensitive information; (2) address conflicts of interest and potential misuse by prohibiting use of agency information processed, stored, or transmitted by the contractor for any purpose other than contract performance; and (3) deter noncompliance with these requirements and ensure accountability by explaining consequences related to violations. According to agency acquisition policy officials, recognition within DHS of the need for contractor safeguards for homeland security–sensitive information likely led to the establishment of extensive requirements when the agency updated its interim FAR supplement and related guidance in 2006. On the other hand, DHS acquisition policy and security officials acknowledge that the agency’s FAR supplement and contract clause do not directly specify contractor responsibilities for promptly notifying contracting officers of unauthorized use or disclosure of sensitive information. Prompt contractor notification to key government officials is critical to avoid internal delays that would prevent officials from being aware of the unauthorized use or disclosure; delay agency decisions about how to respond; and deny the opportunity for affected parties to take precautions. DHS’s guidance establishes stronger safeguards for sensitive information than what we found at DOD and HHS in their FAR supplements. In contrast with the DHS guidance, the analysis in table 2 shows that DOD’s FAR supplement does not include the same amount of detail as to how contractors are to safeguard sensitive information. At present, DOD’s FAR supplement is limited to requiring the use of a disclosure of information clause in solicitations and contracts when contractors have access to unclassified information that may be sensitive and inappropriate for release to the public—for example, DOD officials said the clause authorizes use in a contractor’s press and marketing materials. In addition, since HHS revised its FAR supplement as of January 2010, guidance and a contract provision that required contractors to obtain written consent before disclosing certain kinds of sensitive information— not already subject to FAR and agency privacy restrictions—was deleted in its entirety. According to the director for acquisition policy, HHS deleted the “Confidentiality of Information” clause because the need for agency guidance will be obviated by pending changes to the FAR expected later in 2010. Besides the supplemental FAR guidance, agencies have developed other policies and control practices to establish additional contractor responsibilities for safeguarding certain categories of sensitive information obtained during contract performance. For example, a 2007 privacy breach involving a DOD contractor that potentially compromised the personal health information of 580,000 households led the privacy office in DOD’s component agency TRICARE Management Activity (TMA) to determine that the agency’s contract provisions did not adequately protect sensitive information. According to the TMA privacy office director, most TMA contracts before 2007 did not specifically require the contractor to safeguard personal health information, notify DOD or beneficiaries of privacy breaches, or to mitigate any harm, such as paying for the cost of free credit monitoring to affected individuals. To address this problem, TMA has required since 2007 that standard contract provisions be included whenever a contract is awarded that requires either the use of or access to personal information. The required contract language is posted on TMA’s Web site and imposes protections for the privacy and security of personally identifiable information and protected health information. It seeks to ensure that contractors understand their responsibility in protecting TRICARE beneficiaries’ sensitive information. Similarly, HHS’s Centers for Medicare and Medicaid Services (CMS) issued an acquisition policy and procedure notice, which took effect in 2005, to advise contracting staff of the requirement to use a clause for contractor protection of health information. This standard CMS clause had been revised to integrate the HIPAA security standards along with the privacy standards that were previously adopted in standard contract provisions. For our analysis of contract documents for 42 contract actions at DHS, DOD, and HHS that involved contractor employees supporting mission- critical tasks, in order to be considered to fully safeguard all types of sensitive information, a contract had to contain provisions that specifically required contractors to refrain from (1) disclosing sensitive information to anyone except as needed for contract performance and (2) using such sensitive information for any purpose other than contract performance. In addition, the provisions had to cover the relevant types of sensitive information that may be accessed by a contractor during performance. As shown in table 3, our analysis found that slightly more than half of contract actions reviewed—23 of 42—contained contract provisions that fully safeguard the confidentiality and appropriate use of all types of sensitive information. In contrast, the remaining 19 contract actions reviewed did not extend safeguards to all relevant types of sensitive information that contractors may have had access to through the program offices they support. In the absence of such safeguards, there is higher risk of unauthorized disclosure or misuse of sensitive information by contractors. Of the 19 contracts reviewed that did not have provisions for all safeguards, our content analysis found that one HHS blanket purchase agreement and an associated order we reviewed contained no evidence of contract provisions for contractor safeguarding of sensitive information, except for standard FAR clauses related to the Privacy Act in the base contract. In addition, some contract provisions included in 18 other contract actions provided too few safeguards, given the range of tasks being performed and the potential opportunities to gain access to many types of sensitive information. For example, at HHS several contract actions specified that contractors must safeguard certain types of sensitive information, but did not specify contractor protection of agency-sensitive information from nondisclosure or misuse. In other cases, clauses addressed limitations on the disclosure of certain types of sensitive information, but not its misuse, and therefore did not fully safeguard these types of information. Some HHS contract actions require that contractors perform acquisition functions related to other contractors, such as strategic planning in support of future task awards or auditing business proposals, and thus could require access to proprietary information. These contract actions did not always include safeguards addressing limits on unauthorized disclosure and misuse of proprietary information. Similarly, several DOD contract actions included provisions to prevent contractors from disclosing any nonpublic information they obtained during contract performance, but provisions to prohibit contractors from misusing the information for purposes other than contract performance were absent. In cases where there was agency policy to include specific contract provisions to protect sensitive information, it was not incorporated in five of the contract actions we reviewed. For example, 3 DHS task orders of the 14 contract actions reviewed did not include the contract clause required when contractors need recurring access to government facilities or sensitive information. At HHS, 2 task orders of the 10 contract actions reviewed did not include standard contract provisions regarding HIPAA privacy and security standards required by agency policy to be in all contracts. Several of the contract actions we reviewed used nondisclosure agreements as a mechanism to help protect sensitive information from conflicts of interest and preserve its confidentiality. These agreements generally outline the exchange of confidential information or knowledge that at least two parties need to share for certain purposes, but wish to restrict access to by third parties. When used by agencies as a condition of contractor access to sensitive information, a nondisclosure agreement may serve several important accountability purposes. These include informing contractor employees and subcontractors of (1) the trust that is placed in them by providing them access to sensitive information; (2) their responsibilities to protect that information from unauthorized disclosure and use; and (3) the consequences that may result from their failure to meet those responsibilities. All of the agencies we reviewed had established guidance requiring contractor employees participating in source-selection activities to sign an agreement to not disclose procurement sensitive, proprietary, or source- selection information. Beyond addressing this one area of sensitive information however, only DHS and TMA (in DOD) had guidance requiring the use of standard contractor nondisclosure agreements for a broader range of sensitive information that may be handled by contractors. Under the DHS and TMA guidance, certain contracts are to contain provisions that require contractors to submit to a designated agency official an executed nondisclosure agreement for each employee and subcontractor within a stipulated time following contract award or before they are given access to certain types of agency sensitive information. Appendix IV provides examples of standard nondisclosure agreements we reviewed. DHS and TMA security and acquisition policy officials responsible for jointly developing agency guidance on nondisclosure agreements view these agreements as critical to promoting contractor accountability. According to the DHS administrative security chief, the agencywide nondisclosure agreement was developed in coordination with agency acquisition policy, information technology (IT) security, and privacy officials to educate contractor personnel on the agency’s standards for safeguarding sensitive information and provide a mechanism to hold them accountable should they violate the terms of the agreement. The agencywide form was also developed to eliminate use of nonstandard forms to cover different types of sensitive information that were causing confusion and required contractor employees to sign multiple forms. According to DOD’s acquisition executive for TMA, having contractor employees sign nondisclosure agreements provides additional benefits for the government by (1) requiring that contractors will protect and not disclose sensitive information; (2) protecting against conflicts of interest that could occur if contractors use sensitive information for future competitive advantage; and (3) making contractors and their employees aware of the government’s expectations and their obligations to safeguard sensitive information. As shown in table 4, due to the agencywide use of nondisclosure agreements at DHS and DOD’s TMA, 20 of 42 contract actions reviewed contained contract provisions requiring nondisclosure agreements for each employee and subcontractor. All 10 of the Air Force contracts reviewed and 1 contract at HHS required contractors to enter into third- party agreements with other contractors about the confidentiality and use of their proprietary information obtained during contract performance. One case study of an Air Force contract illustrated the practical challenges for agency monitoring of such third-party agreements in contrast to agency use of its own contractor nondisclosure agreements. In this case study, although the contractor’s conflict of interest mitigation plan indicated the company maintained nondisclosure agreements and proprietary protection agreements with many third-party contractors, no copies of executed nondisclosure agreements were available from the Air Force contracting and program officials responsible for administering the contract. In addition, officials told us they knew that the contractor had entered into such agreements, but they had not reviewed them. We discussed a less challenging approach for implementing agency contractor nondisclosure agreements with the Department of the Treasury’s (Treasury) contract administrator responsible for management and oversight of contractors and financial agents supporting the Troubled Asset Relief Program (TARP). He agrees with DHS and TMA views that nondisclosure agreements are critical to promoting contractor accountability for maintaining confidentiality of sensitive information and providing other benefits, such as helping to prevent conflicts of interest that could arise from contractor misuse of the information. Treasury uses an alternative way to implement these agreements that reduces administrative burden without compromising contractor compliance for their use. Language included in certain TARP Financial Agency Agreements requires the financial agent to have each employee and all affiliate and contractor personnel to whom nonpublic information is or may be disclosed execute the agency’s nondisclosure agreement form— included as an exhibit to the agreement—as a condition of access to sensitive government information. According to the Treasury official, it is better to have the contractor responsible for retaining the executed agreements in its own files, rather than have the government contracting officer or program office retain them. The official explained that as long as the terms of the contract require contractors to certify to the government they have collected the agency’s nondisclosure agreement for all individuals they assign to perform on the contract, and the agreements are available to the government for inspection, it is better to hold contractors accountable for retaining the signed agreements. The FAR Council in recent years has made progress improving guidance for security and oversight related to contractor access to sensitive government facilities and information systems, but challenges remain. While the FAR establishes governmentwide guidance on certain contractor sensitive-information safeguards prescribed in statute—for example, to require contractor protection of individual privacy—FAR guidance does not address certain key areas relating to contractor access to sensitive information. Several amendments are pending before the FAR Council to implement recommended changes and to improve FAR guidance in the complex areas involving contractor access to sensitive information. Such changes to the FAR could provide agencies clear guidance on the use of contractor nondisclosure agreements as a condition of access to sensitive information and could include requirements for contractors to promptly notify agencies of unauthorized disclosure and misuse of sensitive information to enable timely decisions regarding an agency’s response when use of sensitive information is compromised. With the rulemaking process underway to develop these amendments, the FAR Council has an opportunity to consider additional changes to strengthen FAR guidance to ensure remaining gaps in contractor safeguards identified in this review are addressed. The FAR is the primary regulation that provides uniform policies and procedures for acquisitions by executive agencies. During the acquisition process, the FAR emphasizes basic planning that has to be coordinated among agency personnel responsible for significant aspects of the acquisition, such as contracting, fiscal, legal, and technical personnel. In describing agency needs during acquisition planning, the FAR directs agencies to address all significant considerations that will control each acquisition, including security considerations for acquisitions requiring routine contractor physical access to a federal facility or IT system. The FAR has several provisions that establish policy and contract clauses implementing requirements prescribed in statute or executive order for contractor protection of certain categories of sensitive information, such as information related to the privacy of individuals. When these FAR provisions, which are described in table 5, are applicable, certain sensitive- information requirements are included in solicitation and contract provisions that are intended to safeguard procurement integrity, classified information, organizational conflicts of interest, and privacy. Agencies use this guidance to incorporate requirements during acquisition planning and when describing agency needs. Finally, to address the need for improved governmentwide contracting guidance required by presidential directive or law and to assist agencies in addressing identified risks from contractor access to sensitive federal facilities and information systems, OFPP and the FAR Council revised contractor personnel and IT security requirements in the FAR. Key aspects of the revised contractor personnel and IT security safeguards are summarized as follows: Securing personal identity verification of contractor personnel—in 2007 the FAR was amended in part to implement the August 2004 Homeland Security Presidential Directive 12 (HSPD-12), which required the establishment of a governmentwide standard for secure and reliable forms of identification for federal employees and contractors alike. Implementing HSPD-12 requirements through contract provisions may help address the risks of contractors gaining unauthorized physical or electronic access to federal information or contractors using outmoded identification cards that can be easily forged, stolen, or altered to allow unauthorized access. Strengthening federal information security oversight of contractor IT operations—in 2005 an interim rule amended the FAR to implement the Federal Information Security Management Act of 2002 (FISMA) information-technology-security provisions. According to the FAR Council, the addition of specific FISMA-related provisions was intended to provide clear, consistent guidance to acquisition officials and program managers, and to encourage and strengthen communication with IT security officials, chief information officers, and other affected parties. See appendix V for greater detail on these changes to the FAR. There have been numerous recommendations in recent years for improved governmentwide guidance and contract provisions for contractor protection of sensitive information. The emphasis has been on standardizing approaches and establishing accountability mechanisms when access to information is compromised. Problems and recommendations to address them include the following: In 2007, the Acquisition Advisory Panel found that increased use of contractor employees in the government workforce to support the evaluation of other contractors raises questions regarding the potential for organizational conflicts of interest and how to preserve the confidentiality of proprietary information. To address such risks, the panel recommended that the FAR Council provide additional regulatory guidance for contractor access to and responsibilities for protecting proprietary information belonging to other companies. It specifically called for developing standardized contract provisions and approaches for agencies’ use of nondisclosure agreements and in creating remedies for improper information sharing. It also suggested the use of standardized clauses for organizational conflicts of interest to address issues of unfair competitive advantage when a firm gains access to information as part of its performance of government contract responsibilities. Similarly, on the basis of lessons learned from agency responses to loss of personally identifiable information, in April 2007 we noted that agencies need to clearly define contractor responsibilities for protecting privacy information. In this report, contractors were prominently involved in privacy data breaches at three of six agencies reviewed, including one case in which a contractor inadvertently released informational compact discs to several FOIA requesters that contained Social Security numbers and tax identification data on 350,000 individuals receiving government program payments. We noted that contractor obligations for mitigating damage from data breaches, such as notifying affected individuals or providing credit monitoring, may be unclear unless specified in the contract. Consistent with and in response to our report, DHS acquisition policy officials told us in June 2009 of their recommendations for revisions to the FAR Subpart 24.1 to (1) expand existing Privacy Act coverage and (2) implement a standard approach that promotes contractor accountability. According to DHS officials, to avoid agency-by-agency development of inconsistent clauses or other contractual terms, the FAR needs a revised privacy policy and clause for establishing basic government and contractor and subcontractor expectations, roles, and responsibilities—including prompt breach notification procedures for contractors to inform officials of privacy data breaches to enable the agency’s timely response. Additionally, in 2008 we reported that certain defense contractor employees who support key mission-critical tasks that have the potential to significantly influence DOD decisions are not subject to the same ethical safeguards as federal employees. Furthermore, no FAR policy obliges government agencies using these contractor employees to require that they be free from personal conflicts of interest or addresses the issue of contractor employee misuse of the government’s nonpublic information obtained while performing work under a contract for private gain. To address this problem, we recommended that DOD develop and implement policy that would require a contract clause, among other safeguards, to prohibit contractor personnel from using nonpublic government information for personal gain. DOD postponed implementing the recommendation once OFPP and the FAR Council began responding to legislation from Congress. Among other changes, the legislation required a standard policy to be developed and issued to prevent personal conflicts of interest by contractor employees performing acquisition functions closely associated with inherently governmental functions. This policy was to require each contractor whose employees performed these functions to prohibit covered employees with access to nonpublic government information from using it for personal gain. In response, since 2007 the FAR Council has opened several cases, shown in table 6, to amend the FAR to provide additional regulatory coverage and clauses. These open cases, with implementing regulations pending as of July 2010, have significant potential for addressing these identified problems. Discussions with OFPP and DOD officials responsible for these FAR changes, and review of information they provided on these cases, indicate that the steps the FAR Council has been taking to revise governmentwide guidance are consistent with the recommendations. For example, a review of information on these pending FAR cases indicates significant changes are being considered to amend the FAR so that it addresses access to nonpublic information and conflicts of interest. Changes being considered also contain other policies and clauses consistent with safeguards we identified for protecting contractor sensitive information, and these changes may mitigate the risks of unauthorized disclosure and misuse. FAR cases generally follow a lengthy process that allows the public, as well as federal agencies, to comment on proposed changes to the FAR. Because of other rulemaking priorities and the many steps involved—including legal and interagency reviews—FAR Council officials told us the rulemaking process could take many more months to complete. Until the FAR Council completes the rulemaking process for the pending cases listed in table 6, it is unclear the extent to which the changes will address risks and better control contractor confidentiality and authorized use of sensitive information. With regard to unauthorized disclosure and use of sensitive information, these risks include (1) unauthorized access by contractor employees or subcontractors not involved with contract performance, (2) conflicts of interest in using sensitive information for financial gain or unfair competitive advantage, and (3) unauthorized disclosure. Similarly to issues we identified in agency guidance, our review found that FAR guidance does not address certain areas relating to contractor access to sensitive information. Moreover, rather than having agencies develop stronger safeguards individually, the FAR Council is developing a standardized approach to address many of these areas. This is particularly relevant with regard to changes being considered under the open FAR Case 2007-019, Contractor Access to Non-Public Information, listed above. Nevertheless, our review of potential changes to FAR guidance identified two key areas yet to be addressed where the FAR does not contain guidance that could help agencies address problems identified in this report. The first key area is the development and use of contractor nondisclosure agreements as a condition of access to sensitive information. Additional FAR guidance also could ensure nondisclosure agreements used across the government include clear and complete information to contractors. Without uniform emphasis in the FAR on how agencies use contractor nondisclosure agreements, contractors may not be adequately informed of their responsibilities to protect that information from unauthorized disclosure and use and the consequences that may result from their failure to meet those responsibilities. The second key area is the establishment of requirements for contractors to provide agencies prompt notification of deviations by their employees or subcontractors from provisions for use and confidentiality of all types of sensitive information. Without such guidance in the FAR, contractors may not be adequately required to make key government officials aware of unauthorized disclosure or inappropriate use of sensitive information involving their employees. A contractor’s prompt notification is critical to avoiding delays in internal agency decisions about how to respond to the misuse or unauthorized disclosure of sensitive information and the opportunity for affected parties to take precautions. Also, without such guidance, agencies may be less able to act on a timely basis to hold contractors accountable for their failure to properly use and maintain confidentiality of sensitive information. The government’s extensive use of contractors in the multisector workforce to support management activities and administrative functions, coupled with contractors’ increasing access to government facilities, has in recent years prompted several constructive efforts by the FAR Council to establish uniform contract provisions. However, of the three agencies reviewed for this report, only DHS has established guidance for controlling contractor use and limiting unauthorized disclosure of sensitive information obtained during contract performance. OFPP and the FAR Council have recognized that FAR guidance does not address certain key areas. Rather than having agencies develop their own guidance and clauses individually, several amendments are pending to improve guidance and contract clauses in the FAR. While these are steps in the right direction, opportunities exist to address certain gaps we identified in pending FAR guidance. These include the need for guidance on agency use of contractor nondisclosure agreements and the need to establish requirements for contractors to promptly notify agencies of unauthorized disclosure or misuse of sensitive information, which is critical to enabling timely agency decisions and responses. To address the need for clearly defining contractor responsibilities in governmentwide guidance in the FAR, we recommend that the Administrator of OFPP ensures that the FAR Council incorporates changes in the FAR that address safeguards for contractor access to sensitive information by providing guidance to agency acquisition policy officials, in coordination with IT security and privacy officials, chief information officers, and other affected parties, on agency development and use of contractor nondisclosure agreements as a condition of access to sensitive information; and establishing a requirement for prompt notification to appropriate agency officials of a contractor’s unauthorized disclosure or misuse of sensitive information so that timely agency responses are facilitated and appropriate contractor accountability mechanisms can be enforced. We provided a draft of this report to OMB’s OFPP, DOD, HHS, and DHS for review and comment. In oral comments, OFPP generally concurred with our recommendations. DOD provided technical comments that were incorporated into the report as appropriate and HHS did not have comments. In written comments, included in appendix VI, DHS generally concurred with our report. However, DHS took exception to the analysis for 1 of the 14 contract actions reviewed, which we found did not contain adequate safeguards to protect sensitive information. While we agree that the task order identified in DHS’ response includes contract provisions with prohibitions against disclosing sensitive information, the language does not address safeguards to ensure contractors’ appropriate use of sensitive information. DHS also stated that although this task order lacks a contract clause required in DHS acquisition regulations, it includes comparable provisions in the statement of work. We reviewed the task order and the guidance for the clause HSAR 3052.204-71, Contractor Employee Access, which requires the use of the clause or one substantially the same in solicitations and contracts when contractor employees require recurring access to government facilities or access to sensitive information. On the basis of our review, we continue to believe that the task order does not contain HSAR clause 3052.204-71 or a contract clause that is substantially the same as that clause. Although some provisions in the task order contain similar information and requirements, these provisions do not cover the same breadth or detail as HSAR clause 3052.204-71. For example, the task order does not include a comprehensive definition section such as the one in HSAR clause 3052.204-71. Without the use of such comprehensive definitions, it is not clear that the various provisions of the task order noted by DHS collectively and effectively protect the same range of sensitive government information as set forth in HSAR clause 3052.204-71. In addition, the task order specified in DHS’ response does not include provisions that limit contractors from disclosing sensitive information without authorization from the contracting officer. Also, the portions of the statement of work cited as comparable with HSAR clause 3052.204- 71(e) relate specifically to information technology, and not necessarily to information that contractors and their employees may otherwise gain access to in the course of their contractual responsibilities. DHS also provided technical comments, which were incorporated into the draft where appropriate. We are sending copies of this report to the Director of OMB; the Secretaries of Defense, Homeland Security, and Health and Human Services; and interested congressional committees. The report also is 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 at (202) 512-4841 or needhamjk1@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. To assess the extent that agency guidance and contracts establish effective safeguards for sensitive information, we identified key attributes of the safeguards that should be contained in acquisition guidance and contracts to manage the risks of contractor unauthorized disclosure and misuse based on (1) review of agency practices related to controls over contractor access to sensitive information, (2) review of applicable standards drawn from GAO’s Standards for Internal Control in the Federal Government, and (3) discussions with government security and contracting officials responsible for administrative, information, and contractor personnel security functions. Specifically the acquisition guidance and contracts should contain safeguards that (1) describe the relevant scope of sensitive information under the agency’s authority or control that should be protected if contractors require access to it for contract purposes, (2) require the contractor to refrain from disclosing such sensitive information to anyone except as needed for contract performance, and (3) prohibit the contractor from using such sensitive information for any purpose other than contract performance. To assess the extent to which agency guidance contains safeguards for contractor protection of sensitive information, we analyzed applicable guidance available in the respective Federal Acquisition Regulation (FAR) supplements of the Department of Defense (DOD), the Department of Homeland Security (DHS), and the Department of Health and Human Services (HHS). We selected these departments for review because they ranked among the top procurers of contracted services in fiscal year 2008, based on a review of the Federal Procurement Data System–Next Generation (FPDS-NG), and because prior GAO work shows that their component agencies and organizations rely extensively on support contractors to perform mission-critical tasks that would potentially require access to sensitive information. We assessed the reliability of the FPDS- NG data through corroboration with agency officials and contract files and determined they were sufficiently reliable for our purposes. We analyzed applicable policy and guidance available from the departments and some of their selected component agencies and organizations to identify the extent their guidance provides for contractor protection of sensitive information, including guidance contained in agency FAR supplements as well as security and privacy program policies and procedures applicable to contractor employees. We also interviewed acquisition policy, security, and privacy officials to discuss their supplements to FAR guidance and the contract provisions they use to meet their specific agency needs. To assess the extent to which agency contracts contain safeguards for contractor protection of sensitive information, we analyzed DOD, DHS, and HHS contract actions (defined as a contract, task order, and blanket purchase agreement and associated order) for services potentially requiring contractor access to sensitive information from the following five component agencies or organizations and locations: within DOD, the (1) TRICARE Management Activity (TMA) in Falls Church, Virginia, and the contracting activity supporting TMA at the Army Medical Research Acquisition Activity at Fort Detrick, Maryland, (2) the Air Force Materiel Command’s Electronic Systems Cente Hanscom Air Force Base, Massachusetts; within DHS in Washington, D.C., (3) U.S. Customs and Border Protect ns within the Office of the and (4) the Office of Procurement Operatio Chief Procurement Officer, which is the contracting activity supporting headquarters organizations; and within HHS, the (5) Centers for Medicaid and Medicare Services (CMS) Baltimore, Maryland. U.S. At each of these five organizations, we selected for review a nongeneralizable sample of 6 to 10 contract actions (42 in total) in which contractor employees worked in close proximity to government employees and provided professional and administrative services that supported the agencies’ missions, in addition to providing a cross section of contract types and services. In making our selection, we reviewed lists of contract actions and reported dollar values drawn from data provided by DOD, DHS, and HHS component agency and organization officials to confirm that the contract actions belonged to their agencies and that they involved contractors working on-site or in close proximity with government employees, to perform services potentially requiring access to sensitive information. For each of the 42 contract actions, we analyzed the contract documentation provided, including base contracts from which task orders or blanket purchase agreements and their associated orders were issued, to determine whether they contained provisions or clauses that direct contractors to safeguard sensitive information consistent with key attributes we identified for safeguarding sensitive information. In conducting this content analysis, two GAO analysts independently reviewed the provisions in each contract or task any differen ces in how they were coded. We dete order and then reconciled rmined whether the contract provisions addressed limiting disclosure of sensitive information and preventing its misuse. We also assessed the scope of information protected—whether these protections applied to certain categories or to n all relevant types of sensitive information that may potentially have bee accessed during contract performance. We also determined whether the contract actions required the use of contractor nondisclosure agreements . To obtain an in-depth understanding of the reasons why certain contract were required clauses and provisions to safeguard sensitive information and obtain views on their effectiveness and how contractor compliance with the requirements was being monitored by the government at a cross section of DOD, DHS, and HHS offices, we selected 9 of the 42 contract actions as case studies. For each case study, we conducted semistructured oping interviews with the DOD, DHS, or HHS officials responsible for devel contract requirements and monitoring con contracting officers, contracting officers’ representatives, and program managers. To assess the adequacy of governmentwide guidance in the FAR on how agencies are to contractually safeguard sensitive information to which contractor employees prescribe protections associated with sensitive information, i 4 (Administrative Matters); Part 7 (Acquisition Planning); Subpart 9.5 (Organizational and Consultant Conflicts of Interest); Part 24 (Pro of Privacy and Freedom of Information); and Part 52 (Solicitation tection Provisions and Contract Clauses). We reviewed pending amendments to the FAR and legislation to determine the safeguards they might add to have access, we analyzed FAR requirements that existing FAR guidance. To further understand steps being taken to amendthe FAR, we interviewed government officials supporting members of the FAR Council, which oversees the development and maintenance of the (OFPP) FAR, and officials with the Office of Federal Procurement Policy in the Office of Management and Budget. The OFPP Administrator serves as chair of the FAR Council. We conducted this performance audit from May 2009 through 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 fo eve r our findings and conclusions based on our audit objectives. We beli ings that the evidence obtained provides a reasonable basis for our find and conclusions based on our audit objectives. In 2006 we reported on a survey of federal agencies that showed 26 were using 56 different designations to protect information they deem critical to their missions—such as law-enforcement sensitive, sensitive security information, and unclassified controlled nuclear information. Because of the many different and sometimes confusing and contradictory ways thatagencies identify and protect sensitive but unclassified (SBU) information, the sharing of information about possible threats to homeland security has been difficult. To address this challenge, efforts are underway to establish new governmentwide processes for designating, marking, safeguarding, and disseminating SBU information. Since 2008, in response to a presidential memorandum that replaced SBU information with “controlled unclassified information” (CUI) as the single categorical designation for SBU information, the executive branch is attempting to overhaul its CUI framework. The ongoing effort is also addressing a 2009 presidential task force report that found too many labels for sensitive information and recommended that agencies reduce them and balance the need for nondisclosure (to protect privacy or other legitimate interests) and transparency and openness in government. The task force found that currently, across the executive branch, this information is identified by over 100 unique markings and at least 130 different labeling or handling regimes (a partial listing of SBU markings the task force found currently in use are shown below). The SBU challenge, according to the task force, is that although SBU regimes or markings are typically derived from an identifiable authority, collectively they reflect a disjointed, inconsistent, and unpredictable system for protecting, sharing, and disclosing sensitive information. The Department of H 4, Safeg Subpart 3004. Industry ( clause at HSAR 3052. shen contr same, in solicitation and contracts w recurring access to government facilities or access to sensitive information. T requir information. ecurity Acquisit d and Sen ion Regulation (H sitive Information Within SAR) 48 C.F.R. 3004), states that contracting officers shall insert the n in figure 1, or one substantially the se shall not be used unless contractor employees wi e recurring access to government facilitie s or access to sen sitive The “Confidentiality of Information” contract clause shown in figure 3 was to be used in solicitations and resultant contracts whenever the need existed to keep information confidential, for example in contracts that involve the use of proprietary plans or processes or confid information of organizations other than the contractors. In addition, any solicitation or contract including this clause was to indicate, as specifically as possible, the types of data that would be covered and the requirements for handling the data. The Air Force Federal Acquisition Regulation Supplement (AFFARS) section on procurement integrity states that any individuals requiring access to source-selection information as a result of participating on a source selection or to perform their duties shall sign a Source Selection Non-disclosure Agreement identified in the Air Force mandatory procedure for source selection, and shown in figure 4. The Source Selection Non-disclosure Agreement may be used on an annual basis for individuals who must have access to source-selection information in the performance of their official duties throughout the year, whether or not they participate as part of the actual source-selection team. The Department of the resources to assist with implementing the Troubled Asset Relief Program (TARP) since its 2008 beginning underscores the importance of addressing conflict-of-interest issues. As we have previously reported, Treasury has strengthened its processes for managing and monitoring conflicts of interest among contractors and financial agents. In January 2009, Treasury issued an interim regulation on TARP conflicts of interest, which was effective immediately. Among other provisions, the regulation requires a certification, in the form of a nondisclosure agreement, from each retained entity’s management official and key individuals performing work under a contract or financial agency agreement stating that he or she will comply with the requirements for confidentiality of nonpublic information before performing work and annually thereafter. An example of a nondisclosure agreement Treasury uses with its TARP contractors is shown in figure 8. Our April 2005 report concerning the federal government’s extensive reliance on contractors to provide IT systems and services found that without appropriate policies and guidance on how to develop effective information-security oversight of contractors, agencies may not develop sufficient policies to address the range of risks posed by contractors, and that as a result, federal information and operations can be placed at undue risk. Since FAR Council efforts to update the FAR provisions had stretched over 3 years, we recommended expeditious completion to ensure that agencies develop appropriate information-security oversight capabilities. FAR Subpart 2.1 Definition of Information Security Added in 2005 Information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction in ord provide— 1. hich means guarding against improper information modification or n, and includes ensuring information nonrepudiation and authenticity; 2. Confidentiality, which means preserving authorized restrictions on access and disclosure, including means for protecting personal privacy and proprietary information; and 3. Availability, which means ensuring timely and reliable access to, and use of, information. In 2007 the FAR was amended to add personnel-security requirements, in recognition that contractors increasingly are required to have physical e access to federally controlled facilities and information systems in th performance of government contracts and the President’s issuance of Homeland Security Presidential Directive 12 (HSPD-12). Specifically, the FAR was amended to require agencies to include a standard clause in their solicitations and contracts when contractor performance requires recurring access to government facilities and systems. This clause states that the contractors shall comply with agency personal identity verification procedures for issuance of identification cards. This action to unify FAR guidance has assisted agencies in implementing HSPD-12, requiring the establishment of a governmentwide standard for secure and reliable forms of identification cards for federal employees and contractors alike. For example, updates issued since 2007 to some ag FAR supplements have added agency-specific HSPD-12 policies, procedures, contract clauses, and solicitation provisio employees requiring routine access to their facilities and sensitive information stored in agency networks. Implementing HSPD-12 requirements through contract provisions helps address the risks of contractors gaining unauthorized physical or electronic access to federal information or contractors using outmoded ow identification cards that can be easily forged, stolen, or altered to allnauthorized access. In 2009 the FAR Council opened a FAR case in u recognition of the need for return of the physical identification cards i c t ssued to contractors. According to the FAR Council, our re ontractor employees’ access to sensitive information reinforced the o resolve this shortcoming in FAR guidance. In addition to the contact named above, Carolyn Kirby, Assistant Director; Jennifer Dougherty; Guisseli Reyes-Turnell; Greg Campbell; Vijay D’Souza; Claudia Dickey; Ralph Roffo; Tind Shepper Ryen; Alyssa Weir; and Bill Woods made key contributions to this report. | In performing agency tasks, contractor employees often require access to sensitive information that must be protected from unauthorized disclosure or misuse. This report assesses the (1) extent to which agency guidance and contracts contain safeguards for contractor access to sensitive information, and (2) adequacy of governmentwide guidance on how agencies are to safeguard sensitive information to which contractors may have access. To conduct this work, GAO identified key attributes involving sensitive-information safeguards, analyzed guidance and met with officials at three agencies selected for their extensive reliance on contractor employees, analyzed 42 of their contract actions for services potentially requiring contractor access to sensitive information, and analyzed the Federal Acquisition Regulation (FAR) and pending FAR changes regarding governmentwide guidance on contractor safeguards for access to sensitive information. GAO's analysis of guidance and contract actions at three agencies found areas where sensitive information is not fully safeguarded and thus may remain at risk of unauthorized disclosure or misuse. The Departments of Defense (DOD), Homeland Security (DHS), and Health and Human Services (HHS) have all supplemented the FAR and developed some guidance and standard contract provisions, but the safeguards available in DOD's and HHS's guidance do not always protect all relevant types of sensitive information contractors may access during contract performance. Also, DOD's, DHS's, and HHS's supplemental FAR guidance do not specify contractor responsibilities for prompt notification to the agency if unauthorized disclosure or misuse occurs. Almost half of the 42 contract actions analyzed lacked clauses or provisions that safeguarded against disclosure and inappropriate use of all potential types of sensitive information that contractors might access during contract performance. Additionally, DOD and HHS lack guidance on the use of nondisclosure agreements, while DHS has found that these help accountability by informing contractors of their responsibilities to safeguard confidentiality and appropriate use and the potential consequences they face from violations. There have been numerous recommendations for improved governmentwide guidance and contract provisions in the FAR, such as prohibiting certain types of contractor personnel from using sensitive information for personal gain. To address some of these areas, regulatory changes are pending to develop standardized approaches and contract clauses in the FAR that agencies could use to safeguard sensitive information, rather than developing such safeguards individually. However, similarly to issues identified in agency guidance, GAO found two key areas the FAR does not yet address. These include (1) agency use of nondisclosure agreements as a condition of contractor access to sensitive information, and (2) the need to establish clear requirements for contractors to promptly notify agencies of unauthorized disclosure and misuse of sensitive information. The ongoing rulemaking process provides an opportunity to address the need for additional FAR guidance in both areas. GAO recommends that the Office of Federal Procurement Policy (OFPP) ensure pending changes to the FAR address two additional safeguards for contractor access to sensitive information: the use of nondisclosure agreements and prompt notification of unauthorized disclosure or misuse of sensitive information. In oral comments, OFPP agreed with the recommendations. DHS also concurred with the recommendations, while DOD and HHS had no comment. |
FSA is USDA’s primary federal agency charged with administering farm programs at the local level. FSA’s fiscal year 1997 salary and expenses were $956 million. This amount provided funding for 17,269 federal and nonfederal employees at the national office, 50 state offices, and 2,440 county offices. In fiscal year 1997, more than 1.6 million farmers participated in USDA’s farm support programs and received more than $7.4 billion in benefits. Most farm support programs are implemented at the county office level under the direction of a county committee of locally elected farmers. This county committee hires a county executive director, who manages the local county office staff. As a condition of participation in any USDA farm program, farmers generally visit their FSA county office in person to identify the particular tract of cropland that is being enrolled in a program. This information ties the individual to the tract of land in order to ensure compliance with various statutes dealing with program eligibility, payment limitations, and conservation requirements. FSA employees review program requirements with the participating farmer and complete most of the paperwork that the farmer signs. Much of the paperwork associated with farm programs consists of contractual agreements between the farmer and USDA. For example, the marketing assistance loan form is a legal agreement between USDA and the farmer in which the farmer agrees to repay the loan within a specified period of time. The current county-based delivery structure for farm program benefits originated in the 1930s, when the first agricultural acts established farm support programs. At that time, more than one-fourth of Americans were involved in farming, and the lack of an extensive communications and transportation network limited the geographic boundaries that could be effectively served by a single field office. Over the past several years, the Department has made a number of changes to the delivery structure that were recommended by us and others. USDA has collocated agencies; consolidated agencies; closed smaller, less efficient county offices; and streamlined some program requirements. However, despite advancements in technology and communications, farmers generally still deal with USDA in person at their local FSA office. See appendix I for more information on the recent changes USDA has made. Farmers who participated in USDA’s commodity programs for major crops saw a reduction in their administrative requirements because of the program changes resulting from the 1996 act. The savings in time spent on paperwork are due mainly to farmers’ not having to make decisions about program participation and planting alternatives. The reduction in the number of visits results from eliminating the requirements that farmers report the number of acres they plant, except for fruits and vegetables. For farm programs other than the commodity programs, we found no substantial change in the amount of time farmers spend on paperwork and the number of visits they make to county offices. The 1996 act significantly changed USDA’s administrative requirements for the commodity programs. Farmers saw their time spent on paperwork reduced from a minimum of 1-1/2 hours to about 15 minutes annually and the number of office visits reduced from twice to once a year. Under the federal commodity programs in existence until 1995, USDA regulated agricultural production by controlling the crops that farmers could grow and the amount of acreage that they could plant. USDA provided annual payments to participating farmers that were based on annual calculations involving historical acreage and yields devoted to agricultural production, market prices for crops, and support prices set by the Congress and the Secretary of Agriculture. Signing up for the programs normally required that farmers visit the county office annually in order to determine the optimal planting option that they should follow for that year. More specifically, if farmers decided to participate in a commodity program, they selected from several available planting options, such as (1) idling a percentage of land, receiving benefits, and producing a commodity or (2) not planting anything and receiving 92 percent of the benefits. FSA staff completed participation worksheets and calculated benefits using different scenarios as many times as the farmers deemed necessary to determine which annual program provisions best met their needs. After the farmers selected an option, FSA staff generated the contract for their signature. Subsequently, the farmers returned to the office to report the acreage actually planted on the farm. The farmer reported the types of crops planted, the number of acres of each crop planted, and the number and location of acres that were not planted. Farmers could use FSA’s aerial photographs to identify fields planted to program crops or idled. Because incorrect reporting could lead to the loss of benefits, farmers often requested measurement services from FSA to guarantee compliance. According to county office staff and participating farmers, these sign-up and acreage reporting visits took a minimum of 1-1/2 hours altogether and two visits to the county office. The 1996 act eliminated annual sign-ups for the commodity programs and allowed eligible farmers to enter cropland previously enrolled in USDA’s commodity programs into 7-year production contracts. The new program is far less complicated than the commodity programs because once farmers chose to participate in the 7-year program, annual decisions on participation or planting alternatives were no longer necessary. Instead, farmers receive fixed annual payments that are based upon the enrolled land’s previous crop production history. Furthermore, farmers are no longer required to report the acreage planted unless they plant fruits and vegetables. In some cases, farmers do not need to visit the county office during the duration of the 7-year contract. Farmers who own and operate their cropland could make payment designations for all 7 years of the contract during their initial visit. However, many farmers who lease land will visit the county office annually because payment designations can be made only for the length of the lease. Because most farmers lease cropland for one season (1 year) at a time, they are required to visit the county office annually to designate the cropland they will farm in order for FSA to determine the payments they are eligible for. According to the farmers and county office staff we interviewed, this process generally involves one visit of about 15 minutes. The 1996 act generally did not change administrative requirements for other farm support programs, such as the Conservation Reserve Program (CRP), direct farm loans, and the Noninsured Crop Disaster Assistance Program (NAP). Accordingly, the amount of paperwork associated with these programs generally did not change. The number of participants in these programs is relatively small in comparison with the number of participants in the commodity programs. For example, in 1996, 1.6 million farmers signed production contracts and 64,000 farmers participated in CRP. See appendix II for more information on the administrative requirements associated with these other farm support programs. FSA could use alternative methods—such as mail and telecommunications—to enroll farmers in programs and deliver program benefits more efficiently. However, shifting to alternative delivery methods would require FSA to change its long-standing tradition of providing personal service to farmers and would shift the burden of completing many administrative requirements to farmers. USDA could use a number of alternatives that could improve the efficiency of its program delivery. These could include greater use of the U.S. mail, telecommunications, and computer technologies. Generally, using these resources should allow USDA to operate with fewer staff and offices and could save millions of dollars annually. However, absent detailed study, the extent to which delivery efficiencies would be achieved is uncertain. We found no statutory or regulatory requirements that direct farmers to visit a county office in order to meet paperwork requirements. Furthermore, while it may be desirable for farmers to visit the county office to identify cropland and ownership when initially enrolling in USDA farm programs, once enrolled, farmers could obtain the forms they need and comply with program requirements by using alternative methods, such as the mail, telephone, or computers. During the course of our review, we talked to farmers who indicated that they had, or could have, used these alternatives to conduct business with FSA. Several farmers we talked with already conducted some of their business with FSA by mail, such as enrolling acreage coming out of CRP in a new production contract. However, most of the farmers stated that because the office was conveniently located, they preferred to conduct business in person. Our discussions with county executive directors and farmers also suggest that more opportunities exist to use these alternative methods to conduct business. For example, a participant could mail acreage reports to the county office, call the office to apply for assistance, and receive benefits (if qualified) electronically without ever visiting the county office. In the case of the direct loan program, a farmer could complete the loan application on a computer and send this information electronically to FSA for approval. Institutions such as the Farm Credit System—a commercial lender that provides credit to agricultural producers and cooperatives—now accept farm loan applications over the Internet. The use of alternatives such as these could reduce the number of visits farmers make to local offices but will not completely eliminate the need for FSA staff to visit farms to inspect and verify loan collateral and carry out compliance activities. Federal agencies and private companies with much larger customer bases than FSA already use some of these alternative delivery methods to reduce the need for customers to visit an office. For example, the Internal Revenue Service has used the U.S. mail for years and now allows individuals to file tax returns electronically or by telephone and deposits refunds directly into customers’ bank accounts. The Social Security Administration has a free telephone service to answer questions and handle simple transactions, such as a change of address. Banks use automatic teller machines to conduct simple transactions, and individuals can apply for loans using the telephone. Similarly, FSA could make greater use of the mail and telecommunications to deliver farm programs to reduce the need for farmers to visit a county office. Using alternative delivery methods should allow USDA to operate with fewer staff and offices, which could reduce personnel expenses by millions of dollars. For every staff-year reduced, FSA could save more than $32,000 in personnel expenses. However, the actual efficiencies attained would depend largely on how USDA restructured its operations using alternative delivery methods. Changing the current delivery system, which is based on county offices, can only occur with a fundamental shift in the long-standing practices and relationships that FSA has with participating farmers. While farmers we talked to said that they could conduct business by mail, telephone, or computer, they generally prefer the personal service they receive at the county office. This is in part because many farmers rely on FSA staff to help them fill out forms for the program. FSA county offices have long provided a high level of personal service to farmers. Historically, this service has included reminding farmers 15 days prior to the ending date of a sign-up period that they had not enrolled in the current year’s commodity program. Likewise, farmers have been able to walk into a county office without an appointment to receive service. Shifting to the use of alternative delivery methods may reduce FSA’s costs of operation but would have several effects that could be considered undesirable. First, because farmers would receive less personal assistance from FSA staff, alternative delivery methods would place greater responsibility on farmers for knowing which programs are available and what the procedures are for enrolling in them. For example, if FSA consolidated its operations into fewer locations and made greater use of the mail, telephone, and computers, FSA staff could be reduced, and fewer staff would be available to meet face-to-face with farmers and complete their paperwork. The available FSA staff could still be used to carry out required functions, such as explaining program requirements, processing applications, and determining program eligibility. Second, the closure of county offices that could result from alternative delivery methods would increase USDA’s distance from many farmers. This increase would probably have the biggest impact on farmers who are members of a minority and those with small farms, who generally have fewer alternative resources available to assist them and may have the greatest need for USDA’s assistance. Minority farmers have criticized USDA recently for not providing adequate service to them. In addition farmers, who as a group are generally older, may not be able to drive greater distances in order to obtain whatever personal service is available. Third, alternative delivery methods could result in less local control. FSA officials told us that farmers who serve on local committees are a valuable resource because they know the farmers in their county and help monitor their compliance with program requirements. In addition to these consequences, many farmers may not have access to the technology needed to conduct business with alternative methods. According to a recent USDA survey, only 30 percent of farmers own a computer. In addition, because farmers are normally located in rural areas, local access to the Internet may not be available. The role of the county office and its relationship to farmers has not changed significantly since USDA began delivering programs at the local level in the 1930s. Even though improvements have been made in the transportation and communications infrastructure, and the number of farmers living in rural America has declined, USDA continues to provide the same kind of personalized service in the county office that it did 60 years ago. However, this service comes at a cost of almost $1 billion annually. While many farmers prefer this kind of service, some taxpayers may be unwilling to support its high cost over the long term. Using alternative delivery methods should allow USDA to operate with fewer staff and offices, which could reduce personnel expenses by millions of dollars. However, any changes in USDA’s field office structure need to take into account the culture that has existed for decades at the county office level. Making significant changes to this structure to reduce government expenses and improve program efficiency could increase the administrative requirements for, and thereby the costs to, farmers who participate in farm programs. Although farmers prefer the current level of personalized service, continued pressure to reduce federal expenditures requires USDA to look for ways to deliver these services more efficiently. Accordingly, we recommend that the Secretary of Agriculture direct the Administrator of the Farm Service Agency, in coordination with the Natural Resources Conservation Service and the Rural Development mission area (the Farm Service Agency’s Service Center partners), to study the costs and benefits of using alternative delivery methods to accomplish mission objectives. We provided USDA with a draft of this report for its review and comment. We met with departmental officials, including the Associate Administrator of the Farm Service Agency. USDA generally agreed with the information presented in the report. While the Department agreed with the intent of our recommendation, it stated that any study of alternative delivery methods should include the Natural Resources Conservation Service and the Rural Development mission area. We have expanded our recommendation in response to this comment. USDA also commented that while most farmers experienced reductions in their administrative requirements, some farmers participating in programs not substantially affected by the 1996 act, such as those for peanuts and tobacco, experienced no change or slightly increased administrative requirements. In addition, the Department noted that while alternative delivery methods may reduce government expenses, such changes could increase costs and administrative requirements for the farmers themselves. We provided additional language in the report to recognize these comments. USDA also provided technical and clarifying comments that were incorporated as appropriate. To determine the extent to which the changes in the farm programs resulting from the 1996 act have reduced farmers’ administrative requirements, we discussed the administrative requirements for major farm programs prior to and after the 1996 act with USDA headquarters, state, and county officials. We reviewed the documentation that USDA submitted to the Office of Management and Budget to justify the need for the paperwork requirements for these programs, as well as the time associated with completing the forms. In considering changes in administrative requirements directed by the 1996 act, our analysis does not consider changes in requirements after 2002, when the current law expires. In looking at alternative delivery methods, we did not analyze the implications of changes in delivery methods on USDA’s process for gathering the farm data used by other USDA agencies. We met with USDA headquarters, state, and county officials, as well as farmers, to obtain their views on whether USDA could use alternative methods to deliver farm support programs. We visited county offices located in California, Connecticut, Georgia, Illinois, Massachusetts, Missouri, Nebraska, North Carolina, and Washington State. In these offices, we met with the county executive director, the manager for agricultural credit, and farmers from the FSA county committee. In six of these states, we also met with the FSA state executive director, and in one state, we met with a member of the state FSA committee. We also called farmers across the nation who were enrolled in CRP, the direct loan program, and the commodity programs for major crops and who had participated in USDA’s customer satisfaction survey to obtain first-hand information on their personal visits and time spent in FSA county offices before and after the 1996 act. We conducted our work from September 1997 through March 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman, House Committee on Agriculture; other interested congressional committees; the Secretary of Agriculture; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please call me at (202) 512-5138 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix III. The U.S. Department of Agriculture’s (USDA) recent efforts to improve its delivery of farm programs include a wide range of efforts. These efforts are only incremental measures, however, that cut at the margins of existing operations. They do not address large-scale concerns affecting the Department’s overall design, mission, and service delivery method. More specifically, since 1994, USDA has consolidated two of its former county-based agencies—the Agricultural Stabilization and Conservation Service, and the Farmers Home Administration—into the Farm Service Agency (FSA). USDA has also collocated these FSA offices with the Natural Resources Conservation Service (NRCS), and the Rural Development mission area into one-stop shopping centers for farmers. With this arrangement, farmers can get farm program information and complete necessary paperwork requirements at one location. In addition, FSA is reviewing its paperwork requirements for farm programs. The Paperwork Reduction Act of 1995 requires federal agencies, including USDA, to reduce their paperwork burden by 25 percent by 1999. USDA has established teams to review its paperwork requirements to determine how they can be streamlined. Furthermore, USDA is undertaking an effort to streamline its administrative activities at the state and national level. In December 1997, the Secretary of Agriculture approved an administrative convergence plan that will consolidate a number of administrative activities at headquarters and in state offices. The plan establishes a Support Services Bureau in headquarters and one state administrative support unit in each state. This organization will provide administrative services, including financial management, human resources, civil rights, information technology, and management services (including procurement), to field-based agencies. USDA also has contracted for an independent study to examine FSA, NRCS, and the Rural Development mission area for opportunities to improve overall customer service and the efficiency of the delivery system. Results of this study will be incorporated into the future iterations of FSA’s strategic plan. The administrative processes and paperwork requirements for many of FSA’s major farm programs—Conservation Reserve, Nonrecourse Marketing Assistance Loans, Peanuts, Tobacco, Direct Loans, and Noninsured Crop Disaster Assistance—are described below. The Conservation Reserve Program (CRP) makes annual rental payments to farmers to retire environmentally sensitive land from production, usually for 10 years. The 1996 act made several changes to CRP to extend, simplify, and refocus the program. We found that farmers spent three visits totaling a minimum of 1 hour to complete the paperwork requirements for CRP. Because there were two CRP signups in 1997, some farmers made more than three visits to an FSA office. On a farmer’s first visit to enroll land in CRP, the farmer reviews an FSA map and indicates the tracts of land he or she is interested in enrolling in the program. FSA staff enter the tract identification information on a CRP worksheet, and the farmer certifies that this information is correct. If the land is determined to be eligible for CRP, the farmer returns to the FSA office to indicate the rental rate he or she will bid and signs a CRP contract, agreeing to the terms and conditions set forth in the appendix to the contract. FSA staff enter the bid amount on a CRP contract, which the farmer signs. FSA selects bids from across the country. The farmers whose bids are accepted return to the county office to review and sign a conservation plan prepared by NRCS. Marketing assistance loans provide farmers with interim financing, using the crop as collateral. These loans allow farmers to hold their crops for sale at a later date, when prices may be higher than they would have been at harvest. Farmers make two to three visits and spend a minimum of 1 hour in total to obtain and repay a marketing assistance loan. On the first visit to obtain a nonrecourse marketing assistance loan, the farmer files an acreage report, unless one has already been filed. Depending on the crop, the farmer brings warehouse receipts or bin measurements to the FSA office and signs a Commodity Credit Corporation Note and Security Agreement, which states that the farmer agrees to pay back the loan or forfeit the collateral, which is the crop. To satisfy the loan, the farmer can either sell the commodity and bring the check for FSA’s signature to pay off the loan or forfeit the loan and arrange for delivery of the commodity to the government. The peanut program establishes annual poundage quotas to limit production as a way of supporting crop prices. The program requires FSA to keep a record of the acreage planted and the sales of this commodity to ensure that farmers stay within their quotas. Farmers generally make about five to six office visits and spend a minimum of 1 hour in total to complete paperwork and obtain marketing cards. In 1997, 25,000 farmers participated in the peanut program. On the first visit to participate in the peanut program, the farmer may request FSA’s measurement services to accurately determine his or her peanut acreage. After planting, the farmer visits the FSA office to certify the acreage actually planted. The farmer then completes a Report of Seed Peanuts, which FSA uses to determine if the amount planted is reasonable for the acreage reported. On the basis of the acreage planted, FSA allocates a temporary seed quota to cover the producer’s purchase of seed. After harvest, the farmer may visit the FSA office to obtain a Peanut Marketing Card. After selling the peanuts, the farmer must bring his or her Peanut Marketing Card to the FSA office and review a Poundage Sales summary, which reflects the sales of the farmer’s peanuts in the marketplace. In addition, if the farmer has excess quota or needs additional quota, he or she will need to make one or more additional visits to the FSA office to complete a Temporary Lease and Transfer of Peanut Quota, which requires witnessed signatures. The tobacco program establishes annual marketing quotas to limit production as a way of supporting crop prices. The program requires FSA to keep a record of the acreage planted (except Burley tobacco) and the sale of this commodity to ensure that farmers stay within their quotas. Farmers generally make about five to six office visits and spend a minimum of 1 hour in total to complete paperwork and obtain marketing cards. In 1997, 330,000 farmers participated in the tobacco program. Farmers may visit the FSA county office to request measurement services to accurately determine their tobacco acreage. After planting, the farmer visits the FSA office to certify the acreage actually planted in tobacco, except for Burley tobacco. After harvest, the farmer visits the FSA office to obtain a Tobacco Marketing Card and sign the Certification of Eligibility to Receive Price Support on Tobacco. If the farmer has excess quota or needs additional quota, he or she will need to make one or more additional visits to the FSA office to complete a Temporary Lease and Transfer of Tobacco Quota, which requires witnessed signatures. At the end of the selling season, the farmer must return, either in person or by mail, the marketing cards and complete a Report of Unmarketed Tobacco. The direct loan program provides operating and ownership loans to farmers who cannot obtain credit elsewhere. There are statutory limitations on the size of these loans. Farmers visit their county office three to four times and spend a minimum of 3 hours in total completing paperwork to obtain a loan. To obtain a direct loan, a farmer generally visits the FSA county office to obtain a Farm Programs Application Package, which includes all of the forms a farmer must complete. A farmer may complete some of these forms during this visit or may gather documentation and complete some of the paperwork before returning to the county office. Credit managers indicated that they usually scheduled a visit to review the application. A complete application package generally includes a Request for Direct Loan Assistance; a Farm and Home Plan showing projected production, income, and expenses; financial records for the past 5 years; and various other documents that describe the applicant’s operations. A farmer makes additional visits to provide more information and, if the loan is approved, to sign the loan agreement. After the loan is approved, a farmer may be required to visit the county office to get signatures on the checks that the farmer receives for selling commodities or to pay back the loan. The Noninsured Crop Disaster Assistance Program (NAP) protects the growers of many crops for which federal crop insurance is not available. FSA makes NAP payments to eligible farmers when an area’s expected yield is less than 65 percent of the normal yield. Farmers who participate in NAP make at least one visit for a minimum of 15 minutes to the county office each year to file an acreage report. If they suffer a disaster, they will make two additional visits and spend a minimum of 30 minutes for these two visits to apply for assistance. To be eligible for NAP, a farmer must file an acreage report annually with the local FSA office. If a farmer suffers a disaster, that farmer can visit the FSA office to complete a Request for Acreage/Disaster Credit. After the area has been declared a disaster, the farmer signs the NAP Certification of Income Eligibility; provides production records, if needed; and signs a Crop Insurance Acreage Report and a Production Yield Report. Ronald E. Maxon, Jr., Assistant Director Fred Light Renee McGhee-Lenart Paul Pansini Carol Herrnstadt Shulman Janice Turner 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 examined the administrative requirements placed on farmers participating in the revamped farm programs, as well as the Department of Agriculture's (USDA) efficiency in delivering program services to farmers, focusing on the: (1) extent to which the changes to the farm programs resulting from the Federal Agriculture Improvement and Reform Act of 1996 have reduced farmers' administrative requirements; and (2) possibility of having USDA use alternative delivery methods to more efficiently administer farm programs. GAO noted that: (1) farmers are now generally spending less time on administrative requirements than they did before the 1996 act; (2) the number of required visits to county offices has declined, as has the amount of time spent completing paperwork for the farm programs; (3) the Farm Service Agency (FSA) could transact more with business farmers through the mail and by telephone and computer, thus increasing the efficiency of its operations; (4) using alternative delivery methods should allow USDA to operate with fewer staff and offices, which could reduce expenses by millions of dollars; (5) while GAO found no statutory or regulatory requirements that direct farmers to visit county offices, changing delivery methods to rely more on such approaches will require fundamental changes in the FSA's long-standing practices and relationships with farmers; and (6) in particular, such methods would reduce farmers' personal contact with county office staff and place greater administrative responsibility on farmers to ensure that required paperwork is completed and submitted in a timely fashion. |
The next Congress and new administration will confront a set of pressing issues that will demand urgent attention and continuing oversight to ensure the nation’s security and well-being. The goal of our transition planning is to look across the work we have done and across the scope and breadth of the federal government’s responsibilities to offer insights into areas needing immediate attention. A few examples follow: Oversight of financial institutions and markets: As events over the past few weeks have underscored, oversight over the U.S. housing and financial markets will certainly be among the priority matters commanding the attention of the new administration and the 111th Congress. These sectors of our economy have been going through a period of significant instability and turmoil and government support is being provided to a growing number of troubled financial institutions. Congress has taken a number of steps to address some of the immediate effects of the market turmoil including enactment of the Federal Housing Finance Regulatory Reform Act of 2008, which, among other things, strengthens regulation of the housing government-sponsored enterprises (GSE) and provides authority to the Treasury to purchase any amount of Fannie Mae and Freddie Mac securities. We are closely monitoring a range of implications of the current market turmoil including the financial condition of the GSEs and the potential exposures from federal insurance and credit programs and possible bailouts. In addition, recent bank failures and growing numbers of banks on the “Watchlist” raise questions about the impact on the banking system and future federal exposures as well as on the bank insurance fund. We have a larger body of work that involves auditing the Federal Deposit Insurance Corporation, the newly created Federal Housing Finance Agency, and the consolidated financial statements of the U.S. government, as well as evaluating ongoing developments in the housing and financial markets. We will draw on this work to provide observations and advice, as appropriate. While these serious disruptions require immediate attention and careful monitoring, ongoing turmoil in the housing and financial markets has renewed concerns about whether the current system for overseeing and regulating financial institutions and markets is best suited to meet the nation’s evolving needs and 21st century challenges. Later this year we plan to issue a report describing the evolution of the current regulatory structure and how market developments and changes have introduced challenges for the current system. We believe this reassessment is needed to ensure that these types of serious disruptions can be minimized in the future. As part of this work, we are also developing a framework to assist Congress in evaluating alternative regulatory reform proposals. U.S. efforts in Iraq, Afghanistan, and Pakistan: Policy and implementation challenges to achieve U.S. objectives for these countries remain on the horizon. Hundreds of billions of dollars have been provided to the Department of Defense (DOD) for military operations in Iraq, Afghanistan, and Pakistan as well as to the State Department and United States Agency for International Development (USAID) to help address security, stabilization and reconstruction, and capacity-building efforts in Iraq and Afghanistan. Some efforts include developing domestic security forces, rebuilding critical infrastructure, and enhancing the countries’ capacity to govern. Since 2003, we have issued more than 170 reports on Iraq, Afghanistan, and Pakistan, covering topics that ranged from the readiness of U.S. forces, to the logistical implications related to reposturing U.S. forces deployed in Iraq, to planning for counterterrorism programs, to progress in building roads and oil pipelines. Our transition work will highlight the major implementation issues that need to be addressed to ensure the development of comprehensive integrated strategies, accountability over resources provided, and ongoing assessments of progress, regardless of what policies are pursued in the future. DOD’s readiness and capabilities: Extended operations in Iraq, Afghanistan, and elsewhere have had significant consequences for military readiness, particularly with regard to the Army and Marine Corps. Current operations have required the military to operate at a persistently high tempo with the added stress of lengthy and repeated deployments. In addition, because of the significant wear and tear on equipment, refocusing of training on counterinsurgency operations, and other factors, rebuilding readiness of U.S. forces is a major challenge for DOD. At the same time, DOD faces competing demands for resources given broad- based initiatives to grow, modernize, and transform its forces. We will offer our perspective on the competing demands DOD faces and the need to develop sound plans to guide investment decisions, as it reassesses the condition, size, composition, and organization of its total force, including contractor support, to protect the country from current, emerging, and future conventional and unconventional security threats. Protection at home: DHS must remain prepared and vigilant with respect to securing the homeland, particularly during the transition period when the nation can be viewed as being particularly vulnerable. In doing so, it is important that the new administration address key issues that, as we reported, have impacted and will continue to impact the nation’s security and preparedness, including better securing our borders, enforcing immigration laws, and serving those applying for immigration benefits; defining key preparedness and response capabilities and building and maintaining those capabilities through effective governmental and external partnerships; and further strengthening the security and resiliency of critical infrastructure to acts of terrorism. In achieving its critical mission, we found that DHS needs to more fully integrate and strengthen its management functions, including acquisition and human capital management; more fully adopt risk-based principles in allocating resources to the areas of greatest need; and enhance the effectiveness of information sharing among federal agencies and with state and local governments and the private sector. The decennial census: Soon after taking office, the new administration will face decisions that will shape the outcome of the 2010 decennial census. Next spring the first nationwide field operation—address canvassing—of the census will begin. During address canvassing, the Census Bureau will rely, for the first time, on hand-held computers to verify address and map information. A complete and accurate address list is the cornerstone of a successful census. Earlier this year, we designated the decennial census as a high-risk area, in part, because of ongoing challenges in managing information technology—including hand-held computers—and uncertainty over the total cost of the decennial census and the Bureau’s plans for rehearsing its field operations. The Bureau has taken some important steps to get the census back on track but did not rehearse its largest and most costly field operation—non-response follow- up—and has little time for further course correction as it prepares to carry out the national head count. The results of the 2010 census are central to apportionment, redistricting congressional boundaries, and distributing hundreds of billions of dollars in federal aid. Retirement of the space shuttle: A decision that must be made before the year is out is whether to retire the space shuttle in 2010, as currently planned, or to extend its life in view of limited options for supporting the International Space Station. Already, shuttle contracts are being phased out and shuttle facilities are being closed or transferred to contracts supporting new development efforts. A decision in favor of extending the shuttle may offer the best course for the future of the International Space Station, as (1) the recent conflict between Russian and the Georgian Republic has called into question the wisdom of relying on Russian space vehicles to ferry U.S. crew and cargo to and from the station during a 5- year gap in U.S. human spaceflight capability and (2) it still appears that other vehicles being developed to support the station—including those from commercial suppliers as well as NASA—may not be ready when anticipated. However, extending the shuttle could also have significant consequences on the future direction of human spaceflight for the U.S. Specifically, NASA is counting on the retirement of the shuttle to free up resources to pursue a new generation of space flight vehicles for exploration, which are anticipated to come on-line in 2015. According to NASA, reversing current plans and keeping the shuttle flying past 2010 would cost $2.5 billion to $4 billion per year. In addition, extending the shuttle will likely be logistically difficult, particularly since it would require restarting production lines and possibly recertifying suppliers as well as the shuttle vehicles. While facing pressing issues, the next Congress and new administration also inherit the federal government’s serious long-term fiscal challenge— driven on the spending side by rising health care costs and changing demographics. This challenge is complicated by the need to timely address developments such as the recent economic pressures and troubles in the housing and financial markets. Ultimately, however, the new administration and Congress will need to develop a strategy to address the federal government’s long-term unsustainable fiscal path. Planning for the transition will necessarily need to address the fact that achieving meaningful national results in many policy and program areas requires some combination of coordinated efforts among various actors across federal agencies, often with other governments (for example, internationally and at state and local levels), non-government organizations (NGO), for-profit and not for-profit contractors, and the private sector. In recognition of this fact, recent years have seen the adoption of a range of national plans and strategies to bring together decision makers and stakeholders from different locations, types of organizations, and levels of government. For example, the National Response Plan is intended to be an all-discipline, all-hazards plan that establishes a single, comprehensive framework for managing domestic incidents where involvement is necessary among many levels of government, the private sector, and nonprofit organizations. The response and recovery efforts after 9/11 and natural disasters, the nation’s preparations for a possible influenza pandemic, and the need to address global food insecurity are some of the many public issues that vividly underscore the critical importance of employing broad governance perspectives to meet global and national needs. Our transition work will highlight challenges the new Congress and next administration face in devising integrated solutions to such multi-dimensional problems. Some examples follow: Care for servicemembers: Over the last several years, more than 30,000 servicemembers have been wounded in action; many with multiple serious injuries such as amputations, traumatic brain injury, and post-traumatic stress disorder. We have identified substantial weaknesses in the health care these wounded warriors are receiving as well as the complex and cumbersome DOD and VA disability systems they must navigate. While improvement efforts have started, addressing the critical continuity of care issues will require sustained attention, systematic oversight by DOD and VA, and sufficient resources. Health care in an increasingly global market and environment: The spread of severe acute respiratory syndrome (SARS) from China in 2002, recent natural disasters, and the persistent threat of an influenza pandemic all highlight the need to plan for a coordinated response to large-scale public health emergencies. Federal agencies must work with one another and with state and local governments, private organizations, and international partners to identify and assess the magnitude of threat, develop effective countermeasures (such as vaccines), and marshal the resources required for an effective public health response. Our transition work on these topics—including work related to such emergencies as SARS, Hurricane Katrina, pandemic influenza, bioterrorism, and TB—will highlight that federal agencies still face challenges such as coordinating response efforts and developing the capacity for a medical surge in mass casualty events. Food safety: The fragmented nature of the federal food oversight system undermines the government’s ability to plan more strategically to inspect food-production processes, identify and react more quickly to outbreaks of food-borne illnesses, and focus on promoting the safety and integrity of the nation’s food supply. Fifteen federal agencies collectively administer at least 30 laws related to food safety. We have recommended, among other things, that the executive branch reconvene the President’s Council on Food Safety to facilitate interagency coordination on food safety regulation and programs. Surface transportation: The nation’s transportation infrastructure—its aviation, highway, transit, and rail systems—is critical to the nation’s economy and affects the daily lives of most Americans. Despite large increases in federal spending on America’s vital surface transportation system, this investment has not commensurately improved the performance of the system. Growing congestion has created by one estimate a $78 billion annual drain on the economy, and population growth, technological change, and the increased globalization of the economy will further strain the system. We have designated transportation finance a high-risk area and have called for a fundamental reexamination and restructured approach to our surface transportation policies, which experts have suggested need to recognize emerging national and global imperatives, such as reducing the nation’s dependence on foreign fuel sources and minimizing the impact of the transportation system on the global climate change. Disaster response: Hurricane Katrina demonstrated the critical importance of the capability to implement an effective and coordinated response to catastrophes that leverages needed resources from across the nation, including all levels of government as well as nongovernmental entities. While the federal government has made progress since Katrina, as shown in the recent response to Hurricane Gustav, we have reported that the administration still does not have a comprehensive inventory of the nation’s response capabilities or a systematic, comprehensive process to assess capabilities at the local, state, and federal levels based on commonly understood and accepted metrics for measuring those capabilities. We have work under way to identify the actions that DHS and the Federal Emergency Management Agency (FEMA) have taken to implement the provisions of the Post-Katrina Emergency Management Reform Act, which charged FEMA with the responsibility for leading and supporting the nation in a comprehensive risk-based emergency management system—a complex task that requires clear strategic vision, leadership, and the development of effective partnerships among governmental and nongovernmental entities. Cyber critical infrastructures: Cyber critical infrastructures are systems and assets incorporating information technology—such as the electric power grid and chemical plants—that are so vital to the nation that their incapacitation or destruction would have a debilitating impact on national security, our economy, and public health and safety. We have made numerous recommendations aimed at protecting these essential assets and addressing the many challenges that the federal government faces in working with both the private sector and state and local governments to do so—such as improving threat and vulnerability assessments, enhancing cyber analysis and warning capabilities, securing key systems, and developing recovery plans. Until these and other areas are effectively addressed, our nation’s cyber critical infrastructure is at risk of the increasing threats posed by terrorists, foreign intelligence services, and others. Also, more broadly, the Government Performance and Results Act of 1993 (GPRA) calls for a governmentwide performance plan to help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies. Unfortunately, the promise of this important provision has not been realized. The agency-by-agency focus of the budget does not provide for the needed strategic, longer range, and integrated perspective of government performance. A broader performance plan would provide the President with an opportunity to assess and communicate the relationship between individual agency goals and outcomes that transcend federal agencies. Our transition work will identify opportunities to limit costs and reduce waste across a broad spectrum of programs and agencies. While these opportunities will not eliminate the need to address more fundamental long-term fiscal challenges the federal government faces, concerted attention by the new administration could conserve resources for other priorities and improve the government’s image. Examples of areas we will highlight and for which we will suggest needed action follow: Improper payments: For fiscal year 2007, agencies reported improper payment estimates of about $55 billion—including programs such as Medicaid, Food Stamps, Unemployment Insurance, and Medicare. The governmentwide estimate has steadily increased over the past several years; yet even the current estimate does not reflect the full scope of improper payments. Further, major management challenges and internal control weaknesses continue to plague agency operations and programs susceptible to significant improper payments. Addressing these challenges and internal control weaknesses will better ensure the integrity of payments and minimize the waste of taxpayers’ dollars. DOD cost overruns: Total acquisition cost growth on the 95 major defense programs in DOD’s fiscal year 2007 portfolio is now estimated at $295 billion, and of the weapon programs we assessed this year, none had proceeded through development meeting the best practice standards for mature technologies, stable design, and mature production processes—all prerequisites for achieving planned cost and schedule outcomes. DOD expects to invest about $900 billion (fiscal year 2008 dollars) over the next 5 years on development and procurement, with more than $335 billion, or 37 percent, going specifically for new major weapon systems. Yet, much of this investment will be used to address cost overruns rooted in poor planning, execution, and oversight. By adopting best practices on individual programs and strengthening oversight and accountability for better outcomes, as we have consistently recommended, cost and schedule growth could be significantly reduced. DOD secondary inventory: DOD expends considerable resources to provide logistics support for military forces, and the availability of spare parts and other critical items provided through DOD’s supply chains affects military readiness and capabilities. DOD officials have estimated that the level of investment in DOD’s supply chains is more than $150 billion a year, and the value of its supply inventories has grown by tens of billions of dollars since fiscal year 2001. However, as we have reported over the years, DOD continues to have substantial amounts of secondary inventory (spare parts) that are in excess to requirements. Most recently, in 2007, we reported that more than half of the Air Force’s secondary inventory, worth an average of $31.4 billion, was not needed to support required inventory levels from fiscal years 2002 through 2005, although increased demand due to ongoing military operations contributed to slight reductions in the percentage of inventory on hand and the number of years of supply it represents. In ongoing reviews of the Navy’s and the Army’s secondary inventory, we are finding that these services also continue to have significant amounts of inventory that exceed current requirements. To reduce its investment in spare parts that are in excess of requirements, DOD will need to strengthen the accountability and management of its secondary inventory. Oil and gas royalties: In fiscal year 2007, the Department of Interior’s Minerals Management Service collected over $9 billion in oil and gas royalties, but our work on the collection of federal royalties has found numerous problems with policies, procedures, and internal controls that raise serious doubts about the accuracy of these collections. We also found that past implementation of royalty relief offered some oil and gas companies during years of low oil and gas prices did not include provisions to remove the royalty relief in the event that oil and gas prices rose as they have, and this failure to include such provisions will likely cost the federal government tens of billions of dollars over the working lives of the affected leases. Finally, we have found that the federal government ranks low among nations in terms of the percentage of total oil and gas revenue accruing to the government. We have ongoing reviews of Interior’s oil- and gas-leasing and royalty policies and procedures and reports based on this work should be publicly released within the next few months. The tax gap: The tax gap—the difference between taxes legally owed and taxes paid on time—is a long-standing problem in spite of many efforts by Congress and the Internal Revenue Service (IRS) to reduce it. Recently, IRS estimated a net tax gap for tax year 2001 of about $290 billion. We have identified the need to take multiple approaches to reduce the tax gap, and specifically have recommended ways for IRS to improve its administration of the tax laws in many areas, including payroll taxes, rental real estate income, the individual retirement account rules, income sent offshore, and collecting tax debts. We also suggested that Congress consider improving tax administration or revising tax policies related to governmental bonds, the tax preparation industry, and accelerated depreciation for Indian reservations. Ultimately, long-term fiscal pressures and other emerging forces will test the capacity of the policy process to reexamine and update priorities and portfolios of federal entitlement programs, policies, programs, commitments, and revenue approaches. In that regard, the “base” of government—spending and revenue—also must be reassessed so that emerging needs can be addressed while outdated and unsustainable efforts can be either reformed or eliminated. Tax expenditures should be part of that reassessment. Spending channeled through the tax code results in forgone federal revenue that summed to an estimated $844 billion in 2007 and has approximated the size of total discretionary spending in some years. Yet, little is known about the performance of credits, deductions, and other tax preferences, statutorily defined as tax expenditures, which are often aimed at policy goals similar to those of federal spending programs. Because tax expenditures represent a significant investment of resources, and in some program areas are the main tool used to accomplish federal goals, this is a significant gap in the information available to decision makers. While some progress has been made in recent years, agencies still all too often lack the basic management capabilities needed to address current and emerging demands. As a result, any new administration will face challenges in implementing its policy and program agendas because of shortcomings in agencies’ management capabilities. Accordingly, our transition effort will synthesize our wide range of work and identify the key management challenges unique to individual departments and major agencies. Additionally, our transition work will emphasize five key themes common to virtually every government agency. Select a senior leadership team that has the experience needed to run large, complex organizations: It is vitally important that leadership skills, abilities, and experience be among the key criteria the new President uses to select his leadership teams in the agencies. The Senate’s interest in leveraging its role in confirmation hearings as evidenced by Senator Voinovich’s request to us to suggest management-related confirmation questions and your interest in hearings such as this one will send a strong message that nominees should have the requisite skills to deal effectively with the broad array of complex management challenges they will face. It is also critical that they work effectively with career executives and agency staff. Given that management improvements and transformations can take years to achieve, steps are needed to ensure a continuous focus on those efforts. Agencies need to develop executive succession and transition-planning strategies that seek to sustain commitment as individual leaders depart and new ones arrive. For example, in creating a Chief Management Officer (CMO) position for DHS, Congress has required the DHS CMO to develop a transition and succession plan to guide the transition of management functions with a new administration. More broadly speaking, though, the creation of a chief operating officer (COO)/CMO position in selected federal agencies can help elevate, integrate, and institutionalize responsibility for key management functions and transformation efforts and provide continuity of leadership over a long term. For example, because of its long-standing management weaknesses and high-risk operations, we have long advocated the need for a COO/CMO for DOD to advance management integration and business transformation in the department. In the fiscal year 2008 National Defense Authorization Act, Congress designated the Deputy Secretary of Defense as the department’s CMO. Strengthen the capacity to manage contractors and recognize related risks and challenges: Enhancing acquisition and contracting capability will be a critical challenge for many agencies in the next administration in part because many agencies (for example, DOD, DHS, the Department of Energy, and the Centers for Disease Control and Prevention) are increasingly reliant on contractors to carry out their basic operations. In fiscal year 2007, federal agencies spent $436 billion on contracts for products and services. At the same time, our high-risk list areas include acquisition and contract management issues that collectively expose hundreds of billions of taxpayer dollars to potential waste and misuse. To improve acquisition outcomes, we have stated that agencies need a concentrated effort to address existing problems while facilitating a reexamination of the rules and regulations that govern the government- contractor relationship in an increasingly blended workforce. For example, since agencies have turned to contractor support to augment their capabilities, they need to ensure that contractors are playing appropriate roles and that the agencies have retained sufficient in-house workforce capacity to monitor contractor cost, quality, and performance. Better manage information technology (IT) to achieve benefits and control costs: A major challenge for the federal government is managing its massive investment in IT—currently more than $70 billion annually. Our reports have repeatedly shown that agencies and the government as a whole face challenges in prudently managing major modernization efforts, ensuring that executives are accountable for IT investments, instituting key controls to help manage such projects, and ensuring that computer systems and information have adequate security and privacy protections. The Office of Management and Budget (OMB) identifies major projects that are poorly planned by placing them on a Management Watch List and requires agencies to identify high-risk projects that are performing poorly. OMB and federal agencies have identified approximately 413 IT projects— totaling at least $25.2 billion in expenditures for fiscal year 2008—as being poorly planned, poorly performing, or both. OMB has taken steps to improve the identification of the Management Watch List and high-risk projects since GAO testified last September, including publicly disclosing reasons for placement on the Management Watch List and clarifying high- risk project criteria. However, more needs to be done by both OMB and the agencies to address recommendations GAO has previously made to improve the planning, management, and oversight of poorly planned and performing projects so that potentially billions in taxpayer dollars are not wasted. Address human capital challenges: Governmentwide, about one-third of federal employees on board at the end of fiscal year 2007 will become eligible to retire on the new administration’s watch. Certain occupations— air traffic controllers and customs and border protection personnel among them—are projected to have particularly high rates of retirement eligibility come 2012. As experienced employees retire, they leave behind critical gaps in leadership and institutional knowledge, which could adversely affect the government’s ability to carry out its diverse responsibilities. Agencies must recruit and retain employees able to create, sustain, and thrive in organizations that are flatter, results-oriented, and externally focused, and who can collaborate with other governmental entities as well as with the private and nonprofit sectors to achieve desired outcomes. The Office of Personnel Management needs to continue to ensure that its own workforce has the skills needed to successfully guide agency human capital improvements and agencies must make appropriate use of available authorities to acquire, develop, motivate, and retain talent. Build on the progress of the statutory management framework: Over the last 2 decades, Congress has put in place a legislative framework for federal management that includes results-based management, information technology, and financial management reforms. As a result of this framework and the efforts of Congress and the Bush and Clinton administrations, there has been substantial progress in establishing the basic infrastructure needed to create high-performing organizations across the federal government. However, work still remains and sustained attention by Congress and the incoming administration will be a critical factor in ensuring the continuing and effective implementation of the statutory management reforms. Initiated in 1990, GAO’s high-risk program has brought a much greater focus to areas in need of broad-based transformations and those vulnerable to waste, fraud, abuse, and mismanagement. It also has provided the impetus for the creation of several statutory management reforms. GAO’s current high-risk list covers 28 areas, as shown in the chart below. Our updates to the list, issued every 2 years at the start of each new incoming Congress, have helped in setting congressional oversight agendas. The support of this Subcommittee and others in Congress has been especially important to the success of this program. Further, administrations have consistently turned to the high-risk list in framing their management improvement initiatives. The current administration in particular, working with Congress, has provided a valuable and focused effort in requiring agencies to develop meaningful corrective action plans for each area that we have designated as high-risk. As a consequence of efforts by Congress, the agencies, OMB, and others, much progress has been made in many high-risk areas, but key issues need continuing attention. Sustained efforts in these areas by the next Congress and administration will help improve service to the American public, strengthen public confidence in the government’s performance and accountability, potentially save billions of dollars, and ensure the ability of government to deliver on its promises. GAO High-Risk list as of September 2008 Addressing Challenges In Broad-Based Transformations Strategic Human Capital Management Managing Federal Real Property Protecting the Federal Government’s Information Systems and the Nation’s Critical Infrastructures Implementing and Transforming the Department of Homeland Security Establishing Appropriate And Effective Information-Sharing Mechanisms to Improve Homeland Security DOD Approach to Business Transformation DOD Business Systems Modernization DOD Personnel Security Clearance Program DOD Support Infrastructure Management DOD Supply Chain Management DOD Weapon Systems Acquisition FAA Air Traffic Control Modernization Financing the Nation’s Transportation System Effective Protection of Technologies Critical to U.S. National Security Transforming Federal Oversight of Food Safety The 2010 Census (New) The world has obviously changed a great deal since the Presidential Transition Act of 1963. And while there have been periodic amendments to the Act, neither the Act nor the transition process itself has been subject to a comprehensive or systematic assessment of whether the Act is setting transitions up to be as effective as they might be. We will be monitoring the transition and reaching out to the new administration, Congress, and outside experts to identify lessons learned and any needed improvements in the Act’s provisions for future transitions. On a related matter, concerns are always expressed during any transition about the conversion of noncareer political appointees from the existing administration to civil service career appointments. Civil service laws, rules, and regulations, require that all personnel actions, including such conversions, remain free of political influence or other improprieties and meet the nine standards known as “merit system principles.” During a presidential election period, the Office of Personnel Management (OPM) conducts a pre-appointment review of all competitive service appointment actions that involve the appointment or conversion of a Schedule C or Noncareer Senior Executive Service (SES) employee. At the request of Congress, we have regularly reported on such conversions for many years. Most recently, we reported in 2006 that for the period of May 2001 through April 2005, 23 of 41 agencies reviewed reported converting 144 individuals from noncareer to career positions, 130 individuals at the GS-12 level or higher. The remaining 18 agencies reported making no conversions. We found that agencies used appropriate authorities and followed procedures in making the majority (93) of the 130 conversions reported at the GS-12 level or higher. It appeared that agencies did not follow proper procedures for 18 conversions, including by creating career positions specifically for particular individuals, posting SES vacancy announcements for less than the minimum time requirement, and failing to apply veteran’s preference; we referred those 18 conversions to the Office of Personnel Management and recommended that the Director determine whether additional actions were needed. For the other 19, agencies did not provide enough information for us to make an assessment. Congress has again turned to us to monitor conversions. Specifically, we have been asked to report for 42 agencies on (1) the number and types of conversions of individuals holding noncareer positions to career positions from May 2005 through May 2009 and (2) whether agencies used appropriate appointment authorities and followed proper procedures consistent with merit systems principles in making the conversions. We expect to provide the requesters with interim information on our findings and issue a final report early in spring 2010. Finally, as you may know, under the Federal Vacancies Reform Act of 1998, federal agencies must file reports with the Comptroller General and each House of Congress on certain executive office positions that require Presidential nomination and Senate confirmation. Agencies are required to report (1) the vacancy and the date of the vacancy, (2) the name of any person serving in an acting capacity and the date such service began, (3) the name of any person nominated to the Senate to fill the position and the date of the nomination, and (4) the date of a rejection, withdrawal, or return of a nomination. To meet our responsibilities under the Act, we maintain a database on our Web site (www.gao.gov) of current and past vacant positions, based on the reports submitted by the agencies. The law also requires us to inform relevant congressional committees, the President, and OPM if an acting officer is serving longer than the specified period under the Act (210 days, except following a Presidential inauguration when the period is 300 days). We have issued 12 such letters since 1998. In summary, our goal will continue to be to provide congressional and executive branch policy makers with a comprehensive snapshot of how things are working across government and to emphasize the need to update some federal activities to better align them with 21st century realities and bring about government transformation. In keeping with our role, we will be providing Congress and the executive branch with clear facts and constructive options and suggestions that our elected officials can use to make policy choices in this pivotal transition year. The nation’s new and returning leaders will be able to use such information to help address both the nation’s urgent issues and long-term challenges so that our nation stays strong and secure now and for the next generation. Chairman Towns, Mr. Bilbray, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have. Housing Government-Sponsored Enterprises: A Single Regulator Will Better Ensure Safety and Soundness and Mission Achievement (GAO-08-563T, Mar. 6, 2008). Financial Regulation: Industry Trends Continue to Challenge the Federal Regulatory Structure (GAO-08-32, Oct. 12, 2007). Operation Iraqi Freedom: Actions Needed to Enhance DOD Planning for Reposturing of U.S. Forces from Iraq (GAO-08-930, Sept. 10, 2008). Securing, Stabilizing, and Reconstructing Afghanistan: Key Issues for Congressional Oversight (GAO-07-801SP, May 24, 2007). Securing, Stabilizing and Rebuilding Iraq: Progress Report: Some Gains Made, Updated Strategy Needed (GAO-08-837, June 23, 2008). Combating Terrorism: The United States Lacks Comprehensive Plan to Destroy the Terrorist Threat and Close the Safe Haven in Pakistan's Federally Administered Tribal Areas (GAO-08-622, April 17, 2008). Combating Terrorism: Increased Oversight and Accountability Needed over Pakistan Reimbursement Claims for Coalition Support Funds (GAO-08-806, June 24, 2008) Military Readiness: Impact of Current Operations and Actions Needed to Rebuild Readiness of U.S. Ground Forces (GAO-08-497T, Feb. 14, 2008). Force Structure: Restructuring and Rebuilding the Army Will Cost Billions of Dollars for Equipment but the Total Cost Is Uncertain (GAO-08-669T, Apr. 10, 2008). Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions (GAO-07-454, Aug. 17, 2007). Department of Homeland Security: Progress Made in Implementation of Management Functions, but More Work Remains (GAO-08-646T, Apr. 9, 2008). 2010 Census: Census Bureau's Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical (GAO-08-936, July 31, 2008). Information Technology: Significant Problems of Critical Automation Program Contribute to Risks Facing 2010 Census (GAO-08-550T, Mar. 5, 2008). NASA: Challenges in Completing and Sustaining the International Space Station (GAO-08-581T, Apr. 24, 2008). NASA: Ares I and Orion Project Risks and Key Indicators to Measure Progress (GAO-08-186T, Apr. 3, 2008). The Nation's Long-Term Fiscal Outlook: April 2008 Update (GAO-08- 783R, May 16, 2008). Budget Issues: Accrual Budgeting Useful in Certain Areas but Does Not Provide Sufficient Information for Reporting on Our Nation's Longer- Term Fiscal Challenge (GAO-08-206, Dec. 20, 2007). Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and Uncertainties (GAO-03-213 (Jan. 24, 2003). Long-Term Fiscal Outlook: Long-Term Federal Fiscal Challenge Driven Primarily by Health Care (GAO-08-912T, June 17, 2008). DOD and VA: Preliminary Observations on Efforts to Improve Care Management and Disability Evaluations for Servicemembers (GAO-08-514T, Feb. 27, 2008). DOD and VA: Preliminary Observations on Efforts to Improve Health Care and Disability Evaluations for Returning Servicemembers (GAO- 07-1256T, Sept. 26, 2007). Emergency Preparedness: States are Planning for Medical Surge, but Could Benefit from Shared Guidance for Allocating Scarce Medical Resources (GAO-08-668, June 13, 2008). Influenza Pandemic: Efforts Under Way to Address Constraints on Using Antivirals and Vaccines to Forestall a Pandemic (GAO-08-92, Dec. 21, 2007). Federal Oversight of Food Safety: High-Risk Designation Can Bring Needed Attention to Fragmented System (GAO-07-449T, Feb. 8, 2007). Federal Oversight of Food Safety: FDA's Food Protection Plan Proposes Positive First Steps, but Capacity to Carry Them Out Is Critical (GAO- 08-435T, Jan. 29, 2008). Surface Transportation Programs: Proposals Highlight Key Issues and Challenges in Restructuring the Programs (GAO-08-843R, July 29, 2008). Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs (GAO-08-400, Mar. 6, 2008). Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System (GAO-06-618, Sept. 6, 2006). Emergency Management: Observations on DHS's Preparedness for Catastrophic Disasters (GAO-08-868T, June 11, 2008). Critical Infrastructure Protection: Sector-Specific Plans’ Coverage of Key Cyber Security Elements Varies (GAO-08-113, Oct. 31, 2007). Critical Infrastructure Protection: Multiple Efforts to Secure Control Systems Are Under Way, but Challenges Remain (GAO-07-1036, Sept. 10, 2007). Improper Payments: Status of Agencies' Efforts to Address Improper Payment and Recovery Auditing Requirements (GAO-08-438T, Jan. 31, 2008). Fiscal Year 2007 U.S. Government Financial Statements: Sustained Improvement in Financial Management Is Crucial to Improving Accountability and Addressing the Long-Term Fiscal Challenges (GAO-08-847T, June 5, 2008). Defense Acquisitions: Better Weapon Program Outcomes Require Discipline, Accountability, and Fundamental Changes in the Acquisition Environment (GAO-08-782T, June 3, 2008). Defense Acquisitions: Assessments of Selected Weapon Programs. (GAO-08-467SP, Mar. 31, 2008). DOD's High-Risk Areas: Efforts to Improve Supply Chain Can Be Enhanced by Linkage to Outcomes, Progress in Transforming Business Operations, and Reexamination of Logistics Governance and Strategy (GAO-07-1064T, July 10, 2007). Defense Inventory: Opportunities Exist to Save Billions by Reducing Air Force’s Unneeded Spare Parts Inventory (GAO-07-232, Apr. 27, 2007). Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment (GAO-08-691, Sept. 3, 2008). Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk (GAO-08-893R, Sept. 12, 2008). Highlights of the Joint Forum on Tax Compliance: Options for Improvement and Their Budgetary Potential (GAO-08-703SP, June 2008). Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap (GAO-07-488T, Feb. 16, 2007). Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined (GAO-05-690, Sept. 23, 2005). Higher Education: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes (GAO-08-717T, May 1, 2008). Organizational Transformation: Implementing Chief Operating Officer/Chief Management Officer Positions in Federal Agencies (GAO-08-34, Nov. 1, 2007). Defense Management: DOD Needs to Reexamine Its Extensive Reliance on Contractors and Continue to Improve Management and Oversight (GAO-08-572T, Mar. 11, 2008). Federal Acquisitions and Contracting: Systemic Challenges Need Attention (GAO-07-1098T, July 17, 2007). Information Technology: OMB and Agencies Need to Improve Planning, Management, and Oversight of Projects Totaling Billions of Dollars (GAO-08-1051T, July 31, 2008). Information Security: Progress Reported, but Weaknesses at Federal Agencies Persist (GAO-08-571T, Mar. 12, 2008). Office of Personnel Management: Opportunities Exist to Build on Recent Progress in Internal Human Capital Capacity (GAO-08-11, Oct. 31, 2007). Human Capital: Transforming Federal Recruiting and Hiring Efforts (GAO-08-762T, May 8, 2008). High-Risk Series: An Update (GAO-07-310, Jan. 31, 2007). Suggested Areas for Oversight for the 110th Congress (GAO-07-235R, Nov. 17, 2006). 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 upcoming 2009 transition will be a unique and critical period for the U.S. government. It marks the first wartime presidential transition in 40 years. It will also be the first administration change for the relatively new Department of Homeland Security operating in the post 9/11 environment. The next administration will fill thousands of positions across government; there will be a number of new faces in Congress as well. Making these transitions as seamlessly as possible is pivotal to effectively and efficiently help accomplish the federal government's many essential missions. While the Government Accountability Office (GAO), as a legislative branch agency, has extensive experience helping each new Congress, the Presidential Transition Act points to GAO as a resource to incoming administrations as well. The Act specifically identifies GAO as a source of briefings and other materials to help presidential appointees make the leap from campaigning to governing by informing them of the major management issues, risks, and challenges they will face. GAO has traditionally played an important role as a resource for new Congresses and administrations, providing insight into the issues where GAO has done work. This testimony provides an overview of GAO's objectives for assisting the 111th Congress and the next administration in their all-important transition efforts. GAO will highlight issues that the new President, his appointees, and the Congress will confront from day one. These include immediate challenges ranging from national and homeland security to oversight of financial institutions and markets to a range of public health and safety issues. GAO will synthesize the hundreds of reports and testimonies it issues every year so that new policy makers can quickly zero in on critical issues during the first days of the new administration and Congress. GAO's analysis, incorporating its institutional memory across numerous administrations, will be ready by the time the election results are in and transition teams begin to move out. GAO will provide congressional and executive branch policy makers with a comprehensive snapshot of how things are working across government and emphasize the need to update some federal activities to better align them with 21st century realities and bring about government transformation. In keeping with its mission, GAO will be providing Congress and the executive branch with clear facts and constructive options and suggestions that elected officials can use to make policy choices in this pivotal transition year. GAO believes the nation's new and returning leaders will be able to use such information to help meet both the nation's urgent issues and long-term challenges so that our nation stays strong and secure now and for the next generation. GAO's transition work also will highlight the need to modernize the machinery of government through better application of information technology, financial management, human capital, and contracting practices. GAO also will underscore the need to develop strategies for addressing the government's serious long-term fiscal sustainability challenges, driven on the spending side primarily by escalating health care costsand changing demographics. |
In 1997 and 1998, the quality of service IRS provided to taxpayers was identified as a problem both in and outside IRS. The Vice President’s National Performance Review looked within and across federal agencies at how existing programs could operate more efficiently and effectively and what activities the government should be doing. After hearing from citizens, legislators, and others that IRS needed to improve in meeting the needs of taxpayers, NPR commissioned a Customer Service Task Force. The Task Force made more than 200 recommendations for customer service improvements. The Senate Finance Committee held hearings during which taxpayers, IRS employees, and others testified about instances of taxpayer abuse and mistreatment. At the same time, a new Commissioner received thousands of improvement suggestions from meetings held with employees across the nation. The Commissioner was also formulating long-term plans for restructuring IRS according to the functional groups of taxpayers it serves (e.g., wage earners, small businesses, and large corporations) in accordance with the IRS Restructuring and Reform Act of 1998. A major information systems modernization was under way, as were efforts to make IRS’ systems Year 2000 compliant. To meet our reporting objective, we reviewed our prior work and IRS documents and interviewed cognizant officials about the overall strategy for managing the customer service improvement efforts and about activities related to the implementation of the selected individual initiatives. We requested comments on a draft of this report from the Commissioner of Internal Revenue. We received written comments, which are discussed near the end of this letter and reprinted in appendix III. We did our work primarily at IRS headquarters in Washington, D.C., between April 1998 and January 1999, in accordance with generally accepted government auditing standards. (See app. I for more details on our scope and methodology.) IRS established a promising strategy for managing the implementation of the agency’s customer service initiatives. The development and use of management information on costs and benefits, milestones and completion dates, and performance measures would strengthen its management strategy. IRS’ basic management strategy was to establish a central office, TSI, in January 1998 to manage the overall implementation of customer service improvements that were being carried out by many different IRS and Treasury offices. The head of TSI was authorized to build a staff and create a strategy for the coordinated review and implementation of the more than 5,000 improvement initiatives IRS received. At the same time the Commissioner established TSI, he created an executive steering committee, with himself as chair, to oversee the implementation activities. The steering committee was to provide decisions on matters affecting the implementation of the recommended initiatives and was to ensure that initiatives being implemented were consistent with IRS’ overall business strategy. We have found that this kind of centralized coordination of crosscutting programs is an effective management strategy. It can be used to identify program overlap, duplication, or fragmentation. Coordination also helps to ensure that program efforts are mutually reinforcing. By April 1998, the 12-person TSI staff had created a database of the initiatives and begun using it to categorize the initiatives on its agenda. TSI grouped the recommendations into functional areas, identified sources of suggestions, and linked similar suggestions from different sources together. The database also had fields for information on the priority level, impact, and cost of implementing initiatives—data that could potentially be used to monitor implementation and facilitate effective management and oversight of work on initiatives. According to TSI officials, however, this information was not routinely completed and updated by offices implementing the initiatives. Early actions to develop the database notwithstanding, TSI had problems in carrying out its responsibilities during its first months of operation. Officials said that the problems arose in large part from the sheer volume of improvement initiatives on its agenda. The TSI staff was not able to evaluate and prioritize the more than 5,000 mandates, recommendations, and suggestions that came from sources including Congress, task force groups, and individual employees and taxpayers. TSI officials said that efforts to determine accountability for work, especially when two or more offices shared responsibility, and to track the progress being made on individual initiatives were also hampered by the large volume of initiatives. As of January 1999, IRS had taken several actions to address its problems. Top IRS management established criteria for prioritization in September 1998. To determine what initiatives to implement in the short term, officials said that IRS criteria were that legislative mandates were top priorities and that all initiatives selected were to show taxpayers, employees, and external stakeholders (e.g., NPR and Congress) that IRS was changing. In January 1999, IRS leadership approved a list of 157 initiatives as primary customer service improvement actions, drastically reducing the number to be managed by TSI in the short term. The initiatives selected were organized under 19 strategic categories (e.g., protect taxpayer rights, improve and increase the use of education and delinquency prevention techniques, and create an IRS culture that values employees and rewards top-quality service). An “owner”—an IRS executive—was assigned as the official accountable for each strategic category and the initiatives being implemented within it. Each strategic category contributed to one of IRS’ three strategic goals: (1) service to each taxpayer; (2) service to all taxpayers; or (3) productivity through a quality work environment. This prioritization process was a necessary first step to setting realistic goals for progress based on IRS’ capacity to take on additional responsibilities. It reduced the number of improvement actions to a manageable level and established accountability for carrying out the work. It also made it feasible to expect that TSI could track the progress being made in implementing the priority initiatives. TSI also made improvements to its database that gave offices implementing the individual initiatives on-line access to information. This change was designed, in part, to make it easier and more efficient to track progress being made on individual initiatives. IRS’ management strategy could be improved. As our review was being completed, TSI had requested that the owners of each primary initiative enter an “action plan” into the database with information on start and completion dates and milestones. As of March 1999, TSI was working with managers of individual initiatives to finalize the action plans. TSI officials said that they expected to use the action plans to monitor progress being made and to keep current on the status of the initiatives. However, IRS had not assessed the need for information on expected costs and benefits and how results of the initiatives were to be measured. TSI officials said that consideration of how to systematically collect standard information on costs and benefits of the initiatives and plans for measuring their results was in an early discussion stage. TSI had concentrated its efforts on prioritization and then developing information on initiatives’ key milestones and completion dates. It had not developed plans to seek information on costs, benefits, or results for individual initiatives. As of January 1999, managers for a few of the 25 initiatives we reviewed had documented management information on costs and benefits, milestones and completion dates, and anticipated results. For 19 of the 25 initiatives we reviewed (see app. II), we asked for documentation of this management information. These 19 initiatives were in process and had progressed past the planning and design phases. We found that 11 of the 19 initiatives had written plans with milestone dates for reaching key points and an estimated final completion date. Cost- benefit analyses were done for eight initiatives, and written documentation of performance measures to gauge expected results were done in seven instances. Managers on individual initiatives provided a number of reasons why some types of management information were not developed. For example: The manager for an initiative to administer preemployment screening assessments to applicants for customer service positions said that IRS leadership wanted the screening assessments to be used for hiring for the 1999 filing season. She noted that there was not enough time to prepare formal project management documents before that hiring began in September 1998. The manager of an initiative to provide tax information to small start-up businesses jointly with the Small Business Administration said that it was not possible to track individual taxpayers who received the information to directly measure how receiving it improved their compliance with tax laws. The manager of an initiative to provide customer service training to all IRS employees said that since the commitment to this training was made by the Acting Commissioner to the Senate Finance Committee, a cost-benefit analysis was not necessary to decide whether the project should be completed. Our work evaluating the implementation of the Government Performance and Results Act has documented the difficulties that agencies face in developing management information, particularly measures of results. Extenuating circumstances, such as short time frames and difficulties identifying benefits and costs, may even preclude the development of management information in some instances. Moreover, factors such as scope and complexity can drive the level of detail necessary. For example, one would not expect to see as much detail in a plan to study why people hang up when they use an automated telephone menu as in a plan to begin using complex new call router technology. However, our work has also shown that public sector agencies can and do overcome obstacles to successfully implement strategic management principles and become more results-oriented. Such efforts have resulted in improved performance. For example, the National Oceanic and Atmospheric Administration began to measure the extent to which it could increase the advance notice it gave the public before severe weather events, instead of counting the number of forecasts it made. The emphasis is significant because having more time to prepare should lessen the loss of life and property. The Coast Guard’s Office of Marine Safety, Security, and Environmental Protection improved its mission effectiveness with fewer people and at lower cost. It did so by giving field commanders greater authority and by investing in activities and processes that went most directly to the goal of reducing risks on the water. Measuring performance allows agencies to track the progress they are making toward their goals and gives managers crucial information on which to base their organizational and management decisions. No picture of what government is accomplishing with the taxpayers’ money can be complete without management information on benefits and costs. It provides agencies with tools to determine whether they have used public resources economically, efficiently, and effectively to achieve the purposes for which they were appropriated. Viewing program performance in light of costs can be important on at least two levels. First, it can help Congress make informed decisions. Second, it can give taxpayers an accounting of what government is providing in return for their tax dollars. As of January 1999, IRS had established priorities, reduced the number of initiatives to a manageable level, aligned them with its strategic goals and objectives, and assigned accountability for individual initiatives. IRS also improved its ability to monitor and track individual initiatives by providing on-line access to its database and by asking managers responsible for work on individual initiatives to input information on milestones and completion dates. As IRS moves forward on its customer service improvements, we believe its strategy for managing the initiatives would be enhanced by having information on expected costs and benefits, milestones and completion dates, and performance measures. IRS has already linked the initiatives to its strategic goals and objectives and begun to collect information pertaining to timeliness. However, it has not determined how much the initiatives are likely to cost, what benefits are expected to be achieved, and how results will be measured. We recognize that the level of detail that might be needed likely would vary from initiative to initiative. The TSI database could serve as a tool not only to monitor implementation, but also to facilitate effective management and oversight. Consistent information—including cost, benefit, and performance results data, provided and kept current through on-line access—could be the link between project teams, IRS’ leadership, and other stakeholders. We recommend that the Commissioner of Internal Revenue develop an approach and provide guidance to managers for determining the appropriate cost and benefit information for the customer service initiatives and for measuring the results of the initiatives in relation to IRS’ customer service objectives. We also recommend that the Commissioner of Internal Revenue enhance the TSI database to include this management information for the use of IRS’ project teams, leadership, and other stakeholders. We provided a draft of this report for comment to the Commissioner of Internal Revenue. The comments are summarized below and reproduced in appendix III. IRS said that our report was a fair and balanced assessment of its strategy for implementing customer service improvements—recognizing both the strengths of the strategy and how it could be improved. IRS noted that the report indicated our willingness to go beyond identifying problems and to collaborate in developing pragmatic solutions. IRS agreed that it needed to address the two recommendations we made for enhancing its customer service improvement strategy. It noted that some steps were already being taken to collect information on the expected costs and benefits of improvement initiatives, and it recognized that the design of relevant measures of results were also very important. We are sending copies of this report to Representative William J. Coyne, Ranking Minority Member of your Subcommittee; The Honorable Robert E. Rubin, Secretary of the Treasury; The Honorable Charles O. Rossotti, Commissioner of Internal Revenue; and other interested parties. We will also make copies available to others upon request. This report was prepared under the direction of Alton C. Harris, Assistant Director. Other major contributors are listed in appendix IV. If you have any questions, please call me on (202) 512-9110 or Mr. Harris on (404) 679- 1854. At the request of the Chairman of the House Subcommittee on Oversight, Committee on Ways and Means, we agreed to assess IRS’ strategy for managing the implementation of its customer service initiatives—including whether IRS had developed information on expected costs and benefits, milestones and completion dates, and performance measures to gauge results. To provide some perspective on the type of work being done to improve customer service, we also agreed to provide information on the progress made on 25 initiatives. (See app. II.) To address this objective, we interviewed officials and reviewed documentation and our prior reports that addressed the importance of strategic planning in federal program management. We interviewed officials from TSI and the Customer Service Task Force at IRS headquarters. Using a standard set of questions, we also interviewed IRS officials responsible for implementing 25 of IRS’ customer service initiatives. We asked them whether they developed and used selected project management information and what progress they were making in implementing the initiatives. At 3-month intervals over the course of our review, we requested updates of a TSI database that organized and categorized the customer service initiatives. We received database updates in April 1998 and July 1998. In October 1998 and January 1999, TSI officials advised us that no status reports were available because IRS had temporarily suspended follow-up activities on the individual initiatives to focus on the prioritization of all initiatives. We did not independently verify the TSI database, but we did examine its accuracy for the 25 improvement initiatives that we included in our review. We reviewed planning documents that had been prepared for 19 of the 25 initiatives. Work on these initiatives was in process and had progressed past the design and planning stages. We determined, and TSI officials agreed, that they were initiatives that would benefit from having management information on costs and benefits, milestones and completion dates, and performance measures to gauge results. The 25 initiatives we selected for detailed review were chosen before IRS had prioritized its initiatives, reducing the number of primary actions to 157. They were all recommendations of the IRS Customer Service Task Force and were chosen to reflect a cross section of the major customer improvement efforts. Several initiatives were included that addressed improvements in telephone assistance and employee training because more than 70 percent of IRS’ $103 million in fiscal year 1999 appropriations to implement customer service improvements was targeted for these two areas. For each improvement area, we judgmentally selected initiatives to study based on their potential to have a positive impact on IRS’ customer service. TSI officials agreed that all of the projects we selected were significant initiatives. (See app. II for a list of the initiatives we reviewed and information on the progress made in implementing them.) Our review of the 25 initiatives recommended by the Task Force was not intended to assess IRS’ overall progress in improving customer service. Rather, the analysis was to provide information on some of the work being done on initiatives recommended by the Task Force. During our review, IRS approved a list of 157 initiatives as customer service improvements with the highest priority for implementation in the short term. We did not assess the prioritization criteria used. We did our work primarily at IRS headquarters in Washington, D.C. We also interviewed an official in the IRS Southeast Region in Atlanta, GA, and we attended a training conference in Arlington, VA, to prepare IRS trainers to deliver new customer service training to employees. On March 19, 1999, we provided a draft of this report for comment to the Commissioner of IRS. We received the Commissioner’s written comments on April 12, 1999. They are reproduced in appendix III and discussed at the end of the letter. Table II.1 shows the results of our review of progress made on 25 customer service improvement initiatives. In selecting the initiatives to review, we determined and TSI officials agreed that they had great potential for improving customer service. Six of the 25 initiatives that we reviewed were closed as of January 1999. Sixteen initiatives were in process, and three had been deferred. Initiatives were classified as closed because officials believed that they had completed work on them or they did not need to complete them. For example, the initiative to expand telephone serve to 7 days a week, 24 hours a day by January 1, 1999, was classified as closed because IRS had taken this action. The initiative to create a plan for effective alternatives to serve customers before closing a walk-in office was classified as closed because IRS did not plan to close any walk-in offices; thus, no plan for alternatives was needed. Initiatives classified as in process included those in various stages of implementation. For example, an initiative in the early stages of implementation was the effort to improve the national distribution of information to IRS employees. An IRS official said that major improvements in the national distribution of information to IRS employees could not be achieved until all employees had access to computers and were on a standard computer network. While awaiting the required information systems upgrades, however, IRS started smaller scale projects to improve communication. These included issuing a newsletter containing information on IRS’ modernization efforts to all employees. An initiative that was closer to full implementation was an initiative to assess the skills of IRS employees and train those with the most critical needs. Assessment instruments were developed and testing was underway for employees working in Customer Service, Collection, Examination, and Support Services. Some training had started to improve employees’ skills as identified by the testing. Initiatives were deferred because IRS determined that other projects had higher priorities or because timing was not appropriate for implementation. For example, IRS decided not to attempt to standardize the format and content of its written responses to taxpayers until it had completed an initiative that was under way to rewrite all of its notices. Table II.1: Progress on 25 Customer Service Improvement Initiatives as of January 1999 Initiative Market Telefile aggressively to individual taxpayers. In 1999, begin using new call router technology to provide information that is geared to specific customer needs, such as the tax implications of the sale of a house, retirement, or job change. Before closing a walk-in office, create a plan for effective alternatives to serve customers. Establish a uniform set of leadership competencies for all levels of management. Description of work done Officials said that IRS’ current practice of mailing Telefile information, rather than traditional tax filing packages, to taxpayers who are potentially eligible for Telefile is the most aggressive marketing strategy it could use. Officials said that the call router was implemented in December 1998, although IRS has plans for a number of enhancements to the system. By January 1, 1998, expand telephone service to 6 days a week, 16 hours a day. By January 1, 1999, expand telephone service to 7 days a week, 24 hours a day. In 1999, work to enable taxpayers to file paperless returns by eliminating the need for mailing in W-2s and other forms for paper signature in a way that does not jeopardize law enforcement. Use multiple strategies to reduce demand on the telephone lines, such as educating customers on when to expect refunds. Officials said that no further action was needed on this initiative because IRS does not plan to close any walk-in offices. Officials said that the Office of Personnel Management (OPM) revalidated a set of leadership competencies that federal agencies could use in their entirety or adapt as needed. IRS used the OPM model to develop its own model. It was used in1998 as part of the selection process for new executives. Officials said that IRS implemented these actions in January 1999. In February 1998, IRS started preparing a policy to guide its effort in this area, according to project officials. A pilot test is being conducted during the 1999 filing season on substitutes for signatures on electronically filed returns. Complete a study of why people hang up when they use the automated menu and recommend needed modifications to current plans. Assess the skills of IRS employees and train those with the most critical needs. IRS had several efforts under way to reduce demand on telephone lines. These included providing tax law assistance by electronic mail, improving the clarity of and reducing the number of notices, thereby reducing the need for taxpayers to call, and managing telephone calls away from live assistors and onto automated systems where possible. IRS had the study under contract, with an expected delivery in June 1999. Create a skills bank that identifies the skills of IRS employees. In 1998, have an intensive agencywide special training program to introduce employees to the new approach to customer service. Assessment instruments were developed and testing was under way for employees working in the Customer Service, Collection, Examination, and Support Services areas. Some training to improve employees’ skills as identified by the testing had begun. Officials said that IRS developed databases of information on the results of assessments administered to measure employees’ general competencies (e.g., communication and listening skills) and technical skills. Each of 22 field education branch offices managed a database and sent their data to a centralized database. When IRS’ integrated personnel system is in place, these databases are to be integrated into it. IRS developed and piloted a course, but suspended it in late 1998 at the request of the National Treasury Employees Union (NTEU). The course was redesigned, and an official said that training was to resume in May 1999 and be completed by December 1999. Over the long term, change how IRS selects, trains, evaluates, rewards, and supports its employees so they can better serve customers. Work with NTEU to design and test a balanced scorecard to evaluate IRS and its employees in 1998. Improve national distribution of information to IRS employees. Separate projects addressed the selection, training, evaluation, rewards, and support portions of this broad recommendation. For example, a pilot test was done using assessment instruments to measure the skills and abilities of applicants for customer service positions. A team proposed several ways to redesign IRS’ performance management system, including how employees were evaluated and rewarded, and was awaiting feedback from management. Another team offered ways to implement a range of options (e.g., pay for performance and a streamlined external competitive selection process) that IRS could use to motivate and reward employees. In 1998, IRS developed a measurement system that was intended to balance measures of business results with measures of customer and employee satisfaction. Implementation of the balanced measurement system in 1999 is to begin with new operational measurements for three key functions: customer service, examinations, and collections. IRS communications activities were integrated into a single office. While awaiting completion of information management systems upgrades that would make distribution of information to employees quicker and easier, the office was making improvements on a smaller scale. For example, it began producing a newsletter, New Directions, which informed employees about IRS’ modernization efforts. According to officials, IRS organized and funded projects under three STAWRS initiatives: streamlined customer service, single- point filing, and simplified requirements. To give small businesses a single point for reporting tax and wage data to meet the requirements of IRS, Social Security Administration, Department of Labor, and state agencies, continue to work to support the Simplified Tax and Wage Reporting Systems (STAWRS) program. By the end of 1998, eliminate additional unnecessary notices. This will eliminate more than 45 million pieces of mail annually, almost one-third of the total number of notices that IRS has been sending to taxpayers. Seek to route telephone calls from small businesses to specific individuals who have training and the authority to answer business tax questions and resolve tax account problems. Give all locations the ability to input power-of- attorney authorizations and hold the person receiving the authorization responsible for ensuring the input. Track complaints, beginning immediately, using the Taxpayer Advocate’s Problem Resolution Information System (PROMIS). By the end of 1998, IRS had eliminated 32 notices, which generated 22 million pieces of mail to taxpayers annually. Officials said that they are researching the possible elimination of five more notices that generate an additional 30 million pieces of mail. IRS officials said that this initiative is being partially addressed through the call routing system available to all taxpayers. Additionally, they had planned to pilot test the use of a separate toll free telephone number for business calls. However, this project was deferred. A regional advocate team examined this issue and reported on it in November 1998. The report was forwarded to the Taxpayer Advocate, National Accounts Section, and others for review. No decision had been made on whether to implement the initiative nationwide. As part of its test of a new customer feedback system, IRS was doing limited tracking of complaints. Beginning in 1998, team up with other federal agencies, financial institutions, tax preparers, state and local authorities, and others to provide tax information, training, and consultative services to small start-up businesses. The initiative is designed to make record-keeping, filing, and payment requirements as simple and easy as possible. Use a preemployment screening assessment tool, based on technical and behavioral skills, for all external applicants. Beginning in 1999, open additional temporary community-based locations during peak season to make publications and forms available in banks, libraries, shopping malls, and other locations. Analyze the costs and benefits of handling all federal tax deposit penalties in one centralized location. Reassign a case to the next higher management level when a complaint is unresolved after a reasonable period of time. Standardize the format and content of written responses, using appropriate commercial software. IRS had projects under way to address portions of this recommendation, including three projects with federal agencies to distribute tax information and a project with selected states to make obtaining federal identification numbers easier for new businesses. Preemployment screening assessments were done for applicants for customer service positions at four pilot sites for the 1999 filing season, according to an IRS official. IRS was opening additional locations in libraries, post offices, and copy centers for distributing forms and publications in 1999. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touch-tone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Internal Revenue Service's (IRS) efforts to improve customer service. GAO noted that: (1) IRS' strategy for managing the implementation of its customer service initiatives shows promise but could be improved; (2) IRS' basic approach was to establish a central office, the Taxpayer Service and Treatment Improvement Program (TSI), and form a high-level steering committee, chaired by the Commissioner, to oversee the implementation of improvement initiatives that were being carried out by many different IRS and Department of the Treasury offices; (3) TSI and the steering committee were established in January 1998; (4) in its early months, TSI had problems carrying out its responsibilities; (5) officials attributed most of the problems to the large number of potential initiatives on the agenda; (6) by January 1999, TSI and the steering committee had taken steps to: (a) prioritize the initiatives, reducing the number to 157 primary initiatives; (b) align these initiatives to IRS' newly established strategic goals and objectives; and (c) assign accountability for their completion to specific executives; (7) TSI provided offices involved in day-to-day implementation of individual initiatives with on-line access to the central information database it had developed to categorize and monitor progress on the initiatives; (8) IRS could further improve its customer service management strategy; (9) by January 1999, TSI had identified a need for information on milestones and completion dates for each primary initiative and asked offices implementing individual initiatives to input this information into its database; (10) however, TSI had not assessed the need for information on: (a) expected costs and benefits; and (b) performance measures; (11) managers in a few of the offices implementing initiatives GAO reviewed had documented all these types of information on their own, but this information was not being used by IRS' leadership; (12) as past GAO reports have shown, not only do high-performing, results-oriented organizations set priorities, align activities with mission-related goals and objectives, and assign accountability, but they also develop and use information to monitor progress and evaluate results; (13) information on costs, benefits, milestones and completion dates, and performance measures is critical to successfully managing for results; (14) although it can be difficult to develop, this information provides agencies with tools they can use to monitor and evaluate how efficiently and effectively programs are achieving their purposes; and (15) it is important to help determine whether public resources have been used to achieve the purposes for which they were appropriated. |
DOD stated in its May 1997 Report of the Quadrennial Defense Review (QDR) that a steady increase in investment in modern equipment to an annual level of $60 billion is required to fulfill the defense strategy. To achieve modernization goals, DOD plans to reduce the cost of its infrastructure, which includes central training. A focus of the QDR was to build a solid financial foundation for a modernization program that could reliably support future war-fighting capabilities. The key to that foundation was to stop the chronic diversion of procurement funds to pay for underestimated operating costs, unrealized savings, and new program demands by properly projecting and funding DOD’s operating and support activities. To address the problem of the migration of these procurement funds to other activities, the QDR redirected resources to modernization through program adjustments that streamline infrastructure as well as reduce force structure and revise modernization plans. For example, the QDR proposed reducing active military personnel by 61,700 and reserve component personnel by 54,000. These QDR actions and initiatives were reflected in the fiscal year 1999 FYDP and caused some of the net decrease in central training funding. The services consider a number of factors in formulating their central training requirements. Factors include projected authorized end strength, losses in each occupational specialty/category by grade and years in grade, accessions, promotions, and reenlistments. Therefore, a change in end strength levels may not lead to a proportional change in training requirements. For example, lower-than-expected retention rates may necessitate increased training requirements even though personnel levels are lower. The services compile “training workload” to determine resources (people, funds, material, and facilities) required to conduct training. Training workload measures the output of the services’ central training programs. DOD’s 1998 FYDP projected a 1-percent increase in funding for central training between 1999 and 2003, while the 1999 FYDP projected a 2.5-percent decrease in funding for the same period. The total decrease in funding between the two FYDPs was $8.4 billion. Figure 1 compares the annual funding levels for the two FYDPs. Army funding changes account for $7.2 billion (86 percent) of this projected decline. The Air Force projected slightly lower funding levels in the 1999 FYDP. Although Navy funding in the 1999 FYDP shows an increase for 1999 and 2000, it too fell below projected 1998 FYDP levels in 2001 through 2003. Annual funding for the Marine Corps, which accounted for less than 9 percent of central training funding in 1999, was projected to decrease by less than 3 percent annually in the 1999 FYDP from the levels projected in the 1998 FYDP. Defense-wide training, which fell each year of the 1999 FYDP, accounted for less than 6 percent of central training funding in 1999. Figure 2 shows the funding changes by component between the 1998 and 1999 FYDPs. The 1998 FYDP projected that Army central training funding would remain relatively stable over the 1999-2003 period, while the 1999 FYDP projected a decline of $7.2 billion over the same period. The most significant reductions in the Army’s budget were in four categories—training of new personnel, professional and skill training, aviation and flight training, and installation support for training. Most of the reductions were made to correct errors in the 1998 FYDP. Other contributing factors were personnel reductions as a result of the QDR, programmed reductions for planned efficiencies, shifts in programs from central training to other parts of the budget, and reduced funding for installation support and professional development training. Table 1 lists the amounts programmed for the four categories that changed the most between the two FYDPs. Funding for the training of new personnel in the 1999 FYDP was projected to be about $4.1 billion less in total than projected in the 1998 FYDP. Most of the decrease ($4 billion) was to correct an error in the Army’s allocation of military salaries. During the development of the 1999 program, Army personnel found that they had been overestimating the salaries of enlisted trainees that were allocated to new personnel training and underestimating salary costs in other programs. An Army official stated that the error had no impact on the Army’s budget requests for military personnel salaries and benefits. Moreover, there were funding reductions due to programmed personnel cuts from the QDR. According to Army training officials, instructors and training support staff will be reduced as a result of consolidating training functions and increased contractor support. According to Army training officials, the Army did not fully fund several training initiatives in the 1999 FYDP such as improvements in the Army’s human relations training. Because these are high priorities for the Army, the Army officials expect that these initiatives will be fully funded in the 2000 FYDP, probably at the expense of other major commands. Further, Army training officials stated that the funding levels in the 1999 FYDP do not fully support a projected increased workload. The Army projected that workload for the training of new personnel would increase because of increased attrition and a 1-week extension of recruit and One-Station Unit Training. As a result, the Army’s Training and Doctrine Command has already requested additional funds for the 1999 budget year and the Army will likely have to increase the funding levels for this training category in the 2000 FYDP. The 1999 FYDP programmed $1.2 billion less in total for this category than the 1998 FYDP. Several factors contributed to the lower projected funding. Programmed personnel reductions (a result of the QDR) contributed to a decrease in Army Reserve funding. In addition, as part of the implementation of the Total Army School System program, the Army Reserve reviewed its professional development training programs and cut its budget for students, instructors, and overhead. However, according to Army training officials, the Army Reserve underestimated its training requirements, and as a result, requested and received a $48-million increase in the fiscal year 1999 appropriations that offset the shortfall programmed in the 1999 FYDP. Army training officials stated that funding for Reserve professional and skill training in the 2000 FYDP will be increased. Changes in and programmed savings from the Army’s Distance Learning Program also contributed to lower programmed funding for professional and skill training. In 1998, funding for the management of this program was moved from the central training infrastructure to another infrastructure category. In addition, funding was reduced beginning in 1999 to reflect both training load decreases and projected savings through the Army’s ongoing investment in distance learning technology. These savings are to accrue as classroom training time is shortened and student travel and per diem costs are reduced. Army training officials informed us that the Army continues to fully implement its Distance Learning Program, so the service can achieve the savings planned from the program, but substantial savings are not projected to begin until 2004 because of the lengthy implementation process. The decline in Army funding would have appeared even greater if the Army had not received additional funding for its professional and skill training programs from Defense-wide central training activities. The Defense Reform Initiative directed the transfer of the National Defense University operation and maintenance funding from the Defense-wide accounts to the Army. This increased Army funding by $111 million in 1999. Total funding for aviation and flight training was projected to be about $1 billion lower in the 1999 FYDP than in the 1998 FYDP. This occurred primarily because planned procurement funding in the Army’s undergraduate pilot training program was transferred to programs that are not included in central training. Army training and budget officials stated that the funding will be allocated to line units based on Army priorities, although training programs will still receive equipment that is excess to the line units’ needs. According to Army training officials, the Army is experiencing high attrition rates for Apache helicopter pilots because of an increased pace of operations and more requirements for Apache battalions outside of the United States than inside the United States. As a result, the aviation and flight training workload will be even higher than projected in the 1999 budget to meet the increased demand for training new pilots. Increased workload may result in increased funding requirements for this training category in the 2000 FYDP. In an effort to increase pilot retention and reduce flight training requirements, the Army recently received approval for Apache pilot retention bonuses. Funding for installation support for training was projected to be about $435 million less in total in the 1999 FYDP than in the 1998 FYDP. The projected reduction is primarily due to planned efficiencies from DOD’s reinvention initiatives. The efficiencies are projected to result from such efforts as the outsourcing and privatization of installation support functions, lower lease costs, the elimination of less energy-efficient structures, and the upgrade of existing utilities. The Army has assumed some risk by making these projections because it does not know whether the savings can be achieved. The Army is also assuming risk by delaying some real property maintenance to free up additional funds for modernization and readiness. Army training officials stated that the Army knowingly underfunded some training installation support programs, adding to the existing maintenance backlog. For example, the Army reduced funding for its barracks conversion program. The training officials noted that several commanders have stated that the real property maintenance shortfall is adversely affecting morale. Although both the 1998 and 1999 FYDPs projected a net decrease in Navy central training funding, there were some substantial changes within several training categories in the 1999 FYDP. The most significant changes between the two FYDPs were in four categories—professional and skill training, aviation and flight training, command managed training, and installation support for training. These changes were primarily due to personnel reductions, planned savings from training initiatives, deferred real property maintenance, planned savings from changes in the procurement profile for trainer aircraft, higher flying-hour costs, and planned savings from competitive sourcing and regionalization initiatives. Table 2 lists the amounts programmed for the four categories that changed the most between the two FYDPs. Projected total funding for professional and skill training shows a decrease of $135 million from the 1998 FYDP to the 1999 FYDP, with increases in the earlier years and decreases beginning in 2001. Beginning in 1999, the Navy has programmed savings due to QDR-directed personnel reductions and various initiatives. One such initiative, the Training Technology Initiative, plans to upgrade classrooms and produce interactive software to enhance instruction and reduce the overall cost and time of training. Until the initiatives are implemented, it is difficult to determine if and how much savings will accrue from the initiatives. The Navy projected reduced workload levels between 2001 and 2003 for professional and skill training as a result of force structure reductions and military personnel reductions identified in the QDR. The Navy is also reducing the numbers of professors and academic support personnel at the Naval Postgraduate School in conjunction with the reduced student levels. In September 1998, the Chief of Naval Operations testified before the Senate Committee on Armed Services that the Navy is experiencing shortfalls in its recruiting and retention rates. If enlisted retention rates continue to fall below the Navy’s goals, additional recruits will be required, resulting in higher than projected surges in training. As in 1997 and 1998, the Navy may look to real property maintenance as a source of funds to pay for this additional training workload. Total funding levels for aviation and flight training were projected to be lower by $128 million in the 1999 FYDP than in the 1998 FYDP primarily due to changes in the procurement profile of the T-45 trainer aircraft. According to the Navy, Congress added three T-45 aircraft to the 1998 procurement plan and changed the acquisition program to a multiyear procurement contract, which added three aircraft per year through 2002. The number of aircraft planned for procurement in fiscal year 2003 dropped from six to four. Planned procurement funding in 2001 and 2002 is projected to be lower in the 1999 FYDP, even though the number of aircraft increased, because of projected savings from the multiyear procurement contract. Funding is projected to drop further in 2003 because of the procurement contract savings and the reduction in the number of aircraft to be purchased that year. The grounding of the T-2 trainer aircraft from April to November 1997 because of flight control problems caused a decrease in workload and associated funding for 1997 and 1998, but workload and funding were projected to increase for 1999 to make up some of the shortfall in pilot production in the previous 2 years. Total funding for command managed training was projected to be $267 million higher in the 1999 FYDP than in the 1998 FYDP. The higher funding projections were due to the increasing cost of flying aircraft. Actual flying-hour costs experienced in 1997 were higher than those projected in the 1998 FYDP. The funding levels were adjusted upwards in the 1999 FYDP to reflect these higher estimates. Total funding levels for installation support for training were projected to be lower by $154 million in the 1999 FYDP than in the 1998 FYDP primarily due to projected savings from Navy-wide competition sourcing and regionalization initiatives, the shifting of some funds for installation support activities from the training mission to the Naval Facilities Engineering Command, and the use of some installation support funds for skill training programs, a higher Navy priority. The Chief of Naval Education and Training is currently in the process of developing a regionalized base operating support organization and conducting a competitive sourcing analysis. Since these initiatives have not been fully implemented, there is risk that the savings may not materialize to the level programmed. Although both the 1998 and 1999 FYDPs projected an overall increase in Air Force central training funding over the 1999-2003 period and both projected about the same annual funding levels, there were significant funding shifts among three categories—professional and skill training, aviation and flight training, and installation support for training. The funding changes were primarily due to projected lower attrition, increases in pilot production, and increases in real property maintenance funds and the cost of outsourcing/privatizing studies. Table 3 lists the amounts programmed for the three categories that changed the most between the two FYDPs. Total funding for professional and skill training was projected to be $472 million lower in the 1999 FYDP than in the 1998 FYDP. The Air Force programmed lower funding because it estimated lower attrition rates. The Air Force testified before the Senate Committee on Armed Services in September 1998 that overall retention is a serious concern and that the retention of mid-level noncommissioned officers is of special concern because they are experienced and provide an important leadership base critical to force readiness. The Air Force has developed new programs to lower attrition, but these programs have not yet been approved and implemented, introducing risk into its central training program. If retention rates do not improve, the Air Force will need to increase accessions, which leads to higher costs for recruit, initial skills, and professional development training. For example, attrition rates increased more than the Air Force projected in 1998, requiring additional funding for recruit and professional and skill training. Air Force training officials stated that because 1999 recruit and professional and skill training programs are also underfunded due to lower than projected retention rates, the training officials requested additional funding for these programs and shifted funds from other training areas, such as installation support, to these programs. Total funding for aviation and flight training in the 1999 FYDP was projected to be $255 million more than that projected in the 1998 FYDP. The increases were for additional pilot production to alleviate the pilot shortage resulting from lower than expected retention rates. The Air Force expects pilot retention problems to continue for the foreseeable future. The Air Force plans to increase the number of pilots trained annually until it reaches a maximum training rate of 1,100 active duty pilots in fiscal year 2000, based on capacity constraints such as the number of training aircraft, runways, and instructor pilots. According to Air Force training officials, this rate of 1,100 pilots will not be sufficient to alleviate the Air Force’s pilot shortage. Because of the overall shortage, the Air Force intends to forego filling some staff positions that the service says require rated pilots so that it can fill all operational, training, and joint positions. According to Air Force training officials, programmed funds in fiscal years 1998 and 1999 were lower than required to fund the planned increase in pilot production. The shortfalls in 1998 and 1999 were funded from transfers from other training activities, such as installation support. According to the officials, the 2000 FYDP, as currently planned, will have higher funding levels for this training category to fully fund the undergraduate pilot training program. Funding for installation support in the 1999 FYDP was projected to be $250 million more than that programmed in the 1998 FYDP. According to Air Force training officials, the Air Force increased programmed funds for real property maintenance at Air Education and Training Command bases, which funds maintenance and repair at minimum levels—only necessary repairs will be completed, no preventative maintenance will be done. According to the officials, the increase brings these bases up to the same level of maintenance as other Air Force Commands. Funding was also increased to pay for studies to determine if installation support functions should be performed under contract with commercial sources (outsource) or in-house using government facilities and personnel. The Air Force plans to begin studies for outsourcing base support functions for several bases over the 2000-2003 period. However, the Air Force programmed expected savings from these efforts using an almost 40-year old Air Force model. Even with the programmed savings, the one-time costs of the studies result in a net increase in funding for this training category over the 1999 FYDP period. If the savings do not materialize, and the Air Force wants to maintain installations at the level they programmed, the Air Force will need to look elsewhere for this funding. Air Force training officials believe that if additional funding is needed, it will come from reductions in its weapon system modernization programs. Funding for central training in the 1999 FYDP was projected to be considerably lower than that projected in the 1998 FYDP primarily because of the adjustments by the Army for previous errors. Other factors contributing to the programmed reductions were projected personnel reductions as a result of the QDR, optimistic personnel retention rates, projected savings from competitive sourcing of installation support activities and technological advances in training, and lower installation support funding. The services are accepting risk in their central training programs with this lowered funding level. If retention rates do not improve, savings and efficiencies are not fully realized, and real property maintenance can no longer be delayed, there will be little or no reduction in central training infrastructure and DOD will likely will require an increase in funds. Therefore, DOD will not be able to shift funds from this infrastructure category to modernization. In written comments on a draft of this report, DOD concurred with the report. DOD provided some technical comments, which we incorporated in the report where appropriate. DOD’s comments are reprinted in their entirety in appendix II. To compare the funding levels for central training, we analyzed funding data from the 1998 and 1999 FYDPs for 1999-2003. We did not test DOD’s management controls of the FYDP data. We adjusted the nominal dollars to constant 1999 dollars using 1999 DOD Comptroller inflation indexes. To identify trends in workload data, we used data contained in the Army’s, the Navy’s, and the Marine Corps’ annual Operation and Maintenance Justification of Estimates budget books submitted to Congress for fiscal years 1998 and 1999. Because the Air Force was unable to provide workload data for several training categories from the fiscal year 1999 Justification of Estimates book, we obtained the Air Force’s fiscal year 1998 and 1999 workload submissions for the annual DOD Military Manpower Training Report. The training programs analyzed were those that DOD categorized as central training infrastructure and Defense-wide support training mission. Essentially, we accepted DOD’s allocation of central training infrastructure programs to the training categories. We assigned Defense-wide support training mission programs, including health personnel training, that were not already categorized as central training infrastructure to the most appropriate training categories. These Defense-wide support training mission programs accounted for less than 8 percent of the total value of central training in 1999. In cases where DOD recategorized program elements, we made adjustments to both the 1998 and 1999 data to ensure that all programs were placed in the same training categories to make accurate comparisons between the two FYDPs. To determine the causes for the changes in annual funding and workload trends for central training categories between the two FYDPs and the impact of the changes on future central training funding levels, we interviewed officials in the Office of the Secretary of Defense and in the Army, the Navy, the Marine Corps, and the Air Force headquarters training divisions. Additionally, we examined numerous DOD documents, including annual Military Manpower Training Reports, the Report of the Quadrennial Defense Review, the Defense Reform Initiative Report, and service budgets. We also reviewed reports that pertained to military training that had been issued by us and by other organizations. In addition, we provided each of the services with copies of our data analyses and questions about the changes between the two FYDPs. We have included their responses throughout the report, as appropriate. Our work was conducted from July 1998 to February 1999 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate congressional committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also provide copies to other interested parties upon request. If you have any questions concerning this report, please call Robert Pelletier on (202) 512-4032. Major contributors to this report are Edna Thea Falk and Gaines R. Hensley. Central training consists of programs that furnish funding, equipment, and personnel to provide nonunit, or central training of defense personnel. Central training activities provide for the training of new personnel, multiple types of skill and proficiency training, management of the central training systems, and support of central training installations. Administrative Support: includes management headquarters and visual information activities that support central training activities. Installation Support: includes base operations and support, real property maintenance activities, and base communications for central training infrastructure. Command Managed Training Programs: include nonunit training activities managed by the operational commands. These activities include transition training into new weapon systems, supplemental flying to maintain pilot proficiency, graduate flight training in operational aircraft, and specialized mission flight training. General Central Training Activities: include general support to the training establishment and training developments. These resources provide training aids for troop schools and training centers. Health Personnel Training: includes the education and training of health personnel at military and civilian training institutions, health professional scholarship programs, University of the Health Sciences, and other health personnel acquisition programs. Although the Department of Defense categorizes these programs as central medical infrastructure, we included them in central training because the Department considers health personnel training a segment of its central training mission. Training of New Personnel: includes recruit or accession training and One-Station Unit Training. Officer Training and Academies: include reserve officer training corps, other college commissioning programs, officer training schools, and the service academies. Aviation and Flight Training: includes flight screening, undergraduate pilot training, navigator training, North Atlantic Treaty Organization pilot training, and procurement of new training aircraft. Professional and Skill Training: includes academic and professional military education programs as well as multiple types of skill training. This category includes the Department’s civilian training, education and development, language training, undergraduate space training, acquisition training, general skill training, and other professional education. 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 examined the significant differences in two Department of Defense training programs, focusing on the: (1) training categories and military services with the most significant funding changes from the 1998 to the 1999 Future Years Defense Program (FYDP); (2) bases for the changes; and (3) potential impact of the changes on the services' future training budgets. GAO noted that: (1) the total funding for central training was projected to be $8.4 billion less in the 1999 FYDP than the 1998 FYDP; (2) the categories with the most significant changes in each of the services were the Army's training of new personnel; and the Army's, the Navy's, and the Air Force's professional and skill training, aviation and flight training; (3) the majority of the $8.4 billion decrease was due to changes in the Army's central training program; (4) $4 billion of the decrease in Army funding was to correct for an error in the 1998 FYDP that overstated the cost of enlistees' student salaries; (5) another $1.1 billion of the decrease related to the realignment of Army aviation procurement out of central training; (6) the remaining $3.3 billion primarily came from projected savings from: (a) the Army, the Navy and the Air Force reducing the number of personnel projected to be trained; (b) all of the military services contracting some installation support functions with lower cost providers; and (c) the Army and the Navy implementing training initiatives that utilize technology and other cost savings measures; (7) additionally, some of the $3.3 billion came from cuts by the Army and the Navy in funding levels for installation support and underfunding by the Army of some of its training programs; (8) the Army, the Navy and the Air Force may not be able to accomplish their central training programs at the funding levels in the 1999 FYDP; (9) the services are experiencing lower-than-expected retention rates for enlisted personnel, which will require increased accessions and additional funds for new personnel and skill training; (10) the services projected savings in installation support and funded real property maintenance at minimum maintenance levels; (11) if the programmed savings do not materialize, the services will need additional funds to maintain the current levels of maintenance or add to the existing backlog of real property maintenance; (12) the Army did not fully fund training initiatives, but it plans to fully fund these initiatives in the future; (13) the Army already had to request supplemental funding for fiscal year 1999 for the Army reserve professional development training programs because it found that programmed reductions adversely affected the programs; (14) the Army's actual aviation training workloads are higher than those used to develop FYDP 1999; and (15) the Army and the Navy programmed savings from training initiatives that use technology to reduce training. |
FDA classifies each device type into one of three classes based on the level of risk it poses and the controls necessary to reasonably ensure its safety and effectiveness. Examples of types of devices in each class include the following: class I: tongue depressors, elastic bandages, reading glasses, and forceps; class II: electrocardiographs, powered bone drills, and mercury class III: pacemakers and replacement heart valves. Before medical devices may be legally marketed in the United States, they are generally subject to one of two types of FDA premarket review, unless exempt by FDA regulations. These reviews are: Premarket approval or PMA process: The manufacturer must submit evidence, typically including clinical data, providing reasonable assurance that the new device is safe and effective. The PMA process is the most stringent type of premarket review. A successful submission results in FDA’s approval to market the device. Premarket notification or 510(k) process: Premarket notification is commonly called “510(k)” in reference to section 510(k) of the Federal Food, Drug, and Cosmetic Act, where the notification requirement is listed. The manufacturer must demonstrate to FDA that the new device is substantially equivalent to a device already legally on the market that does not require a PMA. For most 510(k) submissions, clinical data are not required and substantial equivalence will normally be determined based on comparative descriptions of intended device uses and technological characteristics, and may include performance data. A successful submission results in FDA’s clearance to market the device. In general, class I and II device types subject to premarket review are required to obtain FDA clearance through the 510(k) process, and class III device types are required to obtain FDA approval through the more rigorous PMA process. With the enactment of the Medical Device Amendments of 1976, Congress imposed requirements under which all class III devices would be approved through the PMA process before being marketed in the United States. However, certain types of class III devices that were in commercial distribution in the United States before May 28, 1976, (called preamendment device types) and those determined to be substantially equivalent to them may be cleared through the less stringent 510(k) process until FDA publishes regulations requiring them to go through the PMA process or reclassifies them into a lower class. Between 1976 and 1990, FDA issued regulations requiring some class III device types to go through the PMA process, but many class III device types continued to be reviewed through the 510(k) process. The Safe Medical Devices Act of 1990 required FDA (1) to re-examine the preamendment class III device types for which PMAs were not yet required to determine if they should be reclassified to class I or II or remain in class III and (2) to establish a schedule to promulgate regulations requiring those preamendment device types that remain in class III to obtain FDA approval through the PMA process. Accordingly, all class III devices are eventually to be reviewed through the PMA process. In our January 2009 report, we found that although Congress envisioned that all class III devices would be approved through the more stringent PMA process, the agency’s actions to make this the case were incomplete. We found that in fiscal years 2003 through 2007, FDA continued to clear submissions for class III devices through the less stringent 510(k) process—clearing 228 over the 5-year period. We recommended that FDA expeditiously take steps to issue regulations for each class III device type allowed to enter the market through the 510(k) process, including to (1) reclassify each device type into class I or class II, or requiring it to remain in class III, and (2) for those device types remaining in class III, require approval for marketing through the PMA process. FDA agreed with our recommendation when we issued our report, but did not specify time frames in which it would take action. Overseeing recalls is an important element of FDA’s postmarket responsibilities. FDA defines a recall as a firm’s removal or correction of a marketed product that FDA (1) considers to be in violation of the laws it administers, and (2) against which the agency would initiate legal actions. Nearly all medical device recalls are voluntarily initiated by a recalling firm, usually the manufacturer of the device. To initiate a voluntary recall, a firm notifies those who have received, purchased, or used the device. The firm may be asked to provide FDA with information such as the reason for the correction or removal of the device, an assessment of the health hazard associated with the device, and the volume of product in distribution and proposed strategy for conducting the recall. The strategy should contain details on the firm’s plan for ensuring that its customers and device users correct or remove the device according to the firm’s instructions. FDA’s role is generally to oversee a firm’s management of a recall. As part of its oversight, FDA reviews and recommends changes to the recall strategy and assigns one of three recall classifications—class I, II, or III—to indicate the relative degree of health hazard posed by the product being recalled. For a class I recall, FDA has determined that there is a reasonable probability that use of, or exposure to, the product could cause serious adverse health consequences or death. Class II recalls are those for which FDA has determined that the use of, or exposure to, the product could cause temporary or medically reversible adverse health consequences or that the probability of serious adverse health consequences is remote. For class III recalls, FDA has determined that use of, or exposure to, a device is not likely to cause adverse health consequences. FDA advises the recalling firm of the assigned recall classification; and posts information about the recall in its weekly enforcement report. It is important to note that FDA’s device and recall classification schemes carry opposite designations. The potential degree of health risk associated with device classes is designated from class III (high) to class I (low), while the potential risk associated with recall classes is designated from class I (high) to class III (low). FDA also monitors the progress of a recall and verifies whether the recalling firm has effectively implemented the recall strategy. FDA requests that a recalling firm periodically provide the monitoring district with status reports that provide updates on the progress of recalls. FDA district staff also conduct audit checks to confirm that the recalling firm has properly corrected or removed devices from the market, in accordance with the recall strategy. Once the firm believes it has completed the recall—that is, done everything as outlined in the recall strategy—it should submit a recall termination request to the monitoring district office. As part of the termination decision, FDA should assess whether the firm has taken sufficient corrective actions to prevent a reoccurrence of the problem that led to the recall. For class I recalls, FDA district staff review a firm’s request, and if they agree, send a recall termination request to headquarters. For class II and III recalls, FDA district staff make the final termination decision. According to FDA’s procedures, FDA should terminate a recall within 3 months after the firm completes the recall. FDA has begun to take steps to address our 2009 recommendation about class III devices that are still allowed to enter the U.S. market through the less stringent 510(k) process, but progress has been limited. Concerns persist about the effectiveness of the 510(k) process in general, including its ability to provide adequate assurance that devices are safe and effective. In 2009, we recommended that FDA expeditiously take steps to address class III device types allowed to enter the market via the 510(k) process by issuing regulations requiring submission of PMAs or reclassifying them to a lower class. Since our report was issued, the agency has set strategic goals to address this matter, but has issued a final rule regarding the classification of only one device type. As of April 1, 2011, 26 additional class III device types could still enter the U.S. market through the less stringent 510(k) process. FDA has been taking steps to address the 26 class III device types— including automated external defibrillators and implantable hip joints— that can still enter the U.S. market through the 510(k) process. Specifically, FDA is following a 5-step process to require PMAs or to reclassify them to a lower device class. As shown in table 1, as of April 1, 2011, FDA was at step 2—assessing the risk and benefits—for 21 device types. FDA was at step 4—receiving and reviewing comments provided on proposed rules—for 5 other device types, but had not yet issued final rules requiring PMAs or reclassifying any of them. While FDA has taken essential initial steps toward implementing our recommendation, until the agency issues final regulations either reclassifying or requiring PMAs for class III device types that currently can be cleared through the less stringent 510(k) process, its actions remain incomplete. Thus, these 26 device types can still enter the U.S. market through the less stringent premarket review process. Since we issued our report in January 2009, FDA cleared at least 67 individual submissions that fall within 12 of these class III device types through the 510(k) process. Subsequent to the issuance of our 2009 report and in response to numerous concerns over the effectiveness of the 510(k) process, including its ability to provide adequate assurance that devices are safe and effective, FDA announced it would take additional actions to enhance premarket device safety. In 2009, FDA reported that it would conduct its own comprehensive internal assessment of the premarket medical device approval process and commissioned the Institute of Medicine to conduct an independent review to assess whether the 510(k) process sufficiently protects patients and promotes public health. The Institute of Medicine is expected to issue its report in mid-2011. Our preliminary findings suggest that shortcomings in FDA’s oversight of the medical device recall process may limit the agency’s ability to ensure that the highest-risk recalls are being implemented in an effective and timely manner. These shortcomings span the entire range of the agency’s oversight activities—from the lack of a broad-based program to systematically assess trends in recalls, to inconsistencies in the way FDA ensures the effective completion of individual recalls. Although FDA’s recall data system contains numerous data elements that would allow for analyses of recall data, our preliminary findings suggest that FDA is not using this system to effectively monitor and manage its recall program. This system contains information on, for example, the status of each recall (e.g., ongoing or terminated); the reason for the recall; the specific device being recalled; the recall classification level assigned based on FDA’s assessment of risk; the dates the recalls were initiated, classified, and terminated; and the medical specialty—area of use—for each device subject to recall (e.g., cardiovascular or orthopedic). However, FDA has not routinely used these recall data as a surveillance tool or for examining broad trends of medical device recalls. Instead of using this information to conduct systemic analyses of the recall program, which would be consistent with the agency’s strategic goal of improving the quality and safety of manufactured products in the supply chain, FDA has primarily been using data from its recall system for processing individual recalls. Our preliminary analysis showed that between January 1, 2005, and December 31, 2009, firms initiated 3,510 device recalls. Only a small percentage of these recalls—about 4 percent—were classified by FDA as class I recalls—those that pose a reasonable probability that the use of, or exposure to, these products will cause serious adverse health consequences or death. The vast majority—nearly 83 percent—were classified by FDA as class II recalls, meaning use of, or exposure to, these devices may cause temporary or medically reversible adverse health consequences or that the probability of serious adverse health consequences is remote; and about 14 percent were classified as class III recalls, which pose the lowest risk. Based on our preliminary analysis, we provided key summaries to FDA officials and asked them to comment on trends that we observed. Officials indicated that they have not fully analyzed these data and could not explain trends without extensive research of individual case files. For example, they could not explain why the majority of recalls are class II, why class I recalls more than doubled between 2008 and 2009, or why many recalls had been ongoing for 5 years. Officials also could not provide definitive answers when we asked them to comment on other related topics, such as: trends in the number of recalls over time; variation in the numbers of recalls by recall classification levels; types of devices and medical specialties of devices accounting for most recalls; and length of time needed to complete or terminate recalls. Although FDA has not been routinely analyzing recall data to assess the effectiveness of the recall process, officials indicated that they have used these data to support compliance and subsequent enforcement actions. For example, officials indicated that they use recall data to help identify which firms the agency should inspect for assessing compliance with laws and regulations. Our preliminary analysis revealed inconsistencies in FDA’s assessments of the effectiveness of recalls. A key tool to making these assessments are FDA’s “audit checks” in which investigators from FDA’s district offices contact a percentage of customers or device users affected by the recall to determine whether they received the recall notice and followed the recalling firm’s instructions for removing or correcting the device. However, we identified numerous inconsistencies in the way FDA’s investigators implemented these audit checks, resulting in conflicting determinations about whether recalls were effectively conducted. Our analysis of 2,196 audit check forms associated with the class I recalls we reviewed found a variety of inconsistencies in how the audit checks were implemented and documented for nearly 90 percent of these recalls. For each of these recalls we found inconsistencies in how different investigators determined whether a recall was effective or ineffective when conducting their audit checks of recalls. We also identified inconsistencies in the level of detail provided in the audit check report and the level of effort undertaken by different investigators. These recalls covered a wide range of devices, including implantable pumps and automated external defibrillators. For example, when conducting audit checks, some investigators concluded that recalls were effective, despite noting problems (such as device users not following the firm’s instructions), while other investigators concluded under similar circumstances that recalls were ineffective. In other recalls, some investigators noted actions they took when they discovered problems, such as providing the device users with a copy of the recall notice or instructing them on actions to take in order to implement a recall. In contrast, other investigators did not indicate whether they made any attempt to help the user implement the recall. FDA officials at both headquarters and the district offices we contacted acknowledged that there are no detailed instructions or requirements for conducting audit checks and that there can be inconsistencies in the process. They also agreed that this may be an area where enhanced guidance is needed. One of the gaps in FDA’s recall process suggested by our preliminary work is that FDA lacks specific criteria for making decisions about whether recalling firms have effectively completed their recalls by taking adequate steps to correct or remove recalled devices. Our preliminary review of FDA’s recall procedures found that the procedures do not contain any specific criteria or general guidelines governing the extent to which firms should be correcting or removing various types of devices—such as a benchmark recall rate—before a recall should be considered completed. FDA officials indicated they consider a recall complete when a firm has completed actions outlined in its recall strategy. In particular, they evaluate whether firms completed their assigned level of effectiveness checks, and have corrected or removed recalled devices in “an acceptable manner.” However, FDA officials said that they do not have specific criteria or thresholds concerning the proportion of various types of devices that firms should be able to correct or remove. Our preliminary review shows that firms are not always able to correct or remove all unsafe medical devices from the market. Of the 53 class I recalls we reviewed, we found 10 were ongoing, 14 were completed— meaning that FDA district office officials concluded that the firm had fulfilled its responsibilities for correcting or removing the devices—and 29 were terminated—meaning that FDA headquarters determined that recalling firms had taken sufficient corrective actions to prevent reoccurrence of the problems that led to the recalls. Of the 43 recalls in our sample that were either completed or terminated, we found that for 20, or 47 percent of these recalls, firms were able to correct or remove all products. However, we found that in the other 23 recalls, or 53 percent, firms were unable to correct or remove all products. These recalls ranged widely, in both volume of devices subject to recall and the types of devices being recalled. Some recalls involved hundreds of thousands of disposable products, while others involved a small number of life-sustaining implantable devices. Recalling firms were often unable to correct or remove all devices. This was because firms either could not locate some of the customers or device users, or these customers or device users could not locate the devices subject to recall. In other cases, devices could not be corrected or removed because they were sold at retail outlets (such as glucose test strips) to individuals who may not have known about the recall. For example, in a recall of tracheal tubes included in certain pediatric medical kits, 1,400 tubes had been distributed but only 200 were returned to the recalling firm. The firm said that the rest had likely been used. Our preliminary findings also suggest another gap in the recall process— insufficient documentation justifying FDA’s termination decisions. Without such documentation, we were unable to assess the extent to which FDA’s termination process appropriately evaluated recalling firms’ corrective actions. Although FDA requests that firms submit corrective and preventive action plans for review and approval before a recall can be terminated, we found little documentation regarding how FDA assessed whether such plans were sufficient when it terminated recalls. When we asked to review documentation justifying the decisions for the 29 terminated recalls in our sample, FDA officials indicated that they do not maintain extensive documentation justifying the basis for their termination decisions. They told us that creating documentation to support concurrence with the termination recommendation is not part of past or current termination procedures. This approach is inconsistent with internal control standards for the federal government, which indicate “that all transactions and other significant events need to be clearly documented,” and stress the importance of “the creation and maintenance of related records which provide evidence of execution of these activities as well as appropriate documentation.” Also, we found that FDA termination decisions were frequently not made in a timely manner—within 3 months of the completion of the recall— increasing the risk that unsafe or defective devices remained available for use. Of the 53 recalls in our sample, 29 were terminated—meaning FDA headquarters agreed with an FDA district office that the firm did not need to take additional actions to prevent reoccurrence of problems that led to the recall. For 72 percent of the terminated recalls, FDA did not make its termination decision within 3 months of the recall’s completion, as called for in FDA’s regulatory procedures. Overall, termination decisions took on average 180 business days from the completion date, though they ranged from 10 days to 800 days after that date. We found at least one instance where FDA’s failure to make a timely termination assessment allowed for a potentially unsafe product to be re- introduced into the market and used for surgical procedures. In this case, based on adverse event reports that screws in its spinal fixation system were becoming loose post-operatively, the firm decided to recall the device in December 2005. The firm implemented its recall, and removed all devices. The firm indicated that it developed a corrective action plan for the screw problem, and relaunched the device in April 2006. It then requested termination from FDA in May 2006. FDA followed up on this request by leaving three voice mail messages with the firm and received no response. The agency sent out a request for information a year later, in May 2007. In June 2007, the company again indicated that the recall was complete, and requested termination. In September 2007, FDA conducted an inspection of the company’s manufacturing facility, and found that while the recall was complete, the corrective action was not adequate. Over the course of the next 2 years, the firm worked with FDA to get revisions to the device approved, but eventually agreed to a second recall for the revised device. This recall was initiated in May 2009. We identified five reports of adverse events related to continuing problems with the implanted device that were filed with FDA subsequent to the firm’s relaunch of the device in April 2006. These reports were filed from December 2006 through March 2007, and revealed that in all cases, patients required surgical intervention to correct or remove the device. While FDA’s recent actions to try to improve the premarket approval process are positive steps—such as commissioning the Institute of Medicine to conduct an independent review of the process—it remains to be seen whether these actions will help ensure that medical devices marketed in the United States receive appropriate premarket review. In addition, gaps in FDA’s postmarket surveillance shows that unsafe and ineffective devices may continue to be used, despite being recalled. The agency faces a challenging balancing act. While it is important to allow devices on the market to treat patients who need them, it is also essential that FDA take necessary steps to provide a reasonable assurance that those medical devices that do enter the market are safe and effective. Likewise, it is vital that the agency’s postmarket safety efforts are both vigorous and timely. Chairman Kohl and Ranking Member Corker, this completes my prepared statement. I would be happy to respond to any questions you or the other members of the committee may have at this time. For further information about this statement, please contact Marcia Crosse, at (202) 512-7114 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Geraldine Redican-Bigott and Kim Yamane, Assistant Directors; Helen Desaulniers; Cathy Hamann; Eagan Kemp; Julian Klazkin; David Lichtenfeld; Christina C. Serna; and Katherine Wunderink made key contributions to this report. High Risk Series: An Update. GAO-11-278. February 2011. Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-Term Planning Is Needed. GAO-10-960. Washington, D.C.: September 30, 2010. Food and Drug Administration: Opportunities Exist to Better Address Management Challenges. GAO-10-279. Washington, D.C.: February 19, 2010. Food and Drug Administration: FDA Faces Challenges Meeting Its Growing Medical Product Responsibilities and Should Develop Complete Estimates of Its Resource Needs. GAO-09-581. Washington, D.C.: June 19, 2009. Medical Devices: Shortcomings in FDA’s Premarket Review, Postmarket Surveillance, and Inspections of Device Manufacturing Establishments. GAO-09-370T. Washington, D.C.: June 18, 2009. Medical Devices: FDA Should Take Steps to Ensure That High-Risk Device Types Are Approved through the Most Stringent Premarket Review Process. GAO-09-190. Washington, D.C.: January 15, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Health-Care-Associated Infections in Hospitals: Number Associated with Medical Devices Unknown, but Experts Report Provider Practices as a Significant Factor. GAO-08-1091R. Washington, D.C.: September 26, 2008. Reprocessed Single-Use Medical Devices: FDA Oversight Has Increased, and Available Information Does Not Indicate That Use Presents an Elevated Health Risk. GAO-08-147. Washington, D.C.: January 31, 2008. Medical Devices: Challenges for FDA in Conducting Manufacturer Inspections. GAO-08-428T. Washington, D.C.: January 29, 2008. Food and Drug Administration: Methodologies for Identifying and Allocating Costs of Reviewing Medical Device Applications Are Consistent with Federal Cost Accounting Standards, and Staffing Levels for Reviews Have Generally Increased in Recent Years. GAO-07-882R. Washington, D.C.: June 25, 2007. Medical Devices: Status of FDA’s Program for Inspections by Accredited Organizations. GAO-07-157. Washington, D.C.: January 5, 2007. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Food and Drug Administration (FDA) is responsible for overseeing medical devices sold in the United States. In general, new devices are subject to FDA review via either the 510(k) premarket notification process, which determines if a device is substantially equivalent to another legally marketed device, or the more stringent premarket approval (PMA) process, which requires the manufacturer to supply evidence providing reasonable assurance that the device is safe and effective. FDA also has broad responsibilities for postmarket surveillance of devices, including oversight of recalls. A recall involves the correction or removal of a product from the market and is an important remedial action that can mitigate the risks associated with a defective or unsafe medical device. In recent years, GAO has identified a wide variety of concerns related to FDA's ability to fulfill its mission of protecting the public health and added FDA's oversight of medical products, including devices, to its list of high-risk areas. This statement provides an update on FDA's actions in response to a recommendation made in GAO's report, Medical Devices: FDA Should Take Steps to Ensure That High-Risk Device Types Are Approved through the Most Stringent Premarket Review Process ( GAO-09-190 , January 15, 2009). It also contains preliminary information on FDA's oversight of medical device recalls. Because of the preliminary nature of this work, GAO is not making recommendations at this time. FDA has begun to take steps to address GAO's 2009 recommendation about high-risk devices that are allowed to enter the U.S. market through the less stringent 510(k) process, but progress has been limited. High-risk devices include those which are implantable or life sustaining. In 2009, GAO recommended that FDA expeditiously take steps to issue regulations for the device types classified as high risk that are currently allowed to enter the market via the 510(k) process. Since then, FDA has set strategic goals to address these device types, but has issued a final rule regarding the classification of only one device type. As of April 1, 2011, FDA's action on the 26 remaining types of high-risk devices was incomplete. Thus, these types of devices--such as automated external defibrillators and implantable hip joints--can still enter the U.S. market through the less stringent 510(k) process. GAO found that, since its report was issued in January 2009, FDA has cleared at least 67 510(k) submissions that fall within these high-risk device types. FDA has taken some additional steps to enhance premarket device safety since GAO's 2009 report was issued--for example, it commissioned the Institute of Medicine to conduct an independent review of the premarket review process--but it is too early to tell whether any forthcoming changes will enhance public health. GAO's preliminary analysis shows that, from 2005 through 2009, firms initiated 3,510 voluntary medical device recalls, an average of just over 700 per year. Although FDA maintains extensive information on each recall, it has not been routinely analyzing recall data that would allow it to explain trends in recalls over time, thus missing an opportunity to proactively identify and address the risks presented by unsafe devices. GAO's preliminary work also identified several gaps in the medical device recall process that limited recalling firms' and FDA's abilities to ensure that the highest-risk recalls were being implemented in an effective and timely manner. GAO found that firms frequently were unable to correct or remove all devices subject to the highest-risk recalls. GAO's preliminary findings indicate that FDA lacks clear guidance for overseeing recalls which has led to inconsistencies in FDA's assessments of whether individual recalls were implemented effectively. Consequently, FDA officials examining similar situations sometimes reached opposite conclusions regarding whether recalls were effective. In addition, FDA had not established thresholds for assessing whether firms effectively completed recalls by correcting or removing a sufficient number of recalled devices. Further, GAO determined that FDA's decisions to terminate completed recalls--that is assess whether firms had taken sufficient actions to prevent a reoccurrence of the problems that led to the recalls--were frequently not made within its prescribed time frames. Finally, GAO found that FDA did not document its justification for terminating recalls. Taken together, GAO's preliminary work suggests that the combined effect of these gaps may increase the risk that unsafe medical devices could remain on the market. |
The WIA Adult and Dislocated Worker Programs provide employment services to a wide range of participants. The Adult Program serves all individuals age 18 and older, and the Dislocated Worker Program serves individuals who have been or will be terminated or laid off from employment, among others. The Adult Program prioritizes certain services for recipients of public assistance and other low-income individuals when program funds are limited. To enable individuals to participate, both programs may offer supportive services such as transportation, childcare, housing, and needs-related payments under certain circumstances. WIA requires that the Adult and Dislocated Worker Programs and other federally-funded employment and training programs provide services through one-stop centers—now called American Job Centers—so that jobseekers and employers can find assistance at a single location. DOL’s Employment and Training Administration administers the Adult and Dislocated Worker Programs and oversees their implementation, which is carried out by states and local areas. At the state level, the WIA Adult and Dislocated Worker Programs are administered by state workforce agencies. Each state has one or more local workforce investment areas, each governed by a WIB. WIBs select the entities that will operate American Job Centers, which provide most WIA services, and oversee the American Job Center network. WIA provides substantial flexibility to states and WIBs to determine how services are provided. WIA represented a fundamental shift from its predecessor program, the Job Training Partnership Act, by decreasing the focus on job training as the primary means to help adults and dislocated workers get a job. The Adult and Dislocated Worker Programs provide participants three types of services: Core services include basic services such as job searches and labor market information, and may be accessed with or without staff assistance. Intensive services include such activities as comprehensive assessment and case management, which require greater staff involvement. Intensive services are available to participants who are unable to obtain or retain employment after receiving at least one core service. Training services include such activities as occupational skills or on- the-job training. To be eligible for training services, participants must: (1) be unable to obtain or retain employment after receiving at least one intensive service, (2) be in need of training, and (3) have the skills and qualifications to successfully complete the training program, among other requirements. To assess participants’ skills and determine whether they need training, WIBs may require them to complete certain activities. We previously found that most WIBs required participants to complete skills assessments or gather information about the occupation for which they wanted training before entering a training program. DOL requires that participants eligible for training select approved training providers in consultation with case managers, but participants ultimately choose the training programs in which they participate. that training be directly linked to in-demand occupations, which DOL interprets to include both currently-available jobs and occupations that are projected to grow in the future. 20 C.F.R. § 663.440(c). financial sanctions and incentive funding. In addition, WIA requires states to use Unemployment Insurance (UI) wage records to track employment-related outcomes. In 2005, DOL began allowing states to request waivers to replace the WIA performance measures with a smaller set of common measures that focus on employment, retention, and earnings across multiple programs (see table 1). These measures do not include credential attainment and are calculated differently than the WIA measures. As of December 2013, a total of 48 states and territories, plus the District of Columbia, had obtained this waiver and used the common measures for the Adult and Dislocated Worker Programs. Although states and territories are no longer subject to financial sanctions or incentive funding for the credential attainment measure, DOL still requires them to report the number of training participants who earn credentials.credential attainment improves workers’ labor market experience through In general, higher earnings, greater mobility, and enhanced job security, according to DOL and research studies. We have previously raised concerns about the accuracy and comparability of DOL’s data on credential attainment because DOL’s guidance allowed states and local areas considerable flexibility in defining what constitutes a credential. In February 2002, we recommended that DOL more clearly define this term. Since that time, DOL issued guidance to clarify its definition of credential attainment. In addition, to verify that the data states report on credential attainment are accurate, DOL requires WIA programs to collect and retain documentation on participants’ credential attainment. In addition to the performance measures, WIA requires states to report a wide array of data that includes whether training participants find employment that relates to their training. A WIA participant’s employment is considered to be related to the training received if in the new job the participant uses “a substantial portion of the skills taught in the training.” However, DOL does not require that states collect and retain documentation for employment related to training to verify the accuracy of data they report. In a September 2011 report, DOL’s Office of Inspector General raised questions about the quality of DOL’s data on employment related to training. Specifically, the Office of Inspector General found that these data were “incomplete and unreliable” based on its review of the data DOL maintains in its WIA database. The Office of Inspector General recommended, among other things, that DOL provide guidance on the best methodology for reporting such data as well as provide oversight to ensure that states develop or identify best practices for increasing the rate of training-related employment. DOL agreed with these recommendations. Federal agencies that work in partnership with states and local areas to administer programs such as WIA must continually balance the competing objectives of collecting uniform performance data and giving program managers flexibility to meet local needs. Our prior work has found that federal agencies have considered key attributes of data quality for performance data, including: Completeness—the extent to which enough of the required data elements are collected from a sufficient portion of the target population or sample. Accuracy—the extent to which the data are free from significant errors. Consistency—the extent to which data are collected using the same procedures and definitions across collectors and times. Ease of use—how readily intended users can access data, aided by clear definitions, user-friendly software, and easy-to-use access procedures. Congress is currently considering legislation to reauthorize the Workforce Investment Act of 1998, which has been due for reauthorization since the end of fiscal year 2003. The Supporting Knowledge and Investing in Lifelong Skills (SKILLS) Act (H.R. 803), passed by the House, would establish both credential attainment and training-related employment as performance measures. The Workforce Investment Act of 2013 (S. 1356), introduced in the Senate and reported out by the Committee on Health, Education, Labor, and Pensions, would establish credential attainment as a performance measure, but not training-related employment. During the time-period from program year 2006 through program year 2011, the total number of participants in WIA’s Adult and Dislocated Specifically, in the Adult Worker Programs increased significantly.Program, the number of participants increased from about 625,000 to about 1.25 million, and in the Dislocated Worker Program, the number of participants increased from about 272,000 to about 761,000. During this same time-period, the number of participants who received training services also increased, but not as dramatically as the number of overall For example, the number of Dislocated Worker participants (see fig. 1).participants who received training increased from about 76,000 in program year 2006 to about 120,000 in program year 2011. Since the number of participants who received training services did not increase at the same rate as the number of participants who entered into WIA’s Adult and Dislocated Worker Programs, the percentage of participants who received training generally declined, according to DOL reports (see fig. 2). There are several reasons that may have contributed to the declining percentage of participants who received training. Beginning in December 2007, the significant increase in the overall number of participants is likely attributed to the downturn in the economy that led to a dramatic rise in unemployment and the subsequent infusion of additional funds to WIA programs from the American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act provided $500 million for grants for the Adult Program and $1.25 billion for grants for the Dislocated Worker Program. By spring of 2009, DOL began allocating these funds to states to supplement existing WIA funds. DOL encouraged states to use Recovery Act funds to increase training in an effort to help Americans acquire new skills and return to work. DOL officials stated that the increase in demand for training services exceeded the increase in supply provided for by the Recovery Act, which may have led to shortages in training capacity that contributed to a relative decline in training. Another factor, according to DOL officials, is that some program participants had limited access to needs-based financial assistance and other supportive services, such as child care, which may have prevented them from entering WIA training services. Further, DOL noted that the preference of many program participants is for immediate employment rather than job training. Similarly, the percentage of training participants who earned credentials has also generally declined from program year 2006 through program year 2011 (see fig. 3). For example, DOL’s data show the percentage of those who earned credentials in the Adult Program dropped from about 74 percent in program year 2006 to about 58 percent in program year 2011. Likewise, the percentage of those in the Dislocated Worker Program who earned credentials dropped from about 75 percent in program year 2006 to about 63 percent in program year 2011. Despite the decline in the percentage of training participants who earned credentials, DOL reported that the total number of participants attaining credentials increased during this time period. For example, the number of training participants in the Dislocated Worker Program who attained credentials increased from about 48,000 in program year 2006 to about 79,000 in program year 2011. According to DOL officials, the percentage of training participants who earned credentials may have declined in part as a result of changes in the performance measures that states negotiated. In program year 2005, states began requesting waivers to replace the WIA performance measures with a set of common performance measures that do not include the employment and credential attainment measure for the Adult Officials in three of the six states we and Dislocated Worker Programs.reviewed said that after this request was approved, reporting data on credential attainment became a lower priority for them. Officials in one of these states also said they stopped collecting and reporting these data until DOL issued clarifying guidance in 2010 emphasizing the importance of credential attainment as a pathway to employment. DOL’s data on credential attainment also show that participants in the Dislocated Worker Program typically have higher credential attainment rates than participants in the Adult Program. DOL officials explained that the Dislocated Worker Program has a higher funding level that supports more training, and that participants in this program generally have longer work histories and more advanced education and so are more likely to enter into training programs that lead to credentials. In contrast, participants in the Adult Program are more likely to require training focused on remedial education and job readiness which are less likely to result in credentials as defined by DOL. Of the training participants who attained credentials during program year 2011—approximately 89,000 in the Adult Program and 84,000 in the Dislocated Worker Program— about two-thirds in each program earned an occupational credential, such as a welding certificate or clinical medical assistant certificate (see fig. 4). The next two most common types of credentials attained by training participants were an occupational skills license, such as a license in nursing, and an associate’s degree. The fact that training participants attained occupational credentials at higher rates than longer-term academic degrees is consistent with DOL’s recommendation that states shorten training duration in an effort to increase credential attainment. In our December 2013 report, we found that in program year 2011, of those in the Adult Program who entered training, 75 percent spent 1 year or less receiving training services, while 25 percent spent more time. Similarly, for the Dislocated Worker Program, 65 percent of training participants spent 1 year or less receiving training services. According to officials from one local workforce investment board we contacted, all training programs offered through their training providers must lead to a credential and must be completed in 12 months or less. We found DOL’s data on training-related employment unreliable for our purposes based on our analysis of the data, an Office of Inspector General report, and data quality reports. We were not able to determine how many participants in the Adult or Dislocated Worker Programs obtained employment related to their training in program year 2011. For the Adult Program, we found that states reported data on 48 percent of training participants, but had missing data for the remaining 52 percent. For the Dislocated Worker Program, states reported data on 74 percent of training participants, but had missing data for the remaining 26 percent. Further, our analysis of the reported data showed wide variation among states regarding the percentage of participants who obtained training- related employment, raising questions about the data’s reliability (see table 2). Our findings are consistent with a September 2011 Office of Inspector General report, which found that DOL’s data on training-related employment were “incomplete and unreliable.” Specifically, the Inspector General reported that 5 of the 53 state workforce agencies it reviewed did not report any data and 12 state workforce agencies reported unreasonably high or abnormally low data on training-related employment. Further, DOL’s WIA data quality report for the third quarter of program year 2011 raised questions about training-related employment data for 26 states. For example, some states reported that none of their training participants secured training-related employment. Workforce officials we interviewed in four of six states said that collecting data on credential attainment can be resource-intensive primarily because it requires manually tracking the information. Unlike employment-related outcomes—which states can generally obtain through the state’s UI wage record system—credentials are not generally recorded in a central, automated data system. As a result, case managers must manually collect this information from various sources including participants, training providers, and third-party credentialing organizations. DOL also requires documentation of credential attainment with a copy of a diploma, transcript, or other approved record in the participant’s case file. DOL monitors this requirement through its data validation process. The process of collecting and verifying a participant’s credential attainment generally entails one or more of the following steps: Contacting Participants. Workforce officials in most states we reviewed said they generally begin their efforts to determine credential attainment by attempting to contact training participants, though some are unresponsive or inaccessible. Several local officials noted that they use a variety of means, including phone, mail, email, and social media. Some training participants readily provide evidence of their credentials. For example, local officials in two states estimated that for about 70 percent of participants, credentials are fairly easy to verify. Other participants may be less responsive. Workforce officials in three states explained that participants who have already exited the program have little incentive to respond to their requests. Local officials in two states also noted that some participants relocate without providing updated contact information. Contacting Training Providers. Training providers are another potential source of credential information, though in some cases they may decline to share such information. If case managers cannot reach a participant, they generally contact the training providers to determine whether a credential was earned. However, workforce officials from three states noted that training providers often declined to provide this information, citing student privacy rights such as those established by the Family Educational Rights and Privacy Act of 1974, as amended (FERPA). Contacting Third-party Organizations. Third-party credentialing organizations represent an additional source of credential information. For some occupations, a license or certification is required before a person can be employed in that capacity, such as a licensed practical nurse. In these cases, third-party organizations, such as state regulatory bodies, issue credentials. Case managers can sometimes search licensing databases online to confirm credential attainment. Local officials from two states noted that such data are fairly easy to obtain because the information is generally centrally accessible. However, an official from another state said that third-party organizations do not always provide information on credential attainment before DOL’s reporting timeframes end. Because case managers may not always be able to track down the documentation needed to verify credential attainment, the actual number of participants who attain credentials may be underreported to DOL. For example, officials in one state we contacted said they believe their credential attainment rate should be about 65 percent, but the rate they actually report is about half of that. Despite such obstacles to verifying data on participant credentials, several workforce experts and officials noted the importance of collecting this information. Workforce experts from one national organization noted that credential attainment can demonstrate the value of the funds invested in training and show employers the value of workforce programs and their participants. Workforce experts from another national organization said that credential data could help officials determine which credentials are best aligned with good employment outcomes. Some employer groups also noted the value of credentials in some high- demand occupations, such as manufacturing and information technology. For example, representatives of employer groups in Illinois and Rhode Island said they value information technology and manufacturing credentials from certifying organizations because these programs prepare individuals to perform high-skill tasks. In 2010, DOL provided guidance to states to increase the quantity and quality of credentials attained and to clarify the definition of credential for reporting purposes. During early WIA implementation, we reported that the definition of credential varied within and across states. For example, some states strictly defined credential as a diploma from an accredited institution, and other states broadly defined credential to include certificates of job readiness or completion of a workshop. DOL issued guidance in 2006 that provided additional clarification on which credentials to report, but, according to some workforce officials and experts, allowed for some interpretation.that defined “credential” as an umbrella term that can include a range of In 2010, DOL issued guidance postsecondary degrees, diplomas, licenses, certificates, and certifications. DOL also clarified that credentials must show attainment of measurable technical or occupational skills necessary to obtain employment or advance within an occupation. For this reason, DOL specified that credentials related to remedial training, such as work- readiness certificates, would not be counted for the purposes of credential attainment. In addition to clarifying which credentials should be reported, the 2010 guidance also included strategies that state and local officials can use to increase the quantity and quality of credentials attained. It noted that the first step in increasing the quantity of credentials attained is to refer more participants to training. DOL’s guidance also encouraged officials to take steps to ensure that the training programs result in an industry-recognized credential and that participants complete these training programs. These steps include shortening the duration of training and providing supportive services that enable participants to succeed. Further, to improve the quality of credentials attained, DOL suggested that state and local agencies build the capacity of front-line staff to identify and assess valuable and appropriate credentials for participants. DOL has also stressed the importance of credential attainment by measuring it through an agency-wide performance goal for its workforce development programs including the WIA Adult and Dislocated Worker Programs. DOL officials noted that credential attainment rates for these WIA programs are higher than the rates of some other DOL programs included in the agency-wide performance goal. DOL first began tracking credential attainment data for its agency-wide performance goal in 2010 when it set out to increase the number of training participants who attain credentials through any one of multiple federal workforce programs. Specifically, the goal was an increase of 10 percent, up to a total of 220,000 training participants earning credentials. In fiscal year 2013, DOL continued to assess credential attainment through this performance goal and sought to increase the percentage of training participants who earn credentials from 57 to 62 percent.attainment rate of 59.4 percent through the first two quarters of fiscal year 2013. DOL officials also said that DOL has established a new credential attainment goal; specifically, that by September 30, 2015, the percentage of training participants who attain credentials will increase by 10 percent from the level reported as of the end of fiscal year 2013. DOL officials reported a credential In addition to issuing guidance and setting credential attainment goals, DOL also undertook a number of other related initiatives, including some that are specific to credentials and others that are more broadly designed, such as the Workforce Data Quality Initiative. See Table 3 for a description of DOL’s initiatives. Some states have stressed the importance of credential attainment by implementing broad, statewide efforts. Similar to DOL’s efforts to enhance credential attainment by establishing annual goals, three of the six states we reviewed have either implemented statewide credential attainment goals or are working to do so: Texas implemented an annual state performance measure on educational achievement that tracks credential attainment for multiple programs, including the WIA Adult and Dislocated Worker Programs. All WIBs in the state are held to this measure. Washington has made credential attainment a state performance measure, but defines credential more broadly than DOL. For example, Washington recognizes a larger range of credentials, such as completion of on-the-job training. Illinois re-implemented a credential attainment performance measure during program year 2012 and, according to state officials, is in the process of setting credential targets for program year 2014. According to officials from some states, their efforts to emphasize credential attainment and reporting may have a positive impact on participants’ reported rate of credential attainment. Moreover, officials in Alabama, Illinois, Kansas, and Rhode Island told us they targeted their training funds more narrowly on credential-yielding programs by only approving training providers with programs that resulted in credentials that met DOL’s definition. For one Chicago WIB, this strategy, along with its other efforts to streamline training options from 753 occupations to 40 in-demand occupations, reduced its number of training providers. This practice was one of many DOL suggested in its 2010 guidance as a means for states and local areas to improve the value of credentials for participants. Officials in nearly every state we interviewed reported that this guidance was helpful largely because it more clearly defined which credentials should be reported to DOL. In addition, selected states and local areas have taken steps to ease the resource-intensive process of collecting data on credentials by enhancing communication with participants and working to overcome privacy issues with training providers. Workforce officials in three states told us that case managers seek to build rapport with participants early in the process so they are more likely to be responsive after their training program ends. Regarding training providers, officials in four of six states said they have made efforts to address privacy concerns. Local officials in Alabama, Kansas, and Texas, for example, told us that they ask participants to sign consent forms to allow training providers to share credential information with officials. In Washington, state officials access some credential data from the National Student Clearinghouse and from their state database of community and technical colleges. They said that student privacy rights are generally not a barrier to accessing credential data in Washington because students attending their community and technical colleges are notified that such information can be released to other entities unless the student opts out of sharing it. Washington state officials noted that they have been refining their process for collecting data on credential attainment for 15 years and now have a fairly sophisticated approach. While these varied efforts to mitigate challenges may help reduce the resources required or improve the quality of reported data, workforce officials from three states and three experts we interviewed raised some additional considerations about measuring performance on credential attainment (see table 4). Establishing a performance measure on credential attainment may affect the type of training provided and which participants receive training. For example, neither work readiness training nor on-the-job training (OJT) leads to what DOL has defined as a credential for reporting purposes. However, these may be the most appropriate types of training for participants with basic skills or for particular industries, according to officials from two states we interviewed. Our December 2013 report found that participants in the WIA Adult and Dislocated Worker Programs often lacked the relevant qualifications and basic skills needed to participate in training that would meet the needs of employers seeking employees for in-demand occupations. In addition, work readiness certificates are generally valued by employers, according to several employer group representatives and local workforce officials we interviewed. Representatives from a few employer groups also noted that, in some cases, experience is more important than credentials. For example, local officials we interviewed in Illinois said that the vast majority of participants in OJT obtained jobs with the employers once their training was completed. The officials said OJT provided a good return on investment, despite the fact that these participants did not earn credentials. Currently, DOL’s credential attainment data do not include participants who completed these types of training programs. If credential attainment is established as a performance measure, it will be important to consider ways to address participants who are enrolled in certain types of training that do not lead to a credential, such as by excluding these participants from a credential attainment measure or considering if other measures, such as basic skill attainment, could capture the value of training provided to participants excluded from the measure. Workforce officials in most states we studied identified challenges reporting data on training-related employment that were greater than those for reporting data on credential attainment, including the high degree of resources required and the subjective nature of determining whether employment is linked to training. Similar to credential attainment, there is no definitive source for these data, so case managers must generally collect participants’ employment information from various sources, including participants, employers, and UI wage records. Then— in a step beyond what is required for reporting on credential attainment— they must piece this information together to determine whether participants’ employment is substantially related to their training. Also unlike reporting on credential attainment, DOL does not require that local WIA programs collect and retain documentation on training-related employment in the participants’ case files to verify the accuracy of data they report to states. Officials in four of the six states we studied, as well as at DOL, said this data collection process often requires considerable time and effort. Further, officials from DOL and four states emphasized the need to consider the balance between the time required to collect outcome data and the time case managers spend serving participants, especially in an environment of reduced resources. In addition, officials in all six states said that making training-related employment determinations can be subjective. According to DOL’s reporting guidance, participants’ employment is related to their training if it uses “a substantial portion of the skills taught in training.” workforce experts from one national organization, said that one case manager’s interpretation of what constitutes a substantial portion of the skills obtained in training may differ from another’s. The training-related employment decision can be straightforward if the training and job are clearly connected. For example, if a participant received training to attain a commercial driver’s license and was subsequently hired as a driver by a trucking company, the case manager can easily determine that the participant’s employment is substantially related to the training received. In other cases, however, the decision may be more subjective. For example, officials in one state could not agree whether a participant who had received aviation instruction training had secured training-related employment in his position as an airframe and power plant mechanic. Some state officials thought the skills obtained were transferable, but others were unsure. U.S. Department of Labor, Training and Employment Guidance Letter No. 17-09: Quarterly Submission of Workforce Investment Act Standardized Record Data (WIASRD) (March 10, 2010). Collecting participants’ employment information and attempting to determine whether it was training-related generally entails several steps (see fig. 5). Contacting participants. Several state and local officials we interviewed said that they generally begin the process of collecting data on training-related employment by attempting to contact participants, though some can be unresponsive or inaccessible, which workforce experts from one national organization noted as well. If case managers are successful, they ask participants for information such as the name of their employer and their job title. Some local areas also ask participants directly if their new jobs are—in the participants’ opinion—related to the training they received. In some cases, case managers make their training-related employment determinations based solely on information the participants provide about their employment. Contacting employers. Some case managers contact employers to obtain participants’ employment information, though employers may not be responsive. If case managers could not reach a participant but know where the person works, they may contact the employer to obtain their job title and description. They may also contact an employer to verify the information provided by a participant. Case managers can use the employment information obtained from an employer, or from both the participant and employer, to determine if a participant’s job is training-related. However, workforce officials in Illinois and Texas said employers may not be responsive because they are concerned about employee privacy or about the amount of follow-up required. Checking UI wage records. Some local workforce officials said that if they are unable to gather information about a participant’s employment from the participant or the employer, they check the UI wage records, which are generally not available until several months after a participant exits from WIA services. DOL officials and workforce experts at two national organizations said the UI wage records generally provide the name of the participant’s employer and a code associated with the employer’s industry, but specific information on the participant’s occupation is rarely included. In some cases, the industry code has a clear connection to the training received, making the case manager’s training-related employment determination straightforward. For example, if a participant who was trained as a nurse was hired by a hospital, the case manager can reasonably assume that the employment and training are related. However, some officials noted that the industry code is not always a good predictor of a participant’s occupation. For example, if the same participant was hired by the health unit of a manufacturing company, the industry code in the UI wage records would suggest that the person’s job was associated with manufacturing and not related to the nursing training. Other steps to determine training-related employment. If successful in accessing a participant’s employment information, including job title, some workforce officials said case managers use DOL’s Occupational Information Network (O*NET), which provides an online tool to match job title occupational codes to the skills code associated with the participant’s training. This can help case managers decide whether the participant’s employment is training- related. According to some local workforce officials, however, it can be difficult to find the precise occupational code that matches the participant’s new job. In addition, DOL officials told us that even attempting to match O*NET codes in this manner might not help case managers determine if participants’ employment is related to their training because the threshold of relatedness is still subjective, as mentioned previously. DOL officials also told us it is difficult to prescribe a standard definition for determining whether a job is related to training because it often requires some judgment on the part of local officials. To improve reporting, some states have taken steps to increase their access to information about participants’ employment. Similar to their efforts to collect information on credential attainment, some local workforce officials told us that case managers seek to build rapport with participants. At the same time, officials we interviewed in four of six states have taken steps to increase access to employment-related information. In Illinois, Rhode Island, and Texas, local workforce officials ask participants to sign release forms authorizing employers to release employment information to officials. Local workforce staff in Kansas and Texas also said they obtain information on participants’ employment, including the names of their employers, and—unlike UI wage records— their job titles, by subscribing to an online payroll database called The Work Number. This service verifies employment via a database of national payroll data but does not include all employers, and local WIA programs must pay to subscribe. Officials said they conduct this survey for internal use to collect and share data on training-related employment that is not otherwise available to program managers and state officials. Another official noted that a significant percentage of respondents who do not report their job as training-related find the training instrumental in getting the job or that the skills they acquired in training are useful on their job. In addition, local workforce officials in four states we contacted said they have developed strategies to help reduce the subjectivity in determining whether a participant’s employment is related to their training. For example, local officials in Texas told us that staff may consult their American Job Center’s local business services office, which often has specific knowledge about what skills correspond with particular job titles. Officials in Texas and Alabama also said case managers may consult with their peers or supervisors to reach consensus about a training- related employment decision. Further, state workforce officials in Kansas told us that when employers post jobs on the state’s job bank, they are required to enter occupational codes from DOL’s online O*NET database. If a training participant gets one of these jobs, case managers can compare the employer-provided occupational code with the training codes supplied by training providers to help them determine whether the job is training-related. State and local officials in Washington also said managers routinely use O*NET when making their training-related employment decisions. While DOL has recently issued guidance aimed at increasing reporting rates for training-related employment data, it has taken limited steps to address states’ ongoing reporting challenges. As previously discussed, a September 2011 report by DOL’s Office of Inspector General raised questions about the quality of these data and made recommendations to address this issue. In response, DOL issued a notice to states in September 2013 that reiterated the requirement for states to report these data and stressed the data’s importance for program analysis and evaluation efforts pertaining to the value of investments in WIA training. The DOL notice also acknowledged that reporting on training-related employment is challenging largely because the information must be collected manually. According to the DOL notice, nearly every state that participated in conference calls on the topic indicated that there was considerable cost in conducting the necessary follow-up for reporting on training-related employment and that this was the primary reason the data were not well-reported. State and local officials we interviewed also noted that such data may be underreported because of the difficulty of following up with participants and employers. DOL also concluded that states with larger training caseloads had less complete reporting on training-related employment. In the notice, DOL also described a few practices most common among states with higher reporting rates for training-related employment. For example, DOL cited the practice of instituting a data system check to ensure that training-related employment data are recorded before closing a participant’s case file. Use of crosswalk not necessarily a solution for determining training-related employment Another program DOL administers, Job Corps—a residential, educational, and career technical training program for disadvantaged youths—uses a crosswalk that links specific training codes and occupational codes to help staff determine training-related employment. However, in a September 2011 report, the DOL Inspector General found that this crosswalk included some matches that were either not related or poorly related. Moreover, DOL officials said that using a crosswalk for the WIA Adult and Dislocated Worker programs could make the training- employment link too restrictive and would require a considerable amount of resources to develop. DOL has not identified and disseminated strategies for increasing access to employment-related data or helping to minimize the subjectivity of training-related determinations, but instead has focused exclusively on increasing data reporting rates. While DOL officials maintain that manual follow-up with participants is the best approach for obtaining employment related data, they also recognize that such data collection is resource- intensive. In addition, as officials in all six of our selected states also noted, DOL officials acknowledged that determining whether a participant’s employment is training-related can be a subjective decision. They noted challenges in defining training-related employment more precisely. For example, officials said some training is intended to develop broad, nonspecific skills that may help participants get jobs but are not associated with a specific occupation or industry. We recognize that utilizing professional judgment is inherent in certain tasks such as determining whether a participant’s employment is related to the training the participant received. However, minimizing the amount of subjective decision-making involved to the extent possible could help ensure better quality data on training-related employment. Reasonable approaches for improving the quality of performance data focus on aspects of completeness, accuracy, consistency, and ease of use. By identifying and sharing with states practices to increase access to employment- related data and reduce the subjectivity of some determinations, DOL could help states improve their reporting of data on training-related employment. In addition to the strategies all six selected states use to mitigate reporting challenges, workforce officials from three states and workforce experts at two national organizations said some additional considerations should be taken into account in weighing a performance measure on training-related employment (see table 5). We previously noted concerns about the level of resources required and the subjectivity of determinations, both of which could affect the data’s completeness and consistency—key aspects of performance data quality. The state and local strategies we identified may help mitigate some reporting challenges. In addition, a participant’s successful placement in a training- related job depends on both the ability and decision to pursue such a position. Some local workforce officials we contacted said that it may take participants longer to find employment in their field of training than is allowed for reporting purposes. For example, workforce officials in Rhode Island said that due to the poor economy in their state, it is not uncommon for some participants to take 2 years or more to find a job. Additionally, workforce officials in three states we contacted said participants may decide to take a job unrelated to their training if it is the only job they can find or if they simply choose not to pursue a job in the field in which they were trained. To ensure that public funds invested in WIA’s Adult and Dislocated Worker Programs are spent wisely, program managers and policymakers need performance data that are accessible, complete, accurate and consistent. The current common performance measures—employment, retention, and earnings—provide a basis for assessing the overall value of the services the programs provide, primarily using a standardized data source (state UI wage records). Beyond these, data on outcomes such as credential attainment and training-related employment can potentially provide information more specifically on the value of training services. However, as we have noted, collecting data on these outcomes can be more resource-intensive, in part because there is no single readily available source of data. DOL has taken steps to elevate the importance of credential attainment and improve data quality for this outcome. We found credential attainment data reported to DOL to be reliable. In contrast, we found the data reported to DOL on training-related employment to be incomplete and inconsistent. While DOL has acknowledged challenges in collecting data on and determining training-related employment, it has taken only limited steps to address these challenges, focusing efforts exclusively on improving reporting rates. This effort alone will not improve the quality of the data being reported. Given the nature of the challenges we identified, there are no easy or complete solutions. However, we also identified strategies some states use that may help increase access to employment information and reduce the subjectivity of some training-related determinations. Sharing such strategies with other states, as well as identifying and communicating other approaches, could lead to incremental improvement in the quality of data reported. Without such action, the data states are required to report on training-related employment are likely to remain unusable. To provide policymakers and program managers with better quality information to assess the value of training provided by WIA’s Adult and Dislocated Worker Programs, we recommend that the Secretary of Labor identify and share with states strategies for collecting and reporting data on training-related employment that could either increase access to employment information or reduce the subjectivity of determining when training is related to employment. We provided a draft of this report to the Secretary of Labor and selected draft sections to the Secretary of Education. DOL and Education provided technical comments, which we incorporated as appropriate, and DOL provided a written response (see app. II). DOL agreed with our recommendation and noted that having reliable data on training-related employment is important to effectively manage and evaluate the Adult and Dislocated Worker Programs. DOL also agreed that states can benefit from learning what other states are doing to address challenges regarding access to and subjectivity of these data. Toward this end, DOL noted that it plans to conduct additional conference calls with state officials to reiterate the importance of identifying training-related employment and continue to discuss and share best practices to improve these data. DOL noted that this sharing of best practices would supplement actions it has already taken to improve data on training- related employment. These actions include coding changes to the WIASRD to capture additional information, conference calls with state workforce officials to discuss reporting on training-related employment, and a work group considering adding more data elements to the UI wage records such as an occupational code. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Labor, the Secretary of Education, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who make key contributions to this report are listed in appendix III. Our objectives for this study on the Workforce Investment Act’s (WIA) Adult and Dislocated Worker Programs were to examine: 1) the extent to which training participants obtain credentials and secure training-related employment, 2) challenges states face reporting on credential attainment and what steps, if any, they and DOL are taking to address them, 3) challenges states face in reporting on training-related employment and what steps, if any, they and DOL are taking to address them. To address these objectives, we reviewed relevant federal laws, regulations, and DOL’s guidance to states for reporting select data on participants in the WIA Adult and Dislocated Worker Programs. We interviewed DOL officials from the Employment and Training Administration and the Office of Inspector General as well as experts on workforce issues (see Selection of Experts, below). We also interviewed state and local workforce officials as well as organizations that provided an employer perspective from a nongeneralizeable sample of six states (see Selection of States and Local Areas, below). To assess the reliability of the data DOL collects on credential attainment and training-related employment, we analyzed data from the Workforce Investment Act Standardized Record Data (WIASRD) system for program year 2010 and program year 2011—the most recent years for which data were available—by testing the data electronically and interviewing knowledgeable agency officials. We found the data to be sufficiently reliable for providing estimates on: 1) participants who received training, 2) the minimum number of training participants who earned a credential, and 3) the types of credentials they earned. However, we determined that the data on training-related employment were not reliable for the purposes of our report (see Analysis of DOL’s Training Outcome Data below). We interviewed experts on workforce issues representing six organizations. We identified experts by first reviewing relevant literature and asking officials from DOL for recommendations. We further developed the list by asking each expert we interviewed for additional names. Only experts who were mentioned more than once were selected. The results of these interviews are not generalizeable, but provided insights about the overall challenges states face in reporting on these outcomes and any efforts by states to overcome them. We interviewed state and local workforce officials from a nongeneralizeable sample of six states. We conducted in-person interviews with officials in Alabama, Illinois, and Texas and telephone interviews with officials in Kansas, Rhode Island, and Washington (see table 4). These results are not generalizeable, but provided insights about the challenges they face in reporting data on credential attainment and training-related employment as well as any steps they are taking to address those challenges. We selected the states to reflect a mix of those that had leading-edge data practices (as identified by experts) and those with either incomplete data or relatively high rates of reporting errors (as identified by WIA data quality reports on credential attainment). We also factored geographic diversity into state selection. In each state, we interviewed state workforce officials and also local workforce officials from at least one workforce investment board and at least one American Job Center—formerly known as a one-stop center. We selected a non- generalizeable sample of local areas based on input from state workforce officials and, for states we visited, proximity to the state workforce agency. In addition, we interviewed at least one employer organization in each state. In selecting these entities, we considered states’ input on organizations that could provide us with an employer perspective on the value of credentials and certain types of training for various industries. They included statewide business associations, regional business associations, individual employers, and industry-specific representatives. In each state, we obtained information about the state and local area’s process of collecting data on credentials and employment related to training as well as any challenges they may have encountered. We also asked state officials about DOL’s related guidance. We used a semi- structured interview guide for the state and local interviews. To assess the reliability of DOL’s data on training, credential attainment, and training-related employment in the WIASRD database for participants in the WIA Adult and Dislocated Worker programs, we: (1) reviewed documentation related to reporting these data, including DOL’s Office of Inspector General reports; (2) tested the data electronically to identify potential problems with consistency, completeness, or accuracy; and (3) interviewed knowledgeable DOL officials about the data. Our electronic testing consisted of identifying inconsistencies, outliers, and missing values. In addition, we analyzed the publicly-available WIASRD data file for program years 2010 and 2011, which was produced for DOL by its data contractor, Social Policy Research Associates. As part of our analysis, we reviewed the steps the data contractor took to address data errors and, to the extent possible, compared the data DOL provided for our analysis to the publicly-available file, and found only slight discrepancies. We found the data on training and credential attainment to be sufficiently reliable for reporting estimates of: (1) participants who received training, (2) the minimum number of training participants who earned a credential, and (3) the types of credentials they attained. We were not able to reliably make state-to-state comparisons because two states are piloting a new reporting format for DOL, and therefore would not have been compatible with the others. For the purposes of this report, we did not find the data on training-related employment reliable. We reached this conclusion based on our analysis of the data, an Office of Inspector General report, and DOL’s data quality reports. We were not able to determine how many training participants in the Adult or Dislocated Worker Programs obtained employment related to their training in program year 2011. For the Adult Program, we found that states reported data on 48 percent of training participants, but had missing data for the remaining 52 percent. For the Dislocated Worker Program, states reported data on 74 percent of training participants, but had missing data for the remaining 26 percent. Further, an analysis of the reported data showed wide variation among states regarding the percentage of participants who obtained training-related employment raising questions about the data’s reliability. We conducted this performance audit from October 2012 to January 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit work 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. Andrew Sherrill, (202) 512-7215 or sherrilla@gao.gov. In addition to the contact named above, Laura Heald, Assistant Director, John Lack, Jeffrey G. Miller, and Kathryn O’Dea Lamas made key contributions to this report. Also contributing to this report were James Bennett, Jessica Botsford, David Chrisinger, Elizabeth Curda, Kathy Leslie, Carol Patey, Rhiannon Patterson, Jerry Sandau, and Walter Vance. Workforce Investment Act: Local Areas Face Challenges Helping Employers Fill Some Types of Skilled Jobs. GAO-14-19. Washington, D.C.: December 2, 2013. Workforce Investment Act: DOL Should Do More to Improve the Quality of Participant Data. GAO-14-4. Washington, D.C.: December 2, 2013. Postsecondary Education: Many States Collect Graduates’ Employment Information, but Clearer Guidance on Student Privacy Requirements Is Needed. GAO-10-927. Washington, D.C.: September 27, 2010. Workforce Investment Act: Employers Found One-Stop Centers Useful in Hiring Low-Skilled Workers; Performance Information Could Help Gauge Employer Involvement. GAO-07-167. Washington, D.C.: December 22, 2006. Workforce Investment Act: Labor and States Have Taken Actions to Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. Washington, D.C.: November 14, 2005. Workforce Investment Act: Substantial Funds Are Used for Training, but Little Is Known Nationally about Training Outcomes. GAO-05-650. Washington, D.C.: June 29, 2005. Workforce Investment Act: Labor Should Consider Alternative Approaches to Implement New Performance and Reporting Requirements. GAO-05-539. Washington, D.C.: May 27, 2005. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. Workforce Investment Act: Labor Actions Can Help States Improve Quality of Performance Outcome Data and Delivery of Youth Services. GAO-04-308. Washington, D.C.: February 23, 2004. Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA’s Effectiveness. GAO-02-275. Washington, D.C.: February 1, 2002. | As the economy recovers, some employers continue to face difficulty finding qualified workers. The WIA Adult and Dislocated Worker Programs provide services, including job training, which aims to help participants acquire skills and credentials employers need. Under WIA, states are required to report data on training participants who obtain credentials and on those who enter employment related to the training they receive. Given that a WIA reauthorization proposal would establish both of these outcomes as performance measures, GAO was asked to examine the capacity of states to report on these outcomes. This report addresses: 1) the extent to which training participants obtained credentials and training-related employment, 2) challenges states face in reporting data on credentials and what steps, if any, they and DOL are taking to address them, and 3) challenges states face in reporting data on training-related employment and what steps, if any, they and DOL are taking to address them. GAO interviewed DOL officials, workforce experts, and state and local officials and employer organizations from a nongeneralizeable sample of six states selected in part on the basis of geographic diversity. GAO also analyzed data on credential attainment and training-related employment for program years 2010 and 2011. Of the more than two million total participants in the Workforce Investment Act's (WIA) Adult and Dislocated Worker Programs, about 11 percent and 16 percent, respectively, received training in program year 2011, and about two-thirds of the training participants in each program attained a credential. Little is known, however, about how many participants got jobs related to their training. From program year 2006 through program year 2011, the percentages of training participants who earned a credential declined from about 74 percent to 58 percent for the Adult Program and from about 75 percent to 63 percent for the Dislocated Worker Program, according to data from the Department of Labor (DOL). Of those training participants who attained a credential in program year 2011, about 65 percent earned occupational credentials, such as a welding certificate, followed by lower percentages who earned occupational skill licenses and associate's degrees, among others. In contrast, GAO found training-related employment data unreliable primarily because a significant portion of the data was missing. Workforce officials in four of six selected states cited some obstacles in reporting data on credential attainment, and both DOL and states are taking steps to address challenges. Officials in four states GAO contacted said reporting such data can be resource-intensive, largely because case managers must manually track this information from various sources, including participants, training providers, and third-party organizations. To improve credential attainment and reporting, DOL clarified which credentials should be reported and began measuring credential attainment through an agency-wide goal in 2010. Officials in five states have taken similar steps, such as setting goals and tracking credential attainment, and enhancing data exchange with training providers. Officials in most of the six states GAO contacted noted some obstacles to obtaining such data. For example, officials from several states cited student privacy laws as a barrier in verifying credentials with training providers. Officials in three states told us that they ask participants to sign consent forms allowing training providers to give credential information to local officials. Workforce officials in most of the selected states identified even greater challenges reporting data on training-related employment, including the high degree of resources required and the subjective nature of determining whether employment is linked to training. DOL has taken only limited steps to address these challenges. To report such data, case managers seek participants' employment information from participants, employers, and wage records. Then they must piece it together to determine whether participants' employment is "substantially related" to their training. Officials in most of the six states described this process as resource-intensive and noted that making such determinations are subjective since one case manager's interpretation of "substantially related" may differ from another's. Given these challenges, officials in all six states have taken some steps to increase access to employment information or make decisions less subjective. DOL has recently stressed the importance of reporting data on training-related employment and shared a few practices with states to increase reporting rates; however, it has not identified and disseminated strategies to address the ongoing challenges states face regarding resource intensiveness and subjectivity, which could improve the quality of such data. GAO recommends that DOL identify and share with states strategies that may ease collection and improve the quality of training-related employment data. DOL agreed with GAO’s recommendation. |
To be validated as a joint urgent operational need, a requirement must be joint in nature and, importantly, if not addressed immediately will seriously endanger personnel or pose a major threat to ongoing operations. DOD has taken a number of steps to provide urgently needed capabilities to the warfighter more quickly and to alleviate the challenges associated with the traditional acquisition process for acquiring capabilities.Office of the Secretary of Defense established JRAC in 2004 to help overcome institutional barriers and provide timely, effective support to meet the urgent materiel and logistics requirements that combatant commanders deem operationally critical. In July 2005, the Chairman of the Joint Chiefs of Staff issued Instruction 3470.01 to establish policy and procedures to facilitate the assessment, validation, sourcing, resourcing, and fielding of urgent combatant command needs considered as life- or combat mission-threatening, based on unforeseen requirements that must be resolved quickly. Although not addressed in the July 2005 instruction, DOD officials stated that a criterion for validation was the expectation that the capability gap could be addressed within 2 years. Subsequently, the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 provided that the acquisition process for fielding capabilities in response to urgent operational needs is appropriate only for capabilities that can be fielded within a period of 2 to 24 months. Headquarters, Department of the Army regulation 71-9, Warfighting Capabilities Determination (Dec. 28, 2009); Department of the Navy, Navy Urgent Needs Process Implementation, OPNAV 4000, ASN (RD&A) (July 26, 2007); Air Force Instruction 10-601, Operational Capability Requirements Development, July 12, 2010; and Marine Corps Order 3900.17, The Marine Corps Urgent Needs Process and the Urgent Universal Need Statement (Oct. 17, 2008). integration and development system to identify, assess, validate, and prioritize joint military capability requirements. In response to Section 804 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011, DOD is now in the process of assessing its policies and processes for managing both joint and service- specific urgent needs. This review is intended to establish policy that will be used to respond to urgent needs arising from future contingencies and will consider improvements to the acquisition process for rapid fielding of capabilities responding to urgent needs. In a February 2012 letter to the Chairmen of the Armed Services and Appropriations Committees, the Acting Under Secretary of Defense for Acquisition, Technology and Logistics stated that additional policy options were under development to address, among other elements, the need for more comprehensive policy to govern the acquisition of capabilities to satisfy urgent needs. DOD expects that the review of these policies will be complete by August 31, 2012. The joint process begins when a need that is threatening to life or mission success is identified and a request is submitted to the commander of U.S. forces in a theater of operations, such as Iraq or Afghanistan. Once approved, the request is submitted to the combatant command headquarters, such as U.S. Central Command, for requests pertaining to Iraq or Afghanistan.submitted to the Joint Staff where it is reviewed by a Functional Capabilities Board. The board is responsible for determining whether the urgent need addresses a capability gap that, if unmet, could threaten lives or the success of a combat mission. If the need meets these criteria, the board convenes a working group that collects additional information and makes recommendations for the review, including whether the Joint Staff Deputy Director for Requirements should validate the need. Once validated, the joint need is sent to JRAC who assigns a military service or agency as the sponsor. JIEDDO is generally the sponsor for joint urgent If endorsed at this level, the joint urgent need is then needs focused on countering improvised explosive devices. The sponsor is responsible for tasking executing organizations to lead the development and fielding of the capability, as well as providing oversight, guidance, and in most cases, funding. The major events throughout the joint urgent needs life cycle are described in figure 2 for urgent needs originating from operations in Iraq and Afghanistan. While the joint urgent needs process begins when a request is submitted in theater, our analysis focused on the part of the process beginning at validation of the need and ending with the fielding of the first units of the capability in theater. From validation, the joint urgent needs process consists of five key events. Twenty-six of the 30 initiatives met, or expected to meet, DOD’s expectation for fielding capabilities within 2 years from validation, but the remaining 4 initiatives took longer. Performance in meeting schedule estimates varied, and more than half of the initiatives experienced schedule delays. Most of the initiatives we reviewed, including all of those that met fielding estimates, used solutions based on buying commercial or government off-the-shelf items or modifying off-the-shelf items to add capabilities. Those based on buying off-the-shelf items took longer in the initial stages of the process, but were fielded more quickly after contract award. The rate at which an initiative progressed through the process also varied based on the type of organization responsible for executing the initiative and the sponsor. The median time to progress through the early stages of the process decreased from 2008 to 2010. A number of initiatives have been fielded in a year or less, and most initiatives (26 of 30) met, or expected to meet, the expectation for fielding capabilities within 2 years, as shown in figure 3. The median time to initial fielding of a capability was 13 months for fielded initiatives and an estimated 19 months for initiatives not yet fielded. Overall, the 30 initiatives consisted of a range of urgent needs solutions, including improvised explosive device disruptors and detectors, wide-area surveillance systems, and Mine Resistant Ambush Protected (MRAP) vehicles. Nine initiatives had not been fielded at the time of our review. These nine initiatives ranged from systems that detect homemade explosives to aerostat balloons that provide persistent surveillance capability and to machine-based Afghani language translation capabilities. Eleven initiatives took 12 months or less to reach initial fielding. For example, the MRAP Recovery Vehicle—a tow truck to retrieve disabled vehicles—reached initial fielding within 6 months of validation. According to program officials, this initiative benefited from existing relationships built during the development of other MRAP vehicles, as well as support from high-level stakeholders. One of the MRAP contractors anticipated the need for such a capability and developed the wrecker so that it was able to immediately respond to program office interest. Because of high- level support, approval for the acquisition was received even before the requirement was formally validated. In another example, the Persistent Ground Surveillance System, a system that provides surveillance and reconnaissance capability, reached initial fielding within 7 months because the program office had prior experience working in a rapid prototype environment. Program officials also said that earlier efforts enabled them to work with the vendor, become knowledgeable about the system, and work with contracting personnel who were very responsive to subsequent requests for the capability. Four initiatives—two fielded and two not yet fielded—had actual or estimated fielding times of 27 months or more. Various factors contributed to the longer fielding times or estimates, depending on the initiative, as shown in table 1. Performance in meeting schedule estimates varied. Eleven of the sampled initiatives met, or were on track to meet, estimated fielding dates. However, 19 of the 30 sampled initiatives reported delays, and 12 of these initiatives exceeded their originally estimated fielding dates by at least 3 months, as illustrated in figure 4. Officials attributed the delays to some key issues that included the receipt of initial funding, awarding contracts, and conducting test activities. Initiatives that addressed joint urgent operational needs leveraged three types of solutions: (1) off-the-shelf products, (2) modifications of off-the- shelf items to add capabilities, and (3) products that required development of a technology. Off-the-shelf solutions should be fielded the quickest because they are focused on buying already-existing products. However, this was not the case for initiatives in our sample. Overall, off- the-shelf solutions in our sample tended to take somewhat longer to field than other solution types, a median time of 13.5 months compared to 12 months for modifications of off-the-shelf products and 11 months for technology development. Once a contract was awarded, off-the-shelf solutions were fielded quickly. However, as shown in figure 5, off-the- shelf solutions took longer in the early stages of the process. The median time to task, fund, and award a contract for off-the-shelf solutions was 9.5 months compared to 2 months for technology development solutions and 4 months for modified off-the-shelf solutions. Off-the-shelf solutions took longer during the early phases, in part, because they were less likely than other solution types to leverage ongoing efforts and thus required additional time to identify, fund, and contract for the solution. In contrast, other solution types—technology development and modifications of existing systems—leveraged ongoing efforts where solutions were at least partially developed. All 13 of the modified off-the-shelf and technology development initiatives leveraged efforts already underway before the sponsor tasked the urgent need to an acquisition organization. In contrast, only three of the eight initiatives that employed off-the-shelf solutions leveraged efforts underway prior to tasking. Leveraging ongoing efforts allowed for shorter time frames because it collapsed the time for identifying a solution and tasking an organization to execute it. For example, officials for an initiative developing a wide-area surveillance capability said they were within weeks of delivering the first sensors (in response to a service request) at the time the urgent need was validated. As a result, the solution was identified quickly and the initiative moved swiftly through the early stages of the process. The experience of four initiatives further illustrated why off-the-shelf initiatives in our sample took longer than other solution types early in the joint urgent needs process. For these four initiatives, more than 9 months elapsed from validation to the receipt of funding. The reasons for these delays varied by initiative, as shown in table 2. After contract award, however, initiatives that required technology development or modification took longer to field as a result of technical challenges and testing delays. Off-the-shelf solutions relied on mature technologies and therefore could be fielded in a median time of 4 months after contract award. This compared to a median time of 8 months for initiatives modifying off-the-shelf products and 9 months for technology development efforts. Three of the four fielded initiatives that developed technology responded to the same urgent need for a wide-area surveillance capability. Officials working on these initiatives highlighted various issues that extended the fielding schedule subsequent to the awarding of a contract, including technical challenges and delays related to certification and accreditation of the solution. Most of the fielded initiatives we reviewed, including all of those that met fielding dates, used solutions based on off-the-shelf items in response to joint urgent operational needs. Specifically, 17 of the 21 fielded initiatives either employed off-the-shelf products or modified off-the-shelf items. As figure 6 illustrates, the eight initiatives that met, or expected to meet, schedule estimates for fielding a capability leveraged off-the-shelf items or modified them to address the urgent need. Joint urgent needs are executed by a broader range of organizations than those typically responsible for managing acquisitions, as shown in figure 7. In addition to program offices that traditionally manage the acquisition and fielding of weapon systems, engineering centers and science and technology laboratories were tasked with executing initiatives. Engineering centers such as the Naval Surface Warfare Center and the Army Research, Development and Engineering Center typically provide support to the program offices that manage acquisition programs. Science and technology laboratories such as the Army Research Laboratory conduct technology development and research in the physical, engineering, and environmental sciences. In responding to urgent needs, both engineering centers and science and technology laboratories operate as reimbursable organizations, accepting project orders under which they get reimbursed for the costs of performing services, sharing knowledge, and conducting technical services. Program offices fielded capabilities faster than reimbursable organizations for the initiatives we reviewed, as shown in figure 8. The ability of program offices to field capabilities more quickly is partly explained by the expertise that these organizations have with the full range of acquisition activities, including developing test plans, accessing contract support, and planning for training and transportation. In addition, reimbursable organizations have a different funding environment than program offices in that they typically rely entirely on customer funding to perform work. In contrast, program offices generally had greater flexibility in terms of their funding sources, which was particularly beneficial when funding delays occurred. Initiatives managed by reimbursable organizations took longer to field a capability, in part, because they do not have the same funding flexibilities as the program offices and they may need additional time to fully understand other program management processes. The amount of time initiatives spent progressing through the urgent needs process, particularly before tasking to an organization, also differed depending on the sponsoring service or agency. As figure 9 shows, for the sampled initiatives, JIEDDO took longer than other sponsors to task an urgent need to an organization. The median amount of time sponsors, excluding JIEDDO, took to task initiatives to organizations was 1 month. In contrast, JIEDDO tasked its initiatives in a median time of 7 months. JIEDDO, however, had a more deliberate process for identifying and selecting a solution when one was uncertain, which helped explain why it took longer to task initiatives to an organization. Officials noted that the lead military service can quickly task urgent needs because an applicable solution, as well as the acquisition organization with the relevant expertise in developing it, is easily identifiable. However, according to DOD officials, JIEDDO often addresses urgent need requests for which the solution is ambiguous, therefore requiring greater effort to identify a capability and executing organization. For instance, one of the joint needs for which JIEDDO was the sponsor required development of a capability allowing warfighters to detect homemade explosives from a distance. According to officials, the urgent need solution was complex and required evaluation of various sensors and platforms tailored for homemade explosive detection. As a result, 7 months elapsed from when JRAC assigned the validated urgent need to JIEDDO to the point when the agency first tasked an organization with development of a solution. In the interim, JIEDDO worked to evaluate and identify potential capabilities to address the urgent need by forming a working group, writing a concept of operations, and completing a proof of concept. In the case of most other sponsors, the executing organization itself was responsible for activities such as developing a concept of operations and assessing solutions, officials said. Sampled initiatives validated in 2009 and 2010 were tasked and funded more quickly than initiatives validated in 2008, suggesting overall improvements in the earlier stages of the joint urgent needs process. Specifically, urgent needs validated in 2008 took 5 months longer than 2009 initiatives and 7 months longer than 2010 initiatives to be tasked and funded, as shown in figure 10. DOD officials cited the establishment of a senior group of officials to facilitate the joint urgent needs process as contributing to the reduction in the median time in which initiatives progressed through the joint urgent needs process since it was created. The deployment of additional forces to Afghanistan in the fall of 2009 led to an increase in demand for urgent need capabilities. Shortly after, in November 2009, DOD created the Counter-Improvised Explosive Device Senior Integration Group to provide oversight for all joint urgent operational needs related to counter- improvised explosive devices. DOD officials stated that the group has been renamed the Senior Integration Group, which is responsible for reviewing all validated joint urgent needs. The group, consisting of high- level DOD officials and agencies, meets every 3 weeks. According to DOD officials, the Senior Integration Group has helped increase oversight over the entire joint urgent operational needs process, and specifically accelerated the identification and allotment of funds to urgent need initiatives. In 2008, the median time initiatives spent from validation to the receipt of funding for the initiative was 9 months; however, initiatives validated in 2010 took no more than 1 month to receive funding during this time period. In developing and fielding solutions addressing joint urgent operational needs, acquisition organizations faced common challenges that affected their ability to deliver capabilities as quickly as possible. These challenges included obtaining timely funding, addressing contracting requirements, and agreeing on testing that should be accomplished. Officials highlighted various practices—having early access to funds, receiving high-level support, using flexibilities in the contracting process, leveraging relationships, and communicating with the warfighter—that helped overcome challenges during solution development and fielding. About half of the sampled initiatives received funding within 1 month of being tasked with an urgent need, but the remainder did not receive funding for 2 months or more, as illustrated in figure 11. For initiatives within our sample, the median length of time from when a program office was tasked with an urgent need to when it received funding was 1 month; the median length of time for all other types of executing organizations, including engineering centers and science and technology laboratories, was 3 months. The difference may be due, in part, to the fact that some of these programs have access to budgeted funds. For example, according to agency officials, the MRAP program has an annual budget that provides the program with access to funding and requires that DOD notify congressional committees 10 days before it transfers these funds from the appropriation in the DOD and Full Year Continuing Appropriation Act, 2011. Although other program offices did not have such dedicated urgent needs funding, agency officials stated that, in some instances, they were able to leverage budgeted funds, as illustrated in the development of an unmanned cargo aircraft. This initiative managed by a Navy program office focused on developing and fielding an unmanned cargo capability to support forward operating bases in Afghanistan. The program office reported that it was able to reprogram funds from an alternate budget line when funding became a challenge. The Navy official said funding was important to begin early activities— such as developing an acquisition plan—particularly since the program had a 12-month deadline to deploy the capability. Funding options were more limited for reimbursable organizations like engineering centers and science and technology laboratories. These types of organizations relied on customer funding and performed work in response to orders placed by other organizations, such as traditional program offices, that received appropriated funds. As a result, these organizations reported funding challenges more frequently than other organizations. Funding challenges were reported for 11 of 20 initiatives managed by engineering centers or science and technology laboratories. In contrast, 8 of the 25 remaining organizations in our sample reported funding challenges. The urgent need for a special purpose X-ray machine is one that experienced funding problems. The engineering center manager for this initiative said that the initiative experienced a 6-month delay due to 4 months in elapsed time to identify resources and 2 months for administrative problems associated with the transfer of customer funding at the end of the fiscal year. While awaiting their major funding allotment early in the process, several organizations had access to a small amount of funding or were able to leverage existing resources to begin activities sooner. According to agency officials, JIEDDO, unlike JRAC or other sponsors, has the authority to provide up to $1 million in early or seed funding for administrative and programmatic start-up prior to the initiative decision memorandum authorizing funds for development or demonstrations. Early funds can be used to support development of the acquisition strategy, test and evaluation strategy, and other programmatic documentation. Among the 45 initiatives in our sample, we identified eight instances where JIEDDO had provided executing organizations with early funding. In other instances, officials from executing organizations stated that they were able to leverage existing “in-house” resources to begin to research urgent needs solutions. However, officials noted that without funding, even staff time is limited and planning activities are constrained, particularly for reimbursable organizations. Visibility by high-level stakeholders helped overcome funding challenges. Initiatives that had the attention of high-level stakeholders (such as the Secretary of Defense; the Senior Integration Group; JRAC; the Intelligence, Surveillance, and Reconnaissance Task Force; or JIEDDO) experienced fewer delays in receiving their major funding allotment than those initiatives that did not have such visibility. In one example, a program office that was developing a wide-area surveillance capability had requested additional funding to accelerate ongoing efforts and meet the urgent need. When receipt of this funding was delayed, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics urged the Marine Corps to provide the program office with existing funds. This allowed the program office to continue developing the capability until its funding became available. Most notably, organizations that reported having high-level visibility among more than one of these stakeholders reported the fewest funding challenges. Executing organizations for only 2 of 11 initiatives that reported high-level visibility among more than one stakeholder also reported having funding challenges. In contrast, executing organizations for five of the six initiatives without high-level visibility reported having funding challenges. DOD officials noted that the establishment of the Senior Integration Group in 2011 has increased the visibility of high-level stakeholders into the joint urgent needs process and, more importantly, into urgent needs initiatives that may not normally receive such attention. DOD and program officials also stated that having high-level attention helped to prioritize and secure funding that otherwise could have been difficult. In March 2010, the Under Secretary of Defense for Acquisition, Technology and Logistics issued a memorandum reinforcing urgent needs as DOD’s highest priority and encouraging the acquisition community to use all available tools and authorities—including contracting tools and authorities—to develop and field capabilities more quickly. Initiatives we reviewed commonly used one or more contracting tools, including use of existing contracts, undefinitized (unpriced) contracts, and sole-source contracts. Within our sample, 24 of the 38 initiatives leveraged existing contracts. As illustrated in figure 12, the median time to contract award was 6 months shorter for initiatives that used existing contracts. A program manager noted that using existing contracts was advantageous because the time traditionally taken to award a contract can exceed 6 months, at least 25 percent of an executing organization’s schedule if it is trying to field a capability in less than 2 years. Another program official said that the use of existing contracts allowed the program to save time in acquiring needed materials, parts, and equipment since competing and awarding a new contract would have added time to the overall effort. For initiatives that used an undefinitized contract—a contract action allowing contractors to begin work before reaching a final agreement on contract terms, such as price—the median time to reach contract award was 5 months shorter than those that did not, as shown in figure 13. As we have previously reported, when a requirement needs to be met quickly and there is insufficient time to use traditional contracting vehicles, defense regulations permit the use of an undefinitized contract action. These can be quickly initiated, but at a later date, the contract’s final price and other terms must be agreed upon by the contractor and government, a process known as definitizing the contract. The use of these contracting vehicles increases the risk to the government until the contract has been definitized. The MRAP program used undefinitized contracts for the three initiatives we reviewed—the MRAP All-Terrain Vehicle, the MRAP Recovery Vehicle, and the MRAP All-Terrain Ambulance. This allowed the contractors to begin work immediately to meet aggressive schedule targets while providing greater time to negotiate firm-fixed-price contracts. Executing organizations for 30 initiatives in our sample reported that they did not compete their contracts, and instead relied upon sole-source contracts. Program officials reported that they used the unusual and compelling urgency exception to full and open competition under FAR 6.302-2 associated with urgent operational needs to justify using sole- source contracts. As illustrated in figure 14, when contracts were competed, initiatives took more time to reach contract award than those that awarded sole-source contracts, although the reliance on sole-source contracts may affect the price the government pays. In the case of the MRAP program, however, officials relied on competition to incentivize contractors to invest in and develop alternative solutions. Particularly noteworthy was a contractor proposal to use underbody armor that addressed the need for greater protection for MRAP All-Terrain Vehicles; the solution was ultimately added to MRAP vehicles already in use, as well as those in production. Cooperative relationships with supporting organizations, such as those in the test and logistics communities, enabled some initiatives to overcome the difficulties associated with fielding capabilities quickly. Program officials stated that approaching the test community early and establishing working relationships with these organizations helped to make testing more efficient. Officials from executing organizations noted that testing performed on typical acquisition programs could not necessarily be completed within rapid time frames. In one example, the testing community requested 3-4 months to conduct tests on a capability, but the schedule only allowed 8 weeks for testing. Officials stated that an organization needs to involve the testing community early in the process to create a feasible test strategy. In another case, officials stated that the testing community was extremely cooperative and designed a test strategy based on discussions that were held early in development. Some officials told us that once the organization completed development of the capability, they still faced challenges in obtaining approval to deliver the capability to theater. According to agency officials, several programs were required to obtain safety certification prior to deployment to theater and some executing organizations experienced delays in certification and accreditation of solutions.one initiative noted that 3 months passed after they had shipped a capability to Afghanistan while it received various forms of accreditation for the system’s components, such as the ground station, network, and aircraft. This delay contributed to the 11 months spent from the time a contract was awarded to when a fully operational capability was fielded. For instance, officials from Logistical challenges were also problematic, according to officials, especially when their organization was not typically responsible for shipping capabilities into theater. Organizations anticipated and overcame logistics challenges by adapting the capability to facilitate shipping or by partnering with other DOD agencies for transporting materials. For example, one executing organization had special shipping requirements for materials requiring cooled storage while in transit. Instead of developing this capability on its own, the organization leveraged the experience of an Army agency that had the requisite logistics experience and knowledge. Officials for some initiatives stated that a list of best practices, or a one-page checklist with requirements and security information, would have made it easier for organizations to plan for these tasks and avoid having to figure it out on their own. Testing and other challenges were at times discussed in acquisition strategies. For example, the acquisition strategy for the MRAP program discussed the level of testing that would take place, logistics and maintenance that would be provided, required facilities support, and training for personnel. Acquisition plans for another initiative identified important aspects of the joint urgent need that included the initiative’s focus on increasing intelligence, surveillance, and reconnaissance capabilities, and other expectations such as procurement quantities, contractor support for procurement of commercial off-the-shelf components and materials, testing, and the need for tailored logistics support. JIEDDO requires that organizations prepare an acquisition strategy within 30 days of tasking, therefore providing a vehicle to address testing, logistics, and other challenges. Officials we spoke with said that communication throughout the joint urgent needs process—particularly between the acquisition community and the combatant command officials in Iraq and Afghanistan and at headquarters—aided in overcoming challenges related to the development and fielding of solutions. While the Joint Staff worked to define and clarify urgent needs requirements during validation, officials for 16 of the 45 initiatives in our sample stated that they had to work with U.S. Central Command officials in theater and at headquarters to further develop the requirements after they were tasked with the urgent need. The median time to initial fielding of a capability was over 8 months shorter for initiatives where officials worked with U.S. Central Command on requirements, as illustrated in figure 15. Officials noted that it is important that urgent needs statements allow some flexibility for developing solutions so that acquisition organizations can make use of all available technologies to meet the warfighter’s needs. In some instances, communication that began with requirements continued and supported fielding of the capability. For example, officials developing a capability to detect improvised explosive devices worked with officials in Afghanistan to clarify overly prescriptive requirements. Program officials noted that strong communication between the program and the warfighter was one of the most important factors that allowed their organization to field a solution within 14 months. Officials also stated that communication with officials in theater before and after fielding a solution was important for overcoming challenges related to integrating the capability into the unit. For example, when solutions arrived in theater, problems could sometimes arise because the receiving warfighter unit was not always the same unit that had originally requested the capability. For 15 of the 45 initiatives we reviewed, officials reported that they had encountered challenges with fielding their capability due to units that rotated into and out of theater. They addressed this by contacting commanders in advance of their deployment to inform them of the fielding of the urgent needs solution and, in some instances, offered training to their unit. In many instances, a representative from the executing organization would also be in theater to assist receiving warfighter units. The program manager from one organization traveled to theater to help address any challenges associated with unit rotation and fielding the capability. This official emphasized that this presence in theater helped to overcome any challenges. While officials for 31 initiatives noted that their organization had, or planned to have, a representative in theater to aid in the fielding and integration of a solution into a unit, some officials noted that it was preferable to have a military representative in theater rather than a civilian employee or contractor because the former had higher visibility among the units. The extent to which U.S. Central Command has knowledge of the progress of urgent needs initiatives depends, in large part, on the initiative of program officials in communicating such information. Officials at U.S. Central Command headquarters stated that they were not always aware of what solutions were being developed in response to joint urgent needs or of the progress being made by executing organizations. JRAC and JIEDDO largely rely on three databases to track urgent needs initiatives and document progress. In these databases, information on specific joint urgent needs, particularly those met by multiple initiatives, was often unclear or incomplete, making it difficult to identify the initiatives implemented in response to an urgent need. For example, not every sponsor or executing organization provided a point of contact for its initiative. JRAC officials explained that they solicit updates from executing organizations and provide these updates to U.S. Central Command and other groups—such as the Senior Integration Group—upon request. Inconsistent documentation presented challenges in tracking the progress of individual initiatives, as well as identifying points of contact for the organizations responsible for meeting urgent needs. Problems cited by U.S. Central Command officials in identifying what initiatives were being developed in response to joint urgent needs were consistent with difficulties we encountered in identifying initiatives responding to the joint urgent needs in our sample. Officials from the Joint Staff, JRAC, and JIEDDO compiled a list of initiatives that responded to the joint urgent needs in our sample. For the urgent need addressing personnel- and vehicle-borne improvised explosive devices, additional initiatives were identified later. In another case—the urgent need addressing wide-area surveillance—officials identified additional initiatives that had not been identified previously. Schedule estimates were not consistently available in databases used by U.S. Central Command, JRAC, and JIEDDO. Schedule plans were at times documented for meeting the joint urgent need more generally, but estimates of when a specific initiative would be fielded were often unclear or undocumented. Executing organizations for many initiatives (25 of 45) estimated initial fielding dates after being tasked with the joint urgent need, but not all organizations or sponsors formally documented schedule estimates. In many instances, estimated fielding dates were communicated in briefing slides or through informal means, such as e- mails. For some initiatives, schedule estimates and expectations were documented and communicated in an initiative decision memorandum. In particular, an initiative decision memorandum was prepared for several JIEDDO-sponsored initiatives, and JIEDDO currently requires that an initiative decision memorandum be prepared for all JIEDDO-sponsored initiatives; however, there is no requirement that applies to all initiatives. The decision memorandums we reviewed generally included an estimated schedule for fielding the capability and called for preparing an acquisition strategy. Acquisition strategies we reviewed identified testing, logistics, and other resources needed to support the development and fielding of the capability and, according to officials, facilitated better planning and disciplined management. Defense officials noted that the initiative decision memorandum includes other important information such as cost and funding estimates, schedule of funding, appropriation totals, entry/exit criteria, and manpower implications. Furthermore, they stated that the document captures performance and schedule changes, establishes a formal agreement between the program manager and JIEDDO, and documents the initiative’s life cycle from cradle to grave. Officials at U.S. Central Command stated that having better communication during development of a solution could help facilitate planning activities and operational decisions that affect the warfighter. JRAC and JIEDDO officials stated that although not required, they see regular communication with the combatant command as important for all initiatives. As DOD puts in place a policy for responding to future contingencies, it is important to understand what worked well and correct what did not work well in responding to urgent needs in Iraq and Afghanistan. Several practices have potential for facilitating a quick response to warfighter needs. Off-the-shelf solutions should be fielded quickly, but doing so requires reducing the time to decide on a solution, make funding available, and award a contract. Creating and leveraging the enablers— early funding particularly for reimbursable organizations, use of authorities to expedite the award of contracts, early involvement of stakeholders including the warfighter—will help reduce response time. Communicating with combatant command officials in theater and at headquarters about requirements as well as challenges in integrating a capability into warfighting units supported effective fielding, but there is no requirement that this communication take place. Clearly communicating what initiatives are being undertaken in response to urgent needs is important to those who plan and make decisions about theater operations. Initiative decision memorandums aided in communicating schedule expectations for JIEDDO initiatives, and in some instances acquisition strategies communicated risks and identified testing, logistical, and other resources that needed to be brought to bear during development and fielding of joint need solutions. But, there is no requirement that an initiative decision memorandum be prepared for all initiatives. To improve the process for responding to joint urgent operational needs, we recommend that the Secretary of Defense take the following four actions: Expedite fielding of off-the-shelf solutions by reducing the time it takes to identify the solution and award a contract. Devise methods for providing early funding to reimbursable organizations tasked to execute joint urgent needs. Require acquisition organizations to communicate with the combatant commands, such as Central Command, regularly about progress in executing initiatives and plans for fielding capabilities. Require that an initiative decision memorandum be developed for all initiatives that identifies the acquisition organization responsible for the initiative, schedule estimates, and expectations for acquisition strategies. DOD provided written comments on a draft of this report. DOD concurred with all four of our recommendations, saying that it would address these recommendations as part of the assessment required by section 804 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011. DOD also provided technical comments that we incorporated in the final report. Their comments can be found in appendix III of this report. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the commanders for the Special Operations Command and the U.S. Central Command. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Staff members making key contributions to this report are listed in appendix IV. To review how the Department of Defense (DOD) has responded to urgent needs, we identified 70 joint urgent operational needs that were validated from April 1, 2008, to December 31, 2010. To create our nongeneralizable sample of initiatives to review, we selected all 14 joint urgent needs with cost estimates greater than $100 million and randomly selected 7 counter-improvised explosive device urgent needs and 7 other urgent needs from the remaining 56 urgent needs with cost estimates less than $100 million, as illustrated in figure 16. Three joint urgent needs were dropped from the sample—in one case because the urgent need was terminated before it was assigned to a sponsor and in the other two cases because knowledgeable officials were not accessible. We encountered several instances in which multiple initiatives were pursued to address one joint urgent need. As a result, we reviewed a total of 45 initiatives addressing 25 joint urgent needs. We collected the dates at which each initiative reached key events in the joint urgent needs process, including: urgent need validation, assignment to a sponsor, tasking to an executing organization, receipt of major funding allotment, first contract award or modification, and initial fielding of the capability. Moreover, the data available on initiatives varied, affecting the number of initiatives included in specific analyses, as shown in figure 17. To determine how quickly executing organizations developed and fielded capabilities in response to joint urgent operational needs, we assessed the extent to which executing organizations met the expectation to field urgent capabilities within 2 years. We reviewed the date on which the urgent need was validated, and identified either the actual or estimated date for initial fielding of a capability. We also assessed the extent to which executing organizations met their own schedule estimates by collecting and reviewing their first estimate for fielding the capability and their actual fielding date or most current estimate. We examined the time initiatives with certain characteristics took to field capabilities. We analyzed characteristics on each initiative including: the year the urgent need was validated; the sponsor; the type of executing organization tasked with the urgent need; whether the executing organization was working on a similar capability; and the type of solution. To assess the reliability of our data for this review, we compared information communicated by officials with initiative documentation, such as decision memorandums, briefing slides, and urgent need requests. We also reviewed information available in the three databases DOD uses to track joint urgent needs—the U.S. Central Command Requirements Information Manager, which is maintained by U.S. Central Command; the Knowledge Management/Decision Support tool, which is maintained by the Office of the Chairman of the Joint Chiefs of Staff; and the Joint Improvised Explosive Device Defeat Organization (JIEDDO) Enterprise Management System, which is maintained by JIEDDO. We determined that the data we used were sufficiently reliable for the purpose of this report. To identify key practices that enabled executing organizations to overcome challenges in the development and fielding of joint urgent needs solutions, we interviewed officials from each initiative and collected data on the challenges that each executing organization encountered. From these interviews, we identified common challenges that initiatives faced—receiving funds and awarding contracts—that could potentially affect the ability of an executing organization to field an urgent capability rapidly. We analyzed how different factors, such as contracting options, affected the time that it took initiatives to reach key events in the urgent needs process. We also reviewed practices that executing organizations employed to overcome these and other programmatic challenges. In performing our work, we obtained documentation to corroborate information provided by officials. We interviewed officials from the Department of Defense, the Office of the Chairman of the Joint Chiefs of Staff, and the Joint Rapid Acquisition Cell who are responsible for validating and assigning joint urgent needs to military services and other agencies for execution. We also met with officials from Functional Capabilities Boards who were responsible for identifying possible solutions for the urgent needs within our sample. We met with officials from JIEDDO, each military service (Army, Navy, Air Force, and Marine Corps), U.S. Central Command, and Special Operations Command, who were the sponsors responsible for identifying funds and tasking executing organizations or the combatant command that endorsed urgent needs statements. We conducted this performance audit between January 2011 and April 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: Sample Joint Urgent Operational Needs and Executing Organizations Army, Counter-Rocket Artillery Mortar Program Directorate Army, Product Manager Improvised Explosive Device Defeat / Protect Force Joint Project Office, Mine Resistant Ambush Protected Vehicle Intelligence Surveillance Reconnaissance Task Force / Unmanned Aerial Systems Task Force Army Research Laboratory Defense Information Systems Agency, Enhanced Mobile Satellite Services Division Air Force, Director of Weather Army, Program Manager, Biometrics Identity Management Agency Naval Sea Systems Command, Asymmetric Systems Department Joint Project Office, Mine Resistant Ambush Protected Vehicle Joint Project Office, Mine Resistant Ambush Protected Vehicle Army, Office of the Provost Marshal Navy, Space and Naval Warfare Systems Command Naval Air Systems Command, Special Surveillance Programs Army, Project Manager Robotics and Unmanned Systems Army, Armament Research Development and Engineering Center, Combating Terrorism Technology Team Army Space & Missile Defense Command / Army Forces Strategic Command Naval Surface Warfare Center, Directed Energy Warfare Office Army, Product Manager Improvised Explosive Device Defeat / Protect Force Army, Project Manager, Distributed Common Ground System Naval Surface Warfare Center, Explosive Ordnance Disposal Technology Division Air Force, Aeronautical Systems Center, Intelligence Surveillance and Surveillance, Sensors Army Corps of Engineers Army, Night Vision and Electronic Sensors Directorate Army, Combating Terrorism Technical Support Office Naval Explosive Ordnance Disposal Technology Division Naval Air Systems Command, PMA-266 Executing organization Department of Energy, Lawrence Livermore National Laboratory Army, Prototype Integration Facility Air Force, Big Safari Air Force Research Laboratory Army, Communication-Electronics Research, Development and Engineering Center Army, Project Manager Robotics and Unmanned Sensors Army, Project Manager, Airborne Reconnaissance and Exploitation Systems Army, Project Manager, Unmanned Aerial Systems Army, Aviation Applied Technology Directorate Naval Air Systems Command, Special Surveillance Programs Navy, Wide Focal Plane Array Camera, Integrated Product Team The names of some organizations are not listed because of sensitivity issues. Key contributors to this report were Karen Zuckerstein, Assistant Director; James Ashley; Jenny Chanley; Laura Greifner; Melissa Hermes; Laura Jezewski; John Ortiz; Sylvia Schatz; Ryan Stott; Roxanna Sun; and Gavin Ugale. Warfighter Support: DOD’s Urgent Needs Processes Need a More Comprehensive Approach and Evaluation for Potential for Consolidation. GAO-11-273. Washington, D.C.: March 1, 2011. Warfighter Support: Improvements to DOD’s Urgent Needs Processes Would Enhance Oversight and Expedite Efforts to Meet Critical Warfighter Needs. GAO-10-460. Washington, D.C.: April 30, 2010. Warfighter Support: Actions Needed to Improve Visibility and Coordination of DOD’s Counter-Improvised Explosive Device Efforts. GAO-10-95. Washington, D.C.: October 29, 2009. Defense Acquisitions: Rapid Acquisition of MRAP Vehicles. GAO-10-155T. Washington, D.C.: October 8, 2009. Rapid Acquisition of Mine Resistant Ambush Protected Vehicles. GAO-08-884R. Washington, D.C.: July 15, 2008. | With the conflicts in Iraq and Afghanistan, DOD has had to accelerate efforts to field capabilities addressing urgent warfighter needs, including joint needs affecting more than one service. GAO was asked to assess (1) how quickly capabilities responding to joint urgent operational needs have been developed and fielded and (2) what key practices enabled executing organizations to overcome challenges. To do this, GAO studied a sample of joint urgent operational needs including all urgent needs over $100 million approved from April 2008 through December 2010 and a random selection of smaller urgent needs. GAO analyzed data on key events and issues in the development and fielding of solutions and met with service and DOD officials responsible for validating, assigning, and executing joint urgent needs. A majority of the initiatives GAO reviewed (26 of 30) met, or expected to meet, the Department of Defenses (DOD) expectation for fielding a capability in response to joint urgent operational needs within 2 years. However, performance in meeting schedule estimates varied, and more than half of the initiatives experienced schedule delays. Initiatives leveraged three types of solutions: (1) off-the-shelf products, (2) modifications of off-the-shelf items to add capabilities, and (3) products requiring technology development. Off-the-shelf solutions should be fielded the quickest because existing products are being bought. However, while off-the-shelf solutions were fielded quickly once a contract was awarded, it took longer than the two other types to identify, fund, and contract for off-the-shelf solutions. In addition to the program offices that manage traditional acquisition programs, initiatives were also managed by research laboratories and engineering centers, such as the Army Research Laboratory or the Naval Surface Warfare Center. Program offices fielded solutions faster, in part, because program offices are experienced in the full range of acquisition activities. Also, laboratories and engineering centers depended on funding provided by other organizations and delays in receiving this funding affected the start of some initiatives. Acquisition organizations employed various practices to overcome challenges affecting fielding of capabilities within short time frames. For example, although these practices could affect the prices paid, shorter times were associated with using existing contracts, awarding contracts without agreeing on contract terms (prices), or awarding contracts without competition. U.S. Central Command officials stated that they were not aware of all initiatives underway or the expected schedule for fielding capabilities and this could affect planning activities. In some cases, initiative decision memorandums were prepared that documented schedule estimates but such memorandums are not required for all initiatives. Also, some organizations were proactive in communicating with U.S. Central Command and this facilitated a clearer understanding of requirements and plans for fielding initiatives, but regular communication is not required. GAO recommends that DOD reduce the time spent on identifying and contracting for off-the-shelf solutions, devise methods for providing early funding to research laboratories and engineering centers, require that initiative decision memorandums be prepared for all initiatives, and require acquisition organizations to communicate with the Central Command and other combatant commands about plans for fielding capabilities. DOD concurred with these recommendations. |
During congressional deliberations on the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, concerns surfaced about whether there would be enough farmworkers to meet the needs of the agricultural industry after the act’s new constraints on foreign workers’ ability to enter the country were implemented. The H-2A nonimmigrant guestworker program provides a way for U.S. agricultural employers to import nonimmigrant foreign workers to perform seasonal agricultural work on a temporary basis when domestic workers are unavailable. During fiscal year 1996, agricultural employers used the H-2A program to import about 15,000 workers, less than 1 percent of the agricultural field labor force. The Congress asked whether the H-2A guestworker program could provide a sufficient supply of agricultural workers if a significant farm labor shortage occurred. As a result, the 1996 law, included in the Omnibus Consolidated Appropriations Act, 1997, directed us to review various aspects of the H-2A program. These issues are included in two general objectives: (1) the likelihood of a widespread agricultural labor shortage and its impact on the need for nonimmigrant guestworkers and (2) the H-2A program’s ability to meet the needs of agricultural employers while protecting domestic and foreign agricultural workers, both now and if a significant number of nonimmigrant guestworkers is needed in the future. (See app. I for a list of primary congressional contacts in addition to the report addressees and app. II for a detailed listing of the questions agreed upon in discussions.) Throughout the 20th century, the Congress has authorized numerous programs to allow U.S. agricultural employers to use foreign temporary guestworkers in the event of a domestic labor shortage. For example, during World War I, the Congress authorized a temporary farm labor program to replace workers who were in the military; that program admitted almost 77,000 Mexicans to the United States. During a similar labor shortage created by World War II, the Congress authorized a program to bring Mexican guestworkers, called “braceros,” to the United States. The Bracero program operated under a series of legislative authorizations from 1942 to 1964, bringing in between 4 million and 5 million workers for the nation’s farms, primarily in the western United States. While the Bracero program was still in effect, the Immigration and Nationality Act of 1952 (P.L. 82-144) authorized a guestworker program that included agricultural workers, which is known as “H-2” after the section of the law. Similar in structure to the Bracero program, the H-2 program was enacted as a permanent program and was primarily used by agricultural employers in the east to contract with Caribbean workers. The Immigration Reform and Control Act of 1986 (IRCA) divided the H-2 program into two visa categories: the H-2A program for agricultural employers and the H-2B program for nonagricultural employers. The H-2A program allows employers to bring in foreign workers to “perform agricultural labor or services . . . of a temporary or seasonal nature.” The purpose of the H-2A program is to ensure agricultural employers an adequate labor supply while also protecting the jobs, as well as the wages and working conditions, of domestic farmworkers. Under the program, agricultural employers who anticipate a shortage of domestic workers can request nonimmigrant foreign workers. The Department of Justice authorizes the State Department to issue nonimmigrant visas for H-2A workers only after the Department of Labor certifies that a labor shortage exists and that the wages and working conditions of U.S. workers similarly employed will not be adversely affected by the use of guestworkers. USDA conducts surveys and acts in an advisory role to Labor in Labor’s determination of the minimum wage rates to be paid by employers of H-2A workers—the so-called “adverse effect wage rate”—which are designed to mitigate any adverse effect the employment of these workers may have on domestic workers similarly employed. Federal agencies are responsible for protecting both H-2A and domestic farmworkers from being exploited by agricultural employers. Labor’s Wage and Hour Division (WHD), which is part of the Employment Standards Administration (ESA), is responsible for ensuring that agricultural employers comply with the contractual obligations that apply to H-2A workers, including wages, benefits, and working conditions. Since agricultural employers must offer at least the same working conditions to willing domestic workers, WHD must also ensure compliance for domestic workers employed in “corresponding employment.” WHD also enforces additional protections afforded to domestic farmworkers by the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), which establishes basic protections for domestic migrant and seasonal farmworkers regarding wages, housing, and transportation. MSPA requires that employers notify prospective workers of the wages and working conditions before they are hired. MSPA also requires that housing provided for workers must meet certain minimum standards for health and safety, and that vehicles in which workers are transported meet certain standards for safety. Labor’s Occupational Safety and Health Administration (OSHA) is generally responsible for regulating workplace safety and health, including the establishment of mandatory standards for temporary labor camps and for permanent migrant farmworker housing constructed on April 3, 1980, or later. OSHA issued a national field sanitation standard in 1987 that required agricultural employers to provide field laborers, at no cost, drinking water, toilets, and handwashing facilities. In those states that operate their own safety and health programs under federal OSHA approval, and which have decided to retain enforcement authority over field sanitation, the state OSHA office enforces provisions of the field sanitation standard. In February 1997, Labor transferred responsibility for enforcing the field sanitation standard in states without state safety and health programs from OSHA to WHD. The Immigration and Naturalization Service (INS), in addition to admitting qualified guestworkers under the H-2A program, is responsible for protecting domestic workers by ensuring that (1) foreign workers do not enter the United States illegally and (2) U.S. employers do not hire illegal workers. Within INS, border management is largely the responsibility of the Border Patrol and Investigations, while special agents throughout the country are responsible for identifying, apprehending, and expelling illegal workers, and for sanctioning employers who knowingly hire foreign workers who are not authorized to work in this country. With the passage of IRCA in 1986, it became illegal for employers to knowingly hire people who are not authorized to work in the United States. All employees hired after November 6, 1986, regardless of citizenship, are required to show employers certain documents to establish both identity and employment eligibility. Employers, in turn, must verify the identity and employment eligibility of everyone they hire. Employers may not, however, discriminate against individuals on the basis of national origin or citizenship. INS’s Worksite Enforcement program enforces this provision. INS investigations special agents and Border Patrol officers investigate employers, inspect eligibility verification, determine the nature and degree of compliance, remove unauthorized aliens from the worksite, and can sanction employers who knowingly hire aliens unauthorized to work. IRCA also established the Commission on Agricultural Workers to study the effects of the act on the agricultural industry, with special emphasis on perishable crop production. The Commission was also asked to review a number of more specific questions regarding IRCA’s impact, including the adequacy of the supply of agricultural labor in the United States, whether certain geographic regions need special programs or provisions to meet their needs for agricultural labor, and the extent to which the labor difficulties experienced by agricultural employers are related to the lack of modern labor-management techniques. The Commission in its 1992 report concluded that no new supplementary foreign worker programs were warranted at that time. However, it also urged the continuation of adequate monitoring and analysis of the farm labor market to facilitate quick action if future shortages develop. Labor conducts the National Agricultural Workers Survey (NAWS) annually, which collects detailed information on the characteristics and work patterns of agricultural workers, including job history data used to estimate fluctuations in farm labor supply. The Immigration Act of 1990 mandated the U.S. Commission on Immigration Reform to examine and make recommendations regarding the implementation and impact of U.S. immigration policy. In 1995, the Commission on Immigration Reform found a considerable oversupply of farmworkers throughout the country, with heavy unemployment even during peak harvest periods. As of September 1997, the Commission found that the agricultural labor market had not changed significantly. The Commission concluded that any new agricultural guestworker programs, particularly “those that seek to revisit the Bracero program,” are not needed, concluding that such programs expand rural poverty, and “are incompatible with the values of democratic societies worldwide.” Although neither the Commission on Agricultural Workers nor the U.S. Commission on Immigration Reform recommended new programs, considerable congressional interest in farm labor issues continues. For example, in March 1996, the House rejected legislation that would have moved the H-2A program from Labor to the Justice Department and replaced the H-2A program’s certification requirements with provisions permitting agricultural employers to attest or state that a labor shortage existed in their area and that employing temporary foreign guestworkers would not adversely affect domestic workers. This legislation would also have modified the program’s housing provisions and withheld portions of guestworkers’ wages to be paid upon the workers’ return to the country of origin. The House also rejected another amendment that would have transferred the H-2A program to Justice, in addition to shortening filing and recruitment times and capping the program at 100,000 workers. Similar legislation has been submitted in both houses of the current Congress, but no action had been taken as of December 31, 1997. To address the objectives of this review, we collected documents and interviewed officials from the Departments of Labor, Justice, State, and Agriculture (USDA) and the Commission on Immigration Reform. We interviewed state health department and employment service officials in the three states that used the most H-2A workers in fiscal year 1996—North Carolina, Virginia, and New York—and in the state producing the largest dollar value in agriculture—California. We also interviewed numerous agricultural employers and agricultural employer association representatives; H-2A and non-H-2A farmworkers; and farm labor advocates, including unions. We analyzed data from INS, the Departments of Labor and State, grower associations, state employment service offices, and selected state unemployment insurance programs. We also consulted with methodological and subject area experts, such as agricultural economists, immigration and labor experts, and policy analysts, and reviewed literature on immigration and agricultural labor markets. We conducted our review from April 1997 to September 1997 in accordance with generally accepted government auditing standards. (See app. II for more detailed information on our scope and methodology.) A sudden widespread farm labor shortage requiring the importation of large numbers of foreign workers is unlikely to occur in the near future. There appears to be no national agricultural labor shortage now, although localized labor shortages may exist for individual crops and in specific geographical areas. In addition, while a significant percentage of the U.S. farm labor workforce is not legally authorized to work in the United States, INS does not expect its enforcement activities to significantly reduce the aggregate supply of farmworkers. Although the limitations of available data make the direct measurement of a labor shortage difficult, our analysis suggests, and many farm labor experts, government officials, grower and farm labor advocates agree, that a widespread farm labor shortage has not occurred in recent years and does not currently exist. However, the lack of evidence of a widespread farm labor shortage does not preclude the potential for, or existence of, localized shortages particular to specific crops or geographic areas. Many grower advocates, USDA officials, and farm labor experts told us that a large proportion of the current agricultural labor supply is composed of workers who are not authorized for employment, leaving many agricultural employers vulnerable to potential labor shortfalls in the event of a concentrated or targeted INS enforcement effort. Many individual growers we interviewed concurred with this assessment, expressing concerns about the prospect of localized shortages resulting from intensified INS enforcement activities. The limited data available make it difficult to directly measure a market imbalance such as a farm labor shortage. For example, it has been suggested that the analysis of job vacancy data could help identify those occupations where shortages exist, but the Bureau of Labor Statistics (BLS) no longer collects this information. Although Labor’s Employment Service does collect information on the number of workers seeking and obtaining employment in agriculture through referrals at individual state employment services, an agency official estimates that such activity accounts for less than 5 percent of all job placements in agricultural field work nationally. Regardless, job vacancy data alone would be insufficient to determine whether a labor shortage existed; they would need to be considered in conjunction with other labor market indicators. Other labor market indicators are consistent with the view that a widespread national farm labor shortage does not currently exist. For example, experts agree that sustained high unemployment rates generally signify that surplus labor is available and that persistently low unemployment rates can indicate a labor shortage. Although unemployment rates are available for states and counties, BLS does not construct unemployment rates for the agricultural industry for counties or all states, or for occupations such as agricultural field worker, so this connection in agriculture cannot be verified directly. In any case, employers could have difficulties filling positions for a particular occupation even when a high unemployment rate exists. Rapidly rising hourly wages are also consistent with a labor shortage, and some hourly and piece-rate wage data are available for agricultural field workers from USDA and other sources. However, rising hourly wage rates may not always signify a labor shortage if, for example, workers are paid by piece rate, as is fairly common in the production of fruits, vegetables, and horticulture. Most farm labor experts, government officials, and grower and labor advocates we interviewed agreed with our conclusion that agricultural employers in most of the United States have had adequate supplies of labor for many years and continue to do so. Our analysis is based on (1) the large number of illegal immigrant farmworkers granted amnesty in the 1980s, (2) persistently high unemployment rates in key agricultural areas, (3) state and federal designations of agricultural areas as labor surplus areas, (4) stagnant or declining wage rates as adjusted for inflation, and (5) continued investments by growers in agricultural production. Farmworker amnesty provisions in IRCA resulted in the legalization of large numbers of foreign farmworkers, ensuring agricultural employers adequate supplies of farm labor during the mid-to late 1980s. Beginning in June, 1987, the Special Agricultural Worker (SAW) provisions of IRCA permitted foreign farmworkers with 90 or more days of qualifying work in agriculture to apply for legal status. The SAW program received nearly 1.3 million applications during its first 18 months of operation, over half of them in California alone, resulting in the legalization of a significant portion of the U.S. agricultural labor supply. Available data suggest that SAW workers have made up a significant, albeit declining, proportion of the U.S. agricultural labor market since the late 1980s, falling from 33 percent of all farmworkers in fiscal year 1989 to 19 percent in fiscal year 1995. Many agricultural areas have exhibited persistently high rates of unemployment over the last few years, suggesting that existing labor supplies were and continue to be more than adequate to meet agricultural employers’ needs. Our analysis of recent annual and monthly unemployment rates of 20 agricultural counties—those that contain large amounts of fruit, tree nut, and vegetable production in dollar value—is consistent with this view. Of these 20 counties, 13 maintained annual double digit unemployment rates throughout 1994 through 1996. (For more detailed information, see table III.1.) As of June 1997, 11 counties exhibited monthly unemployment rates double the national average of 5.2 percent and 15 of the 20 counties displayed rates at least 2 percentage points higher than the national rate. Only two of the counties had unemployment rates below the June 1997 national average. State responses to changes mandated by the recently enacted federal welfare reform legislation also suggest that many agricultural areas may currently be experiencing farm labor surpluses rather than shortages. Section 6(o) of the Food Stamp Act, as added by section 824 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, provides that an individual is ineligible for the program if during the preceding 36-month period, he or she received benefits for 3 months while not working or participating in a work program for at least 20 hours per week. However, in an effort not to penalize food stamp recipients who reside in areas with limited employment opportunities, the Secretary of Agriculture may waive these provisions for any group of individuals in a requesting state if the Secretary determines that the area in which the individual resides is essentially a labor surplus area—has an unemployment rate of over 10 percent or does not have sufficient numbers of jobs to provide employment for the individuals. As of late July 1997, 42 states had applied for and received waivers from the Secretary of Agriculture for counties and other jurisdictions, including many agricultural areas. All of the 20 agricultural counties we analyzed received at least partial waivers from USDA, and 18 received waivers covering their entire counties. (For more detailed information, see table III.2.) Cities, counties, and other jurisdictions also can be designated annually by Labor’s Employment Service as “labor surplus areas.” A labor surplus area must have an average unemployment rate at least 20 percent above the average national unemployment rate during the previous 2 calendar years or a rate of 10 percent or more during the previous 2 calendar years. Labor may also designate an area as surplus if it had unemployment rates of at least 7.1 percent for each of the 3 most recent months or projected unemployment of at least 7.1 percent for each of the next 12 months or has documentation that this has already occurred. Such designation confers preference in bidding on federal procurement contracts for firms that will locate contract work in those areas. As of August 1997, Labor had designated all of 13 and parts of 5 others of the 20 agricultural counties we analyzed as labor surplus areas. (See table III.2.) Some experts cite evidence that agricultural wage rates adjusted for inflation (real wage rates) have declined in recent years, a trend that is also more indicative of a labor surplus than a labor shortage. Our analysis of agricultural wage data shows declining real wage rates. Since the late 1980s, annual average hourly wages for agricultural workers have been flat or have declined in real terms (see table III.3), and real annual average hourly wage rates for piece workers fell. (See table III.4.) Declining or flat real wages also occurred as total employment in agriculture fell by 6 percent between 1986 and 1997 or, as shown in table III.5, 15.9 percent for total peak employment between 1987 and 1997, which also suggests the presence of farm labor surpluses rather than shortages. One expert also noted that growers appear to continue to be investing in new farm production that will not bring returns for a number of years, suggesting a long-term confidence that agricultural labor would be available. Consistent with this belief, between 1989 and 1995, the last year for which data were available, acreage for fruits and tree nuts, vegetables, and nurseries (the more labor-intensive agricultural commodities) has increased by over 30 percent, with the dollar value of production and total production tonnage also rising by 52 percent and 30 percent, respectively. (See table III.5.) The lack of evidence of widespread farm labor shortages does not preclude the existence or potential for more localized shortages in a specific crop or geographic area. Both growers and labor advocates described current difficulties in obtaining workers and concerns about future difficulties in certain areas. For example, both growers and farm labor advocates agreed that it was increasingly difficult to get domestic labor to work in some kinds of tobacco harvesting, although they disagreed on the cause of this development. Similarly, regional Labor officials suggested that it was likely that the geographic inaccessibility of some particularly remote agricultural areas such as in Nevada contribute to a longtime difficulty that they believed growers in those areas have had in obtaining domestic workers. Some growers, grower advocates, and USDA officials also expressed concern that the large number of workers not authorized to work left themselves or agricultural employers in their areas vulnerable to INS enforcement actions that could prove financially devastating to farm operations. Opinions differ regarding solutions to localized labor shortages. Farm labor advocates and some government officials said that the supply of domestic labor is generally sufficient to meet the needs of U.S. agriculture. For example, some of them suggested that the implementation of the work requirements of the recent welfare reform legislation could serve as a potential source of labor for agricultural employers in some areas of the country. In other areas, they believed, many workers with farm labor experience could be drawn back to agricultural employment with fairly modest wage increases that would have little effect on consumer prices or U.S. agricultural competitiveness. Some employers we interviewed, however, stated that it is unlikely that many former welfare recipients would have the ability to be suitable farmworkers, particularly single mothers with young children requiring day care. Transportation from urban population centers to rural worksites was also cited as an impediment. Regarding wages, some employers were convinced that they could not be competitive if they raised wages. Although many farmworkers are not authorized to work in this country, INS officials do not expect their enforcement efforts to significantly reduce the availability of agricultural labor, either nationally or regionally. Law-abiding employers, in particular, are unlikely to be targeted for enforcement efforts, given INS’ focus on apprehending criminal aliens and identifying employers that have engaged in criminal acts. Current enforcement efforts in agriculture are a small proportion of INS’ total enforcement operations and result in few apprehensions. Conducting enforcement operations in agriculture is particularly resource-intensive. Enforcement officials in INS’ Office of Investigations and Border Patrol around the country told us they do not plan to redirect their efforts from other enforcement activities to agriculture and do not expect to have any general impact on farmers’ ability to harvest crops. They agreed, however, that a limited number of individual agricultural employers could be affected. In addition, efforts to increase employers’ ability to identify fraudulent documents are not expected to have an immediate impact. Many grower advocates, USDA officials, and experts told us that a large and increasing proportion of the existing agricultural workforce is not authorized to work in this country. Data from the NAWS and our analysis of available data support this conclusion. The most recent NAWS found that 37 percent of all crop workers in 1995 were ineligible for employment—up from 7 percent in 1989. We estimate that approximately 600,000 farmworkers in the United States lack legal authorization to work, using the NAWS estimate of 37 percent of an agricultural field labor force of 1.6 million. INS enforcement efforts are directed at preventing the illegal entry of people and identifying and apprehending illegal aliens within the United States. The majority of INS enforcement resources are devoted to preventing illegal entry, through the activities of the Border Patrol and the Inspections program. The Investigations program, which consumes fewer than one-fifth of INS enforcement resources, has the primary responsibility for identifying and apprehending those who are in the United States illegally. The Investigations program is also responsible for worksite enforcement, which includes enforcing the IRCA requirements that employers hire only U.S. citizens or authorized aliens and verifying their employment eligibility. Worksite enforcement consumed less than 4 percent of INS enforcement activities in fiscal year 1996. As shown in figure 2.1, most investigation resources are focused on identifying aliens who have committed criminal acts, including violent criminal alien gang and drug-related activity and detection and deterrence of fraud and smuggling. In fiscal year 1996, 304 staff years were devoted to noncriminal investigations, including worksite enforcement for all industries, or an average of about 6 INS staff years per state. See app. V for the distribution of enforcement actions by INS region. INS officials told us that relatively few worksite enforcement resources are assigned to agriculture because almost all of their investigations are complaint-driven and they receive relatively few complaints from agricultural employers. Only about 5 percent of the 4,600 investigations completed in fiscal year 1996 involved employers in agricultural production or services. Furthermore, fewer than 700 workers, about 4 percent of all employees at those worksites, were arrested during INS’ enforcement operations at these agricultural worksites. Even these numbers overstate the potential impact of INS activity on the need for H-2A workers because about 40 percent of these “agricultural” employers appear to be employed in industries that are not defined as agricultural under H-2A—landscapers, lawn maintenance firms, veterinarians, and kennels. INS officials told us that these totals represent a reduction rather than an increase in INS enforcement efforts directed at agricultural employers. Until 1995, the Border Patrol played a significant role in worksite enforcement on farms through “farm and ranch checks.” In fiscal year 1995, most of these resources were refocused on explicit border control activities. This redirection of resources sharply reduced Border Patrol involvement in worksite enforcement—from approximately 30 percent of the total worksite enforcement resources to less than 5 percent. Border Patrol officials we talked with unanimously stated that with current resources their enforcement activities could have no significant impact on the agricultural workforce. Officials told us that agricultural employers who comply with the law are not likely to be targeted for enforcement efforts, given the need to focus on apprehending aliens and identifying employers who have engaged in criminal acts. Law-abiding agricultural employers are not a priority target for INS inspections. INS develops a National Targeting Plan annually to target worksite inspections in response to complaints or leads. The fiscal year 1997 plan identifies 15 industries in which large numbers of illegal aliens have been employed, 2 of which hire farmworkers—“general farm and field crops” and “farm labor and management.” INS focuses primarily on employers in these 15 industries that are “abusive”—that is, employers known to have intentionally hired illegal workers; to have been involved in criminal violations like alien smuggling and harboring; to be repeat offenders; or to have subjected their employees to unlawfully substandard working conditions, housing, or wages. INS’ secondary focus is on abusive employers in industries, other than these 15, with histories of illegal immigration activity. The fiscal year 1997 plan for worksite enforcement was based on leads or complaints, targeting employers that are the subjects of a concrete allegation or for which evidence exists of abuse or violations of IRCA. Major violators are employers in industries or locations with a history of reliance upon unauthorized labor who employ unauthorized foreign workers and violate criminal statutes, violate other regulatory requirements, or continually depend upon unauthorized labor. Officials told us that this emphasis on major violations can result in some investigations of specific farm operations, such as when there are allegations of farmworkers selling illegal substances but that more often result in more urban industries, such as manufacturing, becoming targets for investigations. INS enforcement officials we spoke with noted that logistical impediments make it difficult to apprehend and remove illegal aliens in general and that agricultural worksites present unique enforcement difficulties. These difficulties include the distance many agricultural worksites are from INS offices, the unusually large number of people necessary to conduct an enforcement operation on a farm, the need to obtain the necessary search warrants, the lack of perimeter fencing, and the considerable costs of processing and transporting apprehended illegal aliens. Planning and conducting a major enforcement operation requires a significant number of human resources. To have enough personnel to conduct an operation, INS must often secure the assistance of other law enforcement agencies. For example, an enforcement operation we observed at a poultry processing facility involved 26 of the INS district’s special agents, or almost 75 percent of them, as well as about 40 additional personnel from the state police department, the county sheriff’s department, the city police force, a multiagency drug task force, and the U.S. Secret Service. Most agricultural worksites are located in rural areas, often at great distances from the field offices of the enforcement agencies, making the logistics of agricultural enforcement more time-consuming and costly than those conducted at more urban nonagricultural worksites. In one district, agents said that they were discouraged by agency management from pursuing worksite enforcement investigations that would involve travel costs and were instead encouraged to pursue cases in the local metropolitan area. INS officers face a judicial requirement that can also complicate enforcement efforts at agricultural workplaces. Current law requires INS officers to have either the employer’s permission or a search warrant before entering a farm or other outdoor agricultural operation to interrogate a person about his or her right to be in the United States. Enforcement agents told us that as farms become larger and more spread out, workers may be moved from one field to another during the course of a day and thus workers could be employed on fields in multiple counties for the same employer. This situation can require the procurement of multiple search warrants. In addition, according to an INS worksite enforcement supervisor, an operation in an open field would require more personnel to effectively secure the area and would probably involve chasing the “runners,” many of whom would likely escape. Once suspected illegal aliens are apprehended, they may be sent to a detention center for a hearing or, if they are offered and accept voluntary departure, transported back to their home country. If an apprehended worker demands a hearing, INS district offices may incur additional detention costs like food and housing. Depending on where the apprehension takes place, transporting the worker can be costly. An assistant INS district director for investigations in the Southeast told us that he uses $250 per person as a rule of thumb for estimating the cost of transportation of an illegal alien to Mexico, which does not include the salaries of any of the law enforcement personnel involved. Even if this assistant district director could apprehend several thousand illegal workers, his budget could not cover the transportation costs of voluntary departures. Another assistant district director from a midwestern district stated that his office’s expenses are even higher: When his office apprehends illegal Mexican workers, it may have to pay for air transportation for those who agree to depart voluntarily. Although most agricultural employers would not be targeted by INS for an enforcement action, a limited number of individual employers could be significantly affected in spite of their efforts to comply with legal requirements. Both individual employers and INS officials told us that high-quality fraudulent documents can be obtained so readily that it is virtually impossible for employers who are assiduously obeying the law to be certain that they are not hiring illegally documented workers. Agricultural employers told us that even though they suspected many of their employees were illegal, the employees possessed the required documents, and the employers had to hire them since they had no basis to assert that the documents were fraudulent. Moreover, employers said they were afraid of being sued for discrimination if they attempted to obtain further verification. Although efforts are under way to improve employers’ ability to identify fraudulent documents, these efforts are unlikely to have a significant impact on the availability of unauthorized farmworkers who use such documents in the near future. In 1991 President Bush issued Executive Order 12781 authorizing demonstration projects of different changes in the existing document-based employment verification system. In response to this directive, INS established the Employment Verification Pilot (EVP), a voluntary test program that allows participating employers to verify electronically the employment eligibility of newly hired noncitizen workers. Currently, over 1,000 employers nationwide participate in EVP. Although well received by participating employers, the limitation of EVP to noncitizen workers, rather than all workers, leaves open a door to fraud by unauthorized employees who claim falsely to be U.S. citizens on the Employment Eligibility Verification form (Form I-9). The next generation of verification pilot programs attempts to close this door by verifying all new hires. In August 1997, INS and the Social Security Administration (SSA) began the Joint Employment Verification Pilot (JEVP) program among a small group of employers in the Chicago area. JEVP involves an initial verification inquiry to SSA regarding all newly hired employees with, if necessary, a referral to INS for additional verification. The JEVP approach is also being used in the Basic Pilot currently being implemented by INS and SSA in the five states with the highest estimated population of unauthorized aliens (California, Texas, New York, Florida, and Illinois). The Basic Pilot is one of three verification pilots mandated by the Congress under the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. With limited exceptions, these verification pilot programs are voluntary for employers. Another effort to assist employers in screening unauthorized workers for employment is the development of a model counterfeit-resistant Social Security card. Such a card would permit quicker and more accurate identification of job applicants and employees who are unauthorized to work. The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 directed the Commissioner of Social Security to develop a prototype of a counterfeit-resistant Social Security card. SSA recently issued Report to Congress on Options for Enhancing the Social Security Card (SSA Pub. No. 12-002, September 1997) with accompanying prototypes for eight options for counterfeit-resistant Social Security cards. The Congress will consider these options and is awaiting a study by GAO. However, a counterfeit-resistant Social Security card is unlikely to be issued in the near future. The degree to which these initiatives will affect the number of unauthorized workers and the supply of agricultural workers in general is unknown, and in any case, their effect is expected to be gradual. Both efforts are pilot projects now; the verification pilot has been conducted only on a limited basis. Even if both efforts prove successful, they would have to be authorized as permanent programs before they could be used routinely. In particular, electronic verification would have to be legislatively mandated as a permanent, mandatory part of the employment verification system in order to have a major, long-term effect on the ability of unauthorized aliens to obtain employment in the United States. Labor currently certifies most of the workers that agricultural employers request through the H-2A program on both a regular and an emergency basis. However, while Labor does not generally track process timeliness, our analysis indicates that both Labor and employers have difficulty meeting deadlines for processing and filing program applications. INS’ petition approval procedures also add time and cost to the process without adding significant value. In addition, the multiple agencies and levels of government involved in the H-2A program may result in redundant oversight and cause confusion for program participants. Furthermore, certain program requirements do not appear to be accomplishing their intended purpose. For example, the requirement that agricultural employers actively recruit domestic workers before bringing in guestworkers is often inadequate to protect employment opportunities for U.S. workers. Also, violations of provisions to guarantee that foreign guestworkers are paid for at least three-quarters of the agreed-upon contract period are difficult to identify and enforce, potentially reducing incentives for H-2A workers to remain with the employer for the entire contract period. In addition, in spite of regulations requiring that foreign and domestic workers receive the same minimum wages, benefits, and working conditions, domestic workers recruited through the Interstate Clearance System (ICS) have their wages guaranteed, but foreign workers do not. To help ensure a balance between meeting the needs of agricultural employers for an adequate supply of seasonal labor and protecting the jobs, wages, and working conditions of domestic farmworkers, the H-2A application process requires the employer to submit applications to multiple agencies, as shown in figure 3.1. The H-2A application process also sets very specific time requirements that the employer, Labor, and state agencies must meet, as shown in figure 3.2. To allow sufficient time to attempt to recruit domestic workers and have housing for workers inspected, an employer wishing to participate in the H-2A program must first submit an application to one of Labor’s Employment and Training Administration’s (ETA) 10 regional offices, with a copy to the local state employment service agency (SESA), at least 60 days before the workers are needed. The application includes a request for alien employment certification and a job offer to domestic workers, which the SESA will use in a job order to try to locate domestic workers for the job. Labor may waive the 60-day filing requirement in emergency situations if the employer can demonstrate that “good and substantial cause exists,” such as unforeseen changes in market conditions or unexpected unavailability of previously identified domestic workers. To allow the employer an opportunity to amend the application and initiate mandatory “positive recruitment” of domestic farmworkers, ETA is required by law to determine whether the application will be accepted and notify the employer if it is to be rejected within 7 days of receipt. If the application is rejected, the employer has 5 days to submit amendments. Labor must include in the letter of acceptance specific steps the employer must take to actively recruit domestic workers for the job openings before the certification is issued. To provide sufficient time for the employer to petition INS and the workers to obtain visas, ETA’s regional administrator must grant or deny certification, in whole or in part, no later than 20 calendar days before the date of need, provided that the employer has given Labor the documentary evidence that it met the certification criteria. (See fig. 3.2.) For example, to obtain workers on time, at least 22 days before the date of need, employers must provide ETA with evidence that they have attempted to recruit domestic workers and that prospective workers are insured for work-related injury or illness. Employers are certified for most of the H-2A workers they request, regardless of the skill level required. Specifically, ETA issued certifications for 99 percent of the 3,689 applications filed nationwide in fiscal year 1996 and the first 9 months of fiscal year 1997. Although 3 percent of all applications were initially rejected, most of these were accepted after employers amended their applications. In addition, ETA certified all but 11 percent of the 41,549 job openings requested on these applications during this period. These applications simply request a certain number of job openings but do not identify individual job applicants. (See table IV.2 for detailed information about geographic distribution and results of applications filed in fiscal years 1994 through 1997.) The number of job openings Labor certifies is higher than the number of H-2A workers who enter the country, for various reasons including that employers may not fill all of the job openings certified or H-2A workers may be transferred from one employer to another. For example, although 17,557 job openings were certified for fiscal year 1996, about 15,235 H-2A workers were actually employed. In fiscal year 1996, 68 percent of all H-2A workers came from Mexico, while 28 percent of all H-2A workers came from Jamaica. As shown in figure 3.3, this represents a significant shift over the last 10 years because the sugarcane industry, which was the predominant employer of H-2A workers until the early 1990s, has mechanized and therefore no longer needs the low-wage workers it brought in primarily from Jamaica. (See app. IV for more detailed information about the country of origin and other characteristics of H-2A workers.) The date of need employers request on the H-2A application may differ from the actual date the workers are needed. Agricultural employers, their advocates, and agency officials told us that it was extremely difficult to accurately estimate the date workers would be needed 60 days in advance of the harvest. Employers said that agricultural work is too dependent on the vagaries of weather to predict 60 days in advance when workers will be needed. This problem is particularly acute for crops that have a very short harvest time, such as cherries, for which the entire harvest season is as brief as 3 to 5 days. Although Labor does not generally track application process timeliness, our analysis showed that a large number of Labor’s certifications are issued too late to ensure that employers will be able to get workers by the specified date of need. In fiscal year 1996, one-third of all Labor’s certifications (591 certifications) were issued after the statutory deadline of 20 days before the date of need. For 43 of these applications, the certification was not issued until after the specified date of need. One cause of late certifications is employers’ failure to file applications at least 60 days before the date of need, as required. For example, in fiscal year 1996, employers filed 1,817 applications with Labor. Of the 1,771 cases for which sufficient data were available, 737, or 42 percent, were filed fewer than 60 days before the date of need. But even when the employer files an application on time, Labor still often misses the certification deadline. In fact, Labor missed the certification deadline for 41 percent of the 1,034 applications submitted at least 60 days before the date of need by agricultural employers. Reasons for missing the certification deadline included that (1) Labor failed to accept or reject the application in a timely manner, delaying the beginning of positive recruitment, and (2) the employer failed to provide required documentation in a timely manner. Labor does not collect or analyze information that would allow it to determine either the extent or causes of its failure to meet regulatory and statutory deadlines. Labor’s guidelines recommend that regional offices keep a log of H-2A labor certification activity, including the dates (1) workers are needed, (2) applications are accepted or rejected, and (3) certification is expected and actually takes place. However, Labor cannot provide information on the extent to which either Labor or the employers meet these time frames because not all regions collect and maintain this information. In some regions we contacted, Labor staff responsible for overseeing the H-2A program explained that their failure to keep such records was caused by a breakdown of computer equipment over 18 months earlier that had not been remedied. An official in one region told us that although the region enters some information into an automated system, the region does not have access to any reports from the system and would have to go through filing cabinets in order to obtain basic information on the processing of individual H-2A applications. In addition, the Chief of Labor’s Office of Foreign Agricultural Labor Certifications told us that his office does not keep national records on the timeliness of Labor’s responses to applications, and that if Labor misses a deadline, his office will hear about it from the employer. He agreed, however, that an automated system identifying impending and overdue certification dates is badly needed. Our analysis of data from ETA’s Atlanta regional office, one of the offices we visited, showed that Labor frequently missed deadlines for notification. In fiscal year 1996, Labor initially accepted 95 percent of the applications it received, although it responded after 7 days for 44 percent of them by an average of almost 6 days, and by as long as 36 days. For the period October 1, 1996, through June 30, 1997, the Atlanta regional office notified the employer after more than 7 days for 46 percent of the 454 applications filed. The timeliness of Labor’s notification of its acceptance decision is important because employers and SESAs cannot begin full efforts to recruit domestic workers for H-2A job openings without it. For example, the SESA may not circulate the job order outside of the local area before the regional administrator accepts the application. In addition, Labor’s acceptance notification specifies the recruitment effort that the employer must undertake, called “positive recruitment,” within specific time frames in order for Labor to approve the certification. Once the application is certified, active recruitment efforts must continue until foreign H-2A workers have left for the employer’s worksite. Labor officials in numerous regions attributed the delays almost exclusively to employers’ failure to provide in a timely manner the required documentation of positive recruitment and health care coverage. Some officials attributed the lack of timeliness as at least partially the result of the time required to inspect housing. However, no region had any systematic record to track the timeliness of employer documentation, so we were unable to verify this information. Labor has no required deadline for processing emergency applications; instead, ETA encourages regions to complete emergency applications as soon as possible, or within 1 week of receipt. We could determine neither the frequency of emergency applications filed nor the extent to which the 1-week goal was achieved because Labor does not identify and track such applications. We reviewed individual emergency applications in the three regions with the largest number of H-2A job openings in 1996. All three regions had waived the 60-day filing requirement for emergency applications filed in this region in fiscal year 1996. Emergency applications were accepted for several reasons, such as in response to an INS enforcement action that resulted in the removal of undocumented workers from a farm in the Northeast just before the harvest. After receiving Labor’s certification, the employer and foreign guestworkers have 20 days in which to obtain visas before the date of need; the first step is for INS to approve the employer’s petition to bring in nonimmigrant foreign workers for the certified job openings. Employers file the petition (form I-129) with one of four INS service centers: Dallas, Texas; St. Albans, Vermont; Lincoln, Nebraska; or Laguna Niguel, California. The petition includes Labor’s certification and identifies desired “beneficiaries,” or employees’ names, if known. INS officials in all four processing centers told us that petitions for H-2A nonimmigrant agricultural workers are unique in that they are not required to identify specific workers, and they rarely do. Most H-2A petitions identify only the number of workers needed for a specific job. INS, therefore, does not need to review individuals’ visa eligibility as it does for other petitions. INS officials in both headquarters and the field offices described the INS role in processing H-2A visa petitions as “rubber stamping” and suggested that it provided little or no added value while delaying employers’ ability to get workers in a timely manner, and adding to the costs. INS is not subject to statutory processing deadlines, nor does it track processing times for the H-2A program paperwork. INS service center officials told us that because H-2A petitions represent only a fraction of the visa petitions the centers process (petitions for 15,000 workers out of petitions for 26 million visas for fiscal year 1996) and are not filed separately, a retrospective analysis of processing times would be prohibitively time and resource consuming. INS officials’ estimates of the time required to process the petitions across the INS service centers ranged from 2 to 21 days. Officials at all four service centers told us that they expedite H-2A petitions. The adjudications officer examines the petition to ensure that Labor’s certification is enclosed; individual workers, if identified, have not been banned from entering the United States; and a check from the employer to cover the filing fee of $75 per petition plus $10 for every named beneficiary is enclosed. Adjudication officials told us that although they do not have data on H-2A denials, they rarely, if ever, deny H-2A petitions that include both the Labor certification and the appropriate fees. However, federal and state labor officials told us that INS’s fee structure sometimes causes confusion and delay in obtaining workers. For example, in one case we were able to track, the confusion caused a 10-day delay at INS, which meant workers were not available when they were needed. An emergency application, which requested visa extensions for H-2A workers already in the United States, was filed 7 days before the date of need. Labor inspected the housing and approved the certification in 1 day. Although INS completed review of the application in fewer than 2 days after receipt, it took 10 days to approve the petition because the employer did not submit the correct fee. Labor officials told us that they had been unable to contact the INS service center by telephone to determine the correct fee; as a result, they unintentionally misinformed the employer about the amount of the fee. The petitioner herself told us that she had contacted both Labor and INS to determine the correct fee but was given two different amounts. She sent two checks to INS to cover both possibilities, and INS approved the order 6 days after the date of need. After its approval, INS must notify both the employer and the State Department that the petition has been approved. The employer must now identify potential workers who in turn must file visa applications with accompanying fees directly to the State Department consulate in their country of origin. The worker must go to the consulate to apply for the visa. Because H-2A visa applicants come predominantly from Mexico, the consulates in Monterrey and Hermosillo, Mexico, together processed 93 percent of all H-2A visa applications in fiscal year 1996. Although the number of workers entering the United States through the H-2A program has experienced limited fluctuation since the program’s inception in 1986, the number of workers arriving with visas has increased substantially. (See fig. 3.4.) This increase is caused by a shift in the country of origin of H-2A workers over the last 10 years. Nationals of certain Caribbean islands entering the United States as H-2A workers are not required to have visas. These H-2A workers are represented by the West Indies Central Labour Organisation (WICLO), which organizes their entry into, stay in, and exit from the United States. To apply for H-2A Caribbean workers, an employer goes through the same process with Labor and INS that he or she would for workers from other countries. However, for Caribbean workers, INS keeps the form I-129 petition, rather than sending it to the consulate where a visa would be issued. Instead, these workers enter the United States through Miami with a valid travel document provided by their home governments and are not required to have a passport or H-2A visa. This travel identification document is approved by INS (in addition to the already approved I-129 petition). INS gives the workers a form I-94, Record of Arrival/Departure, stamped “H-2A.” Once the workers enter the country, they typically travel to various employers along the east coast, with transportation arranged by an employer or employer group. When the workers leave, they return their I-94 and WICLO oversees their departure. Even when H-2A workers have been issued visas, they are not guaranteed entry into the United States but are subject to inspection at the port of entry by immigration officials, who can deny admission. At the port of entry, an INS official issues the form I-94, which notes the length of stay permitted. The worker is admitted to the United States for the “validity period” of the petition—that is, until the labor certification expires. H-2A visa holders can be admitted to the United States 7 days before the beginning of the validity period and stay 10 days after it ends. Officials at INS, which has the responsibility of monitoring whether visitors overstay their visas, told us that no reliable data exist on the number of H-2A workers who overstay their visas. As we reported in 1995, the task of estimating overstays presents a difficult challenge. INS procedures require that visitors return the I-94 when they leave the country. It has a data system for tracking the dates when individual foreign visitors arrive in and depart from the United States. However, the agency cannot assume that all people whom the system does not record as having left have, in fact, overstayed their lawful periods of entry because, according to INS officials, about 70 percent of forms I-94 are not returned. This is especially true of nonimmigrants who leave the United States by surface transportation such as automobile or bus, which would include most H-2A workers. Because no INS employees are inspecting traffic exiting the country at land border crossings, there is no assurance that the forms I-94 are being submitted. Because the H-2A program involves multiple agencies at various levels of government, oversight activities sometimes overlap, resulting in duplication and confusion among both the agencies and the employers. Employers, advocates, and agency officials repeatedly expressed frustration about the lack of information on various segments of the H-2A process which they needed to obtain, or assist others in obtaining, foreign guestworkers. As mandated by IRCA, Labor produced a handbook on the H-2A Labor certification process in 1988. The 325-page handbook provides detailed information on application requirements, including relevant sections of the Federal Register and Code of Federal Regulations. However, some of the information provided relates to provisions that are no longer applicable, the handbook is not user-friendly, and Labor officials agreed that it includes little information about the process after certification by Labor. Employers we interviewed were frequently confused by the multiple agencies and levels of government involved in the H-2A program. Discerning how to comply with regulations can be difficult because of overlapping responsibilities for inspection and the resulting conflicting administrative procedures and regulations. Complying with housing requirements is a case in point. Federal regulations require that employers in the H-2A program provide worker housing and that such housing meets health and safety standards before and during occupancy. The housing must be inspected and approved 30 days before the employer’s date of need. In some of the states we reviewed, H-2A housing was also subject to state and local housing regulations and inspected by multiple agencies. Having numerous standards and procedures can be inefficient and create confusion about compliance requirements. For example, although New York, a state with heavy H-2A participation, took action to streamline its housing inspection process, it continues to require multiple inspections. To formalize a working relationship, federal and state agencies responsible for enforcing “employee protection legislation to guard against the exploitation of farmworkers” developed a memorandum of understanding, including an agreement to exchange information on housing inspections, and coordinate inspections and notification of violations. (See fig. 3.5.) Officials in the New York State Department of Labor’s Community Services Division told us that housing inspections can be conducted as many as three times: once by the federal Department of Labor, once by Community Services Division of New York’s Department of Labor, and once by the New York State Health Department. The Director of the Bureau of Community Sanitation and Food Protection, which is responsible for enforcing the State Sanitary Code relating to migrant worker housing, told us that his department is still uncertain as to the role of the agencies that signed the memorandum of understanding. He said that the federal Department of Labor carries out some inspections, but “picks and chooses” and does not keep track of the sites, so the state Health Department does not know which sites have been inspected. As a result, the Health Department ends up inspecting all housing facilities in the state every year. Virginia, another state with heavy H-2A participation, has a similar problem with its housing inspection operations. While the Virginia Health Department and the Virginia Employment Commission developed a memorandum of understanding in 1986 to avoid duplication of effort, H-2A housing in the state continues to be inspected twice, once by the Employment Commission and once by the Health Department, in contrast to non-H-2A housing that is inspected only by the Health Department. A state official complained about the redundancy in H-2A inspections. Other states have tried to address this problem of redundancy. For example, North Carolina has developed a system to remedy its problems with multiple agency oversight that has elicited praise from the various stakeholders. To avoid duplication and reduce confusion, in 1993, the state employment commission, the state health department, and the federal ETA signed a memorandum of agreement that the state health department would conduct all housing inspections using county health departments’ water and septic system certifications. If the state health department gets backlogged and cannot inspect the housing before the workers arrive, employers not using H-2A workers can notify the state employment commission, which will allow the employers to house workers until the housing is inspected. Federal regulation requires employers using H-2A workers to have housing certified prior to occupancy. Health department officials told us that they prioritize inspections for H-2A employers because H-2A requires the inspection 30 days before the date of need. Confusing and redundant housing inspections may result in misinterpretations or misunderstandings of the regulations by program participants. Employers, particularly those in California, told us that the difficulty of providing and maintaining housing that complies with regulations would prevent them from participating in the H-2A program in the event of a labor shortage. However, some of the housing standards employers described as preventing them from providing housing were not required for participation in H-2A. For example, in California, employers and advocates for employers and labor told us that using tents for farmworker housing was effectively prohibited because employers are required to provide heating and air-conditioning, which are difficult to provide in a tent. However, California state housing officials told us that tents have been certified in the past and are still acceptable, as long as they meet certain specifications, and that federal housing regulations also permit such arrangements. They also said that air-conditioning is not required because there are no maximum temperature requirements for temporary housing to be used for fewer than 180 days. Moreover, federal migrant farmworker housing regulations have no maximum temperature requirements, and both federal and state regulations establish minimum standards for heating only if the outside temperature falls below 60 degrees. Furthermore, in California, local housing standards, including those for heating and cooling, are preempted by state standards. Correcting misunderstandings about H-2A program housing requirements may also address agricultural employers’ concerns about community opposition and local zoning laws that some have encountered when they attempted to build more permanent farmworker housing. Federal and state labor officials agreed that employers have reason to be concerned about “not in my backyard” community opposition to farmworker housing and restrictive zoning laws because they limit the availability of low-income housing generally and make it difficult for farm employers to build housing. A representative of a California company that grows apples and cherries told us that the company had tried to build housing at an estimated cost of $1.5 million for 240 temporary farmworkers in a sparsely populated community. The planned housing project would have been used about 10 months a year and would have included recreation rooms, security guards, and parking. Community residents strenuously objected, fearing the project would bring crime and other problems into the area. The company official told us that they ended up abandoning efforts to construct permanent farmworker housing and withdrawing the company’s H-2A petition. Officials in New York described a similar problem on the eastern end of Long Island, where residential development has overtaken farm land and where community opposition has grown to employers’ attempts to build housing for farmworkers. It is difficult, said one state housing official, for agricultural employers to build housing “unless the grower has a lot of land and the neighbors cooperate.” Another official in New York observed that zoning boards have not approved any new housing: Some growers who wanted to put substantial investments into new farmworker housing ($100,000, in one case) were barred from doing so by the local zoning board. It is difficult to determine the effectiveness of worker protections in the H-2A program. H-2A guestworkers may be less aware of U.S. laws and protections than domestic workers and are less likely to file a complaint. In addition, Labor’s Wage and Hour Division (WHD) faces inherent obstacles in enforcing existing protections when the worker is legally in the country only at the behest of the employer and must leave the country soon after separating from employment. Our analysis of state and federal enforcement data and data from a major H-2A employer do, however, raise concerns about the effectiveness of several of the H-2A program’s worker protection provisions, in particular, positive recruitment and wage guarantees, including guaranteed wages for three-quarters of the contract and the first week of the contract. H-2A provisions require that before Labor will certify a labor shortage, an employer must actively try to recruit (“positive recruitment”) domestic workers for H-2A job openings, including using newspaper and radio advertising in geographic areas where such workers may reside. The purpose of this requirement is to protect the employment opportunities of domestic workers by giving them first choice of accepting this work to bring in. Filling job vacancies with domestic workers would reduce the number of H-2A workers to bring in. The positive recruitment requirement appears to result in few domestic workers being placed in these jobs. An employer is required to hire all qualified workers referred by state job services. However, we found that state job services may refer only a few workers for H-2A job openings, even when they make many referrals and placements in agriculture as a whole. The North Carolina Employment Security Commission record of referrals of agricultural workers for 1996 shows 27,461 potential workers referred and 15,886 workers placed with non-H-2A employers. In contrast, even though North Carolina employers asked for more than 5,000 workers, about one-fourth of all H-2A workers requested nationwide, the Commission referred only 13 potential workers to H-2A employers. Our analysis of ETA data shows the same limited SESA referrals in most other states. SESA officials in other states told us that they rarely refer agricultural workers for H-2A job orders because of concerns about H-2A employers’ willingness to hire the workers. H-2A employers we spoke with told us that they offer domestic workers jobs but that the workers either do not report for work or they quit before the harvest ends. While several H-2A employers told us that positive recruitment was a waste of time and money because no domestic workers were willing to accept the work, non-H-2A employers joined others in asking why one agricultural employer would be unable to find a single domestic worker, while a neighboring employer could find all he or she needed. Federal and state Labor officials expressed concern that the increasing role of agricultural employer associations in accessing the H-2A program for individual employers may pose problems for positive recruitment. The number of workers requested by associations has grown from 4,800 in 1994 to 12,300 in 1997, over 55 percent of the 21,701 workers requested, and the number of associations that filed applications has grown from 7 to 9. In filing an H-2A application, an association may file in one of three ways: as an agent, a sole employer, or a joint employer. In a joint employer relationship, ETA grants the certification to both the association and its specified employer members, and the association assumes the liabilities and obligations of an employer. Associations make it easier for smaller employers to access the H-2A program in that they normally prepare and file the appropriate Labor and INS forms covering individual employers, advertise for domestic workers, and, in some cases, recruit the foreign H-2A workers. Such a relationship also increases flexibility in that associations are allowed to transfer workers among individual growers as the workload dictates. However, officials in both federal and state agencies told us that when associations represent employers from a large geographic area (for example, an entire state), domestic workers may be less likely to accept job offers for H-2A openings and, if hired, exhibit high turnover. Several explanations have been suggested for the failure of those who are referred to the association to accept or stay at work. One possible reason is that the job description may not accurately reflect the actual work involved, and the worker is unable or unwilling to perform the work required. Another reason may be that, unlike most individual agricultural employers, a joint employer association may offer jobs at a worksite far from the worker’s home, and the worker may be unable to accept the job because of the need for transportation and housing. Although current law requires that employers provide transportation and housing for workers recruited through the Interstate Clearance System, the law does not require that these be provided for locally recruited workers unless they are not reasonably able to return to their residence within the same day. Labor generally considers a reasonable commute to be as much as 60 miles, which may be difficult for those domestic farmworkers who do not own cars. Employers using workers recruited by associations can cover a large geographic area, such as an entire state. Labor’s Office of Inspector General has undertaken a review of H-2A positive recruitment provisions and expects to issue a report in the spring of 1998. Although explanations for the lack of success of positive recruitment with associations are largely anecdotal rather than empirical, our analysis did confirm that a significant number of domestic workers refused work. Of the 220 domestic workers who applied to one major H-2A employer in 1996, almost 70 percent refused employment or did not show up for work. This employer was an association that filed “master job orders” with ETA, allowing it to place workers all over a large state. SESA officials in one state told us that they had recently obtained commitments from associations to place domestically recruited workers at worksites close to their homes. However, it is unclear how such commitments will be monitored and enforced. Under the H-2A program’s three-quarter wage guarantee, an employer must offer each worker employment for at least three-fourths of the workdays in the work contract period, including any extensions. If the employer provides less employment, the employer must pay the amount the worker would have earned had the worker been employed the guaranteed number of days. This provision is intended to ensure that domestic and foreign farmworkers who are recruited and often travel from distant locations to work in the United States do not actually end up earning substantially less than they were led to believe they would earn through the initial job offer, and to encourage H-2A employers to accurately estimate both their labor force needs and the duration of employment they can offer so as to limit their potential wage liabilities. Hence, employers will make honest assessments of both the number of workers needed and the amount of time that they will be employed, and prospective workers will have some guarantee about the total wages and duration of employment to expect. It is difficult to determine the extent to which the three-quarter guarantee is being complied with or violated. Agency officials and worker advocates report that H-2A workers are unlikely to complain about worker protection violations, including the three-quarter guarantee, because they fear that they will lose their jobs or will not be accepted by the employer or association for future employment. H-2A workers we spoke with raised this concern. For example, in 1997, ranchers employing sheepherders failed to pay them the proper wages under the three-quarter guarantee, but no complaint had been filed with WHD. WHD only became aware of the situation when one of the sheepherders was assaulted and a local newspaper publicized the attack. The employers admitted that they failed to pay the appropriate wages to their sheepherder employees. In another example, Employment Standards Administration (ESA) officials told us they were aware that some employers may have brought in Jamaican H-2A workers without paying them wages in compliance with the three-quarter guarantee, but said they were too understaffed to investigate the matter. According to an ESA official, in fiscal year 1996, the agency received no complaints from workers employed by H-2A employers. ESA data from that year showed that most investigations—93 percent—were targeted by ESA or triggered by complaints from SESAs; only 7 percent were triggered by complaints from third parties, such as Legal Services. The three-quarter guarantee is particularly difficult to enforce because the provision is only applicable at the end of the contract period. Because H-2A workers must leave the country within 10 days of the end of the contract, there is only a small window of opportunity to interview the workers in the United States. Regional and district WHD officials said they could not monitor the application of the three-quarter guarantee effectively because they cannot interview workers after they return to Mexico to confirm their work hours and earnings. Similarly, it is hard to prove retaliation against workers who complain about such violations because there is no way to obtain and corroborate information. These enforcement difficulties also create an incentive for less scrupulous employers to request contract periods longer than necessary: if workers leave the worksite before the contract period ends, the employer is not obligated to pay the three-quarter guarantee or their transportation home. If this occurs, however, it is almost impossible to determine if these workers have left the country or are taking jobs from domestic workers. Data from a major employer showed that almost 40 percent of their H-2A workers (1,763 workers) left prior to the end of the contract, losing their right to both the three-quarters guarantee and transportation home. This development raises concerns about whether the employer accurately estimated the ending date of need. Discussions with H-2A program officials suggest that, at least with associations, contract periods have been lengthening in duration in recent years. More importantly, the three-quarter guarantee does not provide incentives for the employer to ensure that the workers stay through the end of the contract period. Migrant and seasonal farmworker regulations provide a guarantee of first-week wages for domestic workers recruited through the Interstate Clearance System. If an employer fails to provide adequate notification in amending an incorrect date of need, the employer must pay workers referred by the job service in the first week when they are present and available for work and no work is provided. The H-2A program’s equivalent treatment provision, sometimes referred to as “disparate” treatment, requires that the employer provide the same minimum wages, benefits, and working conditions to H-2A workers that are provided to domestic workers employed in “corresponding employment.” However, officials at the state and federal levels do not apply this provision to foreign workers, even though they joined worker advocates in expressing concern about the community impact when foreign workers arrived in their areas without work or money to support themselves. In one state, an association of churches reported having to raise money to house and feed foreign H-2A workers hired by local employers who had incorrectly estimated the date of need such that when the H-2A workers arrived at the worksite there was no work or wages for several weeks. ETA has the authority to sanction employers, by denying their certifications, if they have committed substantial violations of the terms or conditions of a temporary foreign agricultural labor certification. ETA must notify an employer that has committed a substantial violation that certification will not be granted for a certain period of time, depending on the number and kind of violations. However, ETA is not responsible for enforcing H-2A work contract provisions or other labor violations; WHD has this responsibility. WHD has authority and responsibility for conducting investigations and inspections regarding matters such as the payment of required wages, transportation, and housing; reporting violations to ETA; and invoking penalties, such as recovery of unpaid wages, assessment of civil monetary penalties, and seeking injunctive relief against the employer. ETA officials told us that they try to coordinate with WHD but that they have never denied certification for labor law violations, although they typically use the authority as leverage in obtaining voluntary compliance. However, because WHD is the agency that enforces the labor laws, it is the agency that most needs this leverage. WHD field officials expressed concern about the difficulties of ensuring that abusive employers do not participate in the H-2A program, where they believe the potential for abuse is much greater. Although a national farm labor shortage currently appears unlikely, Labor, INS, State, and state employment service officials who implement the H-2A program said that they could handle unanticipated, moderate short-term program workload increases by shifting staff resources, or, as is the case at the State Department, prioritizing the types of visas to be processed. However, officials from the federal agencies all agreed that any massive (for example, a 10-fold increase to 150,000 per year), sustained national increase in the demand for agricultural guestworkers could not be effectively processed without additional resources. Labor and State officials also emphasized that the additional staff necessary to process large, sustained workload increases would have to be added over the course of a year, given the need to train and relocate personnel. In contrast, SESA officials stated that, in general, additional resources would not be required because the steps that they take to recruit workers are not significantly more resource intensive to meet the demands from a few employers as for many. Discussions with officials at State, Labor, and USDA noted that the administration is aware of the potential problems facing agricultural employers and the processing agencies if the H-2A program was faced with a major, sustained workload increase. Officials from Labor, INS, USDA, and State have met in the administration’s Domestic Policy Council to discuss the potential for significant increases in the demand for H-2A guestworkers to occur and to develop an appropriate response, if necessary. Officials at Labor and USDA told us that several proposed options have been discussed but that these options are not yet available for review. Given the condition of the agricultural labor market and INS’ current enforcement resources and priorities, the likelihood of significant labor shortages, and the resulting massive increases in the demand for H-2A guestworkers, appears small. Although a large percentage of farmworkers are not legally authorized to work in the United States, INS’ current enforcement efforts are unlikely to cause a major disruption in U.S. agricultural production or generate a major increase in the demand for H-2A workers. The H-2A program currently provides guestworkers for the small percentage of agricultural employers who request them on either a regular or emergency basis. Labor and INS deny or disapprove applications from few agricultural employers, State denies visas to few prospective guestworkers, and INS detains few of these workers at the border. However, the potential for localized labor shortages for a specific crop or on a geographic basis remains. Although it successfully provides workers to employers who request them, the H-2A program requires employers to interact with multiple agencies at different levels of government, a process that can seem very confusing and difficult to navigate. No centralized source of information exists that clearly explains the entire H-2A application and labor procurement process. Labor’s handbook gives information about provisions that are no longer applicable, is not user-friendly, and includes little information about the processes at INS and State. This perspective also extends to Labor’s oversight of the program. Labor currently collects limited data to facilitate oversight of the program’s day-to-day operations. Labor was generally unable to determine the extent to which its regional offices were in compliance with statutory and regulatory deadlines governing the H-2A program. Our review, however, found significant noncompliance with these mandated deadlines. Our work suggests that some procedural changes could improve the program’s ability to meet the needs of agricultural employers. Processing times under the current program are unnecessarily extended as a result of the requirement that INS approve all non-Caribbean Labor certifications before transmitting the request for workers to the State Department. Because H-2A visa petitions are unlike those in any other category in that they rarely identify individual workers, INS is in the position of merely “rubber stamping” the work of others, burdening the employer with unnecessary paperwork and fees and adding as much as 2 to 3 weeks to the entire H-2A application process. Delegating INS’ role of authorizing approval of H-2A visa petitions to Labor could reduce the bureaucratic maze of rules and paperwork that agricultural employers now face. This transfer would need to be accompanied by revisions in regulations, such as accommodating visa extensions where no new Labor certification is required and ensuring that appeals procedures are changed to ensure employers’ right to due process. Such a transfer could also significantly reduce total application processing time. Many agricultural employers have reported that the current requirement of filing an application at least 60 days before the date of need is difficult given the uncertainties inherent in agricultural production. A shorter period could eliminate some of this uncertainty. Delegating INS’ approval role in the H-2A program could reduce total application processing times by 2 weeks. This would permit Labor to modify to 45 days the existing administrative requirement that applications be submitted at least 60 days before the date of need. However, to ensure that agricultural employers have sufficient time to positively recruit for domestic workers, obtain inspections of farmworker housing, and show proof of workers’ compensation coverage, it will also be necessary for the Congress to modify to 7 days the statutory requirement that applications be approved 20 days before the date of need. Without modifying this requirement, employers will not have sufficient time to meet their duties as required by the program and domestic workers will not have ample opportunity to compete for agricultural employment. Obtaining workers through the current H-2A program requires agricultural employers to interact with multiple agencies at different levels of government. Given the often time-critical needs of agricultural employers, the multiplicity of agencies can seem confusing and seem difficult to access. Current written information that Labor provides to prospective employers is incomplete, hard to understand, and in some instances, outdated. These weaknesses contribute to a general perception that the program is too complex to be accessed by employers who may require its services. We also identified several weaknesses regarding the protections afforded to both domestic and foreign workers. In general, Labor’s WHD is the primary agency for the enforcement of existing H-2A contracts and other labor standard provisions, while ETA administers the H-2A program, working with state job services and agricultural employers to facilitate the application process. However, under current law, ETA exercises Labor’s authority to suspend an employer’s participation in the H-2A program if this employer has committed a serious labor standard or contract violation and WHD, when conducting an enforcement action, must request that ETA consider using this authority. Given the overall separation of program functions between WHD and ETA, the fact that suspension authority resides with ETA seems incongruent. We believe, and Labor officials agreed, that consolidating this suspension authority in WHD would permit ETA to concentrate more effectively on the H-2A program’s crucial administrative duties and possibly increase the effectiveness of WHD enforcement. We found another weakness in the equivalent treatment provision of the H-2A program, commonly referred to as the “disparate” treatment provision. This provision generally requires that the employer provide equal treatment to domestic and foreign workers in terms of opportunities, wages, benefits, and working conditions. For example, if an employer hires H-2A workers at a particular wage, that wage is the minimum that must be paid to any domestic workers performing the same work for that employer. However, we found that while current Labor regulations guarantee wages for the first week of work to domestic workers who are referred to agricultural employers through the Interstate Clearance System of Labor’s Employment Service, even if they are unable to work during that period, comparable wage protection is not afforded to foreign workers. This disparity appears inconsistent with Labor’s general application of the H-2A equivalent treatment provision and could cause needless personal hardship for some foreign workers. Our review also raised concerns about other existing protections afforded to workers under the H-2A program. Current program provisions requiring that H-2A workers receive wages at least equal to three-quarters of the contract period were implemented to protect foreign workers from exploitation and provide some certainty to both workers and employers so that workers will know how much work to expect, and employers can limit their potential wage liabilities. On one hand, the few complaints registered about this provision suggest compliance. But some H-2A workers may be unaware of their rights or how to exercise them in the United States. Furthermore, our findings concerning the increasing length in the average contract period for H-2A workers and indications that a significant number of H-2A workers may be separating from employment before the end of the contract period, invalidating the guarantee, also suggests that this protection may not always work as intended and that some employers could “game” the system to avoid paying wages and transportation they owe to H-2A workers. One solution to this vulnerability is to apply the three-quarter guarantee incrementally to shorter periods of time throughout the duration of the contract. For example, requiring that workers receive either three-quarters of the full-time wage rate or the wages for the actual hours worked, whichever is larger, payable at the end of every 2 or 3 weeks, could provide additional protection for H-2A workers. However, the length of the pay increment should consider that the contract period does not always correspond with the period of time the H-2A worker spends at one worksite. Some large associations move workers from one worksite to another during the same contract, and the workers receive wages from different employers. It is important that any modification of the three-quarter guarantee be implemented in a manner that protects workers but also avoids increasing the administrative complexity of the program. To simplify the H-2A application process and reduce the cost and burden on agricultural employers, we recommend that the Attorney General delegate authority for approval of H-2A visa petitions from INS to the Secretary of Labor or designee and revise corresponding regulations as necessary to implement and facilitate such an agreement, including revising visa extension and appeals procedures. If the Attorney General delegates this authority, we recommend that a combination of two other actions be taken. After the Attorney General has delegated INS’ role in petition approval to Labor, to reduce total application processing time and facilitate better accuracy in estimating the date workers will be needed, we recommend that the Secretary of Labor amend the regulations to allow H-2A applications to be submitted up to 45, rather than 60, days before the date of need so long as INS does not have a role in the petition approval process. To protect work opportunities for domestic workers by ensuring that sufficient time is available for agricultural employers to positively recruit them while reducing the total processing time, we recommend that the Congress amend the Immigration and Nationality Act so that, as long as the authority for approval of H-2A visa petitions remains with Labor, Labor is required to complete all applications at least 7 days before the date of need, rather than 20 days. To better protect both domestic and H-2A workers, we recommend that the Secretary of Labor take the following actions: Extend the authority to suspend employers with serious labor standard or H-2A contract violations to WHD, Revise its regulations to require agricultural employers to guarantee H-2A workers’ wages for the first week after the date of need and to pay workers those wages no later than 7 days after the date of need, and Revise regulations regarding the three-quarter guarantee to remove incentives to overestimate the contract period. Revisions Labor considers should include applying the guarantee incrementally during the duration of the H-2A contract in a manner that would improve the protection afforded to H-2A workers but also minimize any additional administrative burden on agricultural employers. To improve service to both employers and workers, we also recommend that the Secretary of Labor regularly collect data on its performance in meeting H-2A regulatory and statutory deadlines for processing H-2A applications, and use these data to monitor and improve its performance; and update and revise the H-2A handbook to include the procedures for all agencies involved and key contact points, both at Labor and at other agencies. Labor, the State Department, and USDA all commented on a draft of this report. Labor and State, agencies responsible for implementing our recommendations, generally concurred with our findings and most of our recommendations. For example, Labor concurred with our recommendation that the Attorney General delegate authority for approval of H-2A visa petitions from INS to the Secretary of Labor. In contrast, USDA, which serves in an advisory capacity and has no responsibility for H-2A program administration, while agreeing with some of our findings and recommendations, submitted detailed comments on statements, conclusions, and recommendations presented in the draft report that it believed were either inaccurate or required clarification. (The full text of Labor’s comments is in app. VIII, State’s is in app. IX, and USDA’s is in app. X.) We requested comments from the Department of Justice as well. Justice’s INS staff provided technical comments on the draft report, which we incorporated as appropriate. Justice did not, however, within the time available, provide official comments on the overall findings and conclusions of the report or on the recommendations. Labor generally agreed with the report’s findings, conclusions, and recommendations. Labor, did, however, suggest two revisions to our recommendations, which we made, and numerous technical changes, which we incorporated as appropriate. While Labor specifically agreed with our finding that “a farm labor shortage does not now exist and is unlikely in the foreseeable future,” it also contended that there is evidence of a farm labor surplus. The Department cited the many economic indicators we presented in our analysis, such as high unemployment rates in agricultural areas, the persistent heavy underemployment of farmworkers, and declining real farm wages, both in hourly and piece rates, as evidence of a labor surplus. The Department agreed with our assessment that INS enforcement is unlikely to significantly reduce the availability of agricultural labor, either regionally or nationally. Labor also noted the potential of the implementation of the work requirements of the recent welfare reform legislation to provide agricultural labor. Labor disagreed with the assertions of some of those we interviewed that welfare recipients were unlikely to provide a source of farm labor. In particular, the Department stated that the problems, such as child care, that employers and former welfare recipients will confront as they seek employment in farm occupations are little different from the challenges facing employers and recipients in other industries and occupations. Furthermore, Labor rejected the notion that few recipients are located in or near many rural areas, contending that at least some rural areas have very large welfare populations that could serve as potentially significant sources of labor in close proximity to many agricultural establishments. Although Labor believes that the three-quarter guarantee generally serves its intended purpose, Labor agreed that the structure of the three-quarter guarantee could result in employers’ overestimating the contract period in the expectation that less work and lower earnings toward the end of the contract period will encourage workers to “abandon” employment and thereby relieve the employer of the obligations of the three-quarter guarantee and return transportation reimbursement. Labor agreed to evaluate possible solutions to this problem but believed that, given fluctuations in the amount of work required during a growing season, applying the guarantee on an incremental basis may not be the most appropriate solution. In response to Labor’s comments, we amended the recommendation to say that regulations should be revised to apply the three-quarter guarantee to remove incentives to overestimate the contract period. Revisions Labor considers should, however, include applying the guarantee incrementally during the duration of the H-2A contract in a manner that would improve the protection afforded to H-2A workers but also minimize any additional administrative burden on agricultural employers. Labor also suggested that we revise our recommendation regarding authority to suspend employers with serious labor standard or H-2A contract violations. The Department suggested that we extend authority to the Wage and Hour Division of ESA rather than transferring it from ETA; we revised the recommendation accordingly. Although USDA agreed with some of our findings, conclusions, and recommendations, it submitted detailed comments on aspects of the draft report that it believed either were inaccurate or required clarification. These comments can be grouped into several broad areas concerning (1) our analysis of conditions in agricultural labor markets; (2) the magnitude and consequences of INS enforcement operations; (3) our assessment of H-2A program operations, specifically late filing of applications; and (4) the effectiveness of protections covering both domestic and H-2A workers, specifically the three-quarter guarantee and the application processing deadlines. Although USDA did not explicitly disagree with our finding that widespread labor shortages do not now exist, it contended that the central issue is whether an adequate supply of qualified U.S. workers is currently available to agricultural employers. USDA stated further that U.S. agriculture’s dependence on illegal aliens is poor policy and that programs like H-2A that permit “the employment of legal workers under controlled conditions” are preferable. Consistent with the notion that qualified domestic farmworkers may not now be available, USDA questioned our use of county unemployment rates as an indicator of labor market conditions and noted that our data on the unemployment rates of farmworkers failed to account for regional mismatches in farm labor supply and demand. USDA also provided information that it believes suggests that sufficient numbers of qualified workers are not available for agricultural employers, including 1987 data on characteristics of the national farm labor supply, and excerpts from a 1988 GAO report that analyzed labor market conditions for tobacco growers in selected counties in Virginia and North Carolina. Information provided by USDA does not alter our assessment that the overwhelming weight of the evidence indicates that widespread farm labor shortages do not exist now and are unlikely to occur in the near future. USDA’s rejection of consideration of annual and monthly unemployment rates as an indicator of labor market conditions contradicts the position of the Department during our review, when it concurred with our use of such data. Moreover, USDA relies on such data in determining whether various jurisdictions, including agricultural areas, are essentially labor-surplus areas and thus should receive waivers of the work requirement for food stamp eligibility. Furthermore, our analysis of national and county unemployment rates was only one piece of evidence we analyzed to assess the condition of agricultural labor markets throughout the nation. We also reviewed changes in real wage rates, investment patterns by agricultural employers, and federal and state agency assessments of labor market conditions in agricultural areas. In addition, we made a serious effort to present the analytical difficulties of the concept of a labor market shortage and weaknesses associated with the evidence presented. We also note that, although in this report we included only the annual unemployment rate for 20 major agricultural counties, we also reviewed monthly unemployment rates from January 1994 through June 1997 for these counties. As we reported, 15 of these counties had unemployment rates above 7 percent for every month during this entire period, even during peak periods of agricultural activity. Many of these counties, for example, Yuma, Arizona, and Yakima, Washington, had rates far in excess of 7 percent for every month during the period. On the basis of this analysis, we believe that it is plausible to conclude that such agricultural areas, which have high unemployment even during peak periods of agricultural activity, do not have labor shortages. This conclusion is also consistent with the anecdotal information we received from our interviews with agricultural employers around the country, who, while expressing concern about the availability of labor in the future, had not yet experienced a labor shortage. USDA also presented data from 1987 suggesting that a considerable proportion of the agricultural labor force is casual, for example, housewives and students, who presumably do not have a strong attachment to the labor force. Although these may be the latest data available, they are over 10 years old, before the legalization of over 1.3 million SAW workers and the full implementation of the H-2A program as specified in IRCA. It is unclear what percentage of the current agricultural labor force is composed of such groups. Furthermore, casual workers like students and housewives would not contribute to the seasonal fluctuation in the unemployment rates of agricultural areas, since presumably many return to school or other activities in the off-season and thus do not actively seek work at that time. These data are also relevant to the issue that USDA raises concerning the number of qualified workers in the agricultural labor force. Although it is clear that a substantial portion of the agricultural labor force is not legally authorized to work in this country, we were unable to determine the distribution of such workers throughout the country. We were also unable to assess the distribution of other sources of domestic workers, such as welfare recipients and unemployed or underemployed farmworkers who may have the skills for agricultural employment. USDA’s identification of students and housewives represents another pool of potentially qualified labor that could be tapped by agricultural employers. Given the limited effect of INS enforcement operations, it is most likely that the number of workers not legally authorized to work in this country will change slowly in many parts of the country. The pace of change will potentially permit agricultural employers and federal and state authorities to substitute other domestic labor where available, if they pursue this option, or, where necessary, to use the H-2A program. As additional evidence concerning the ability of agricultural employers to recruit qualified domestic farmworkers, USDA also cited our 1988 report, which included an analysis of the agricultural labor market supply in the production of tobacco in selected counties in Virginia and North Carolina. The qualitative information from the targeted case study analysis of selected tobacco-growing counties in two states complements the extensive quantitative data in this report. In this report, we discuss the potential for localized labor shortages in specific crops under current labor market conditions and, consistent with our earlier work, cite difficulties agricultural employers may have now in obtaining domestic tobacco workers in North Carolina. We also note that tobacco producers in Virginia and North Carolina, the crop and geographic area we focused on in our 1988 report, are now significant participants in the H-2A program. Our finding that certain H-2A program requirements, including the positive recruitment requirement, do not appear to be accomplishing their intended purpose echoes our 1988 study, in which we concluded that “there were shortcomings in the protections of U.S. workers in the recruitment process.” That report also made recommendations to the Labor Department on how to enhance the effectiveness of this requirement. We believe that it is inappropriate to use our 1988 limited case study analysis to generalize about the current availability of sufficient supplies of qualified farm labor on a national level. Major events that can influence the availability of farm labor, including the full integration of 1.3 million SAW workers, welfare reform, and the mechanization of the Florida sugarcane industry, have transpired since that time. In this respect, we suggest that our current quantitative analysis of key market indicators, coupled with our numerous in-depth interviews with agricultural employers, associations, and other interested parties, provides a more reliable assessment of current farm labor market conditions. USDA raised several concerns related to INS enforcement operations, which we considered. Our analysis, however, indicated no need to revise the draft report in response. USDA agreed with our finding that INS enforcement efforts are not likely to significantly reduce the availability of agricultural labor. However, USDA points to the impact INS efforts can have on individual agricultural employers, a point we also make in the report. While we agree that INS enforcement efforts may have an impact on individual agricultural employers, there is no evidence that it will cause a widespread farm labor shortage. USDA discusses INS enforcement activity directed at employers and at “conducting roadblocks, sweeps of shopping centers . . . and other places they [INS] expect aliens to be found,” but this activity is not new and is limited in scope. As discussed in chapter 2, such INS enforcement activity is included in the responsibilities of the 304 staff years devoted to noncriminal investigations, or an average of about 6 INS staff years per state. While USDA cites the efforts of INS’ Border Patrol to “seal the border,” the extent to which these efforts have reduced the availability of illegally authorized workers is unclear. As we recently reported, INS intelligence reports and other available data do not indicate whether the increased difficulty of entry in the areas of highest known illegal activity on the southwest border of the United States has deterred the flow of illegal workers into the country. Apprehension statistics are INS’ primary quantitative indicator of the results of INS’ strategy to deter illegal entry along the southwest border. Apprehension data, standing alone, however, have limited value for determining how many aliens have crossed the border illegally. Data were unavailable, for example, on whether there has been a decrease in attempted reentries by those who have previously been apprehended. For a more detailed description on the difficulties in accurately measuring the total number of illegal aliens in the United States and in estimating how many illegal aliens come into this country each year, see Illegal Immigration: Southwest Border Strategy Results Inconclusive; More Evaluation Needed (GAO/GGD-98-21, Dec. 11, 1997). USDA also cites Labor’s enforcement activities as potentially reducing the Labor supply. INS, and not Labor, has responsibility for identifying workers not legally authorized to work. Labor’s enforcement responsibility is limited to ensuring that employers have collected documents relating to authorization to work; Labor does not verify the authenticity of the documents collected. USDA stated that “INS often determines, through procedures not available to employers, that 75 percent or more of an employer’s work force submitted fraudulent documents.” We agree that while it is possible that INS has determined that 75 percent or more of an employer’s workforce submitted fraudulent documents, INS cannot provide information on the frequency with which this occurs. INS does not collect data on the percentage of an employer’s workforce in all industries or in specific industries, such as agriculture, found to have fraudulent documents. INS officials stated that the percentage of such workers varies greatly from one employer to another. For example, information INS provided in response to our requests for information about specific individual enforcement efforts showed one employer with only 1 percent of workers with fraudulent documentation and another with 50 percent. “Workers who claim to be U.S. citizens and possess fraudulent documents are liable to be detected by the Social Security Administration (SSA). SSA requires employers to verify through its Enumeration Verification System the names and social security numbers that do not agree with SSA records (if the Wage and Tax statements filed by the employer has an error rate that exceeds ten percent.)” Instead, SSA officials stated that while employers are encouraged to use the Enumeration Verification System, they are not required to do so. When the name and Social Security number do not agree, SSA places the record in the Earnings Suspense File. It sends a letter to the employee at the address that is on the W-2 form and asks the employee for a correction. SSA only contacts the employer if the address is incomplete or missing. SSA has a task force examining ways to better use the Suspense File, including the possibility of requiring employer use of the Enumeration Verification System. USDA questioned our finding that Justice authorizes the State Department to issue nonimmigrant visas for H-2A workers only after the Department of Labor issues a labor certification, with reference to the statutory requirement that the certification be applied for, but not specifically obtained, before INS petition approval. In response to this concern, INS stated that “the INS will NEVER approve a new H-2A petition unless the petition is accompanied by a labor certification issued by the U.S. Department of Labor. The fact that a prospective employer has filed for a cert with the Department of Labor is insufficient.” USDA questioned how many of the 42 percent of applications employers filed fewer than 60 days before the date of need were actually late, rather than emergency, applications. USDA said that “he Department of Labor rejects late-filed applications.” We agree with USDA that it would be inappropriate to characterize emergency applications filed fewer than 60 days prior to date of need as “late.” However, our review of H-2A applications in one regional office that processes a large number of H-2A applications confirmed Labor officials’ statements that emergency applications represent only a small fraction of all applications. In fact, data for the period October 1, 1996, through June 30, 1997, the only period for which these data were collected in this region, identified fewer than 15 percent of the applications filed within the 60-day period as “emergency.” Furthermore, Labor does not reject nonemergency applications because they were filed with fewer than 60 days remaining. Our analysis showed that for the period October 1, 1995, through June 30, 1997, Labor approved 99 percent of all such applications, the same percentage approved for applications filed within the statutory deadline. In addition, despite having fewer than 60 days, Labor issued certifications for 76 percent of these applications at, or before, the date of need. We agreed with USDA that an agricultural employer who experiences an unexpected labor shortage as a result of INS enforcement activity would be eligible for an emergency certification. Both our draft and final report refer to a specific labor certification issued for just this reason in the Northeast. Unlike Labor, USDA disagreed with our conclusion that the three-quarter guarantee does not provide incentives to ensure that the employer makes the worker stay through the end of the contract period, and that it may provide disincentives to accurately estimate the end date of the contract period. USDA asserted that “there is significant incentive for the employee to stay and collect 3/4 wages without working, receive the return transportation, and maintain eligibility to return to the job the following season.” However, USDA also quoted the manager of a major H-2A association as saying that 1,598 of 4,573 (more than one-third) of the association’s H-2A workers chose not to complete the contract period. In addition, USDA uses the case of a sheepherder who “had not received regular wages when due” to refute our assessment of the difficulty in enforcing the three-quarter guarantee provision. However, in citing this case, USDA stated that “ subsequently worked for a series of H-2A employers and it may be that his total employment did not meet the 3/4 guarantee. The unresolved dispute is which of the series of employers owe a 3/4 guarantee and how is the liability to be apportioned between them.” The situation USDA describes is one of the difficulties inherent in enforcing the three-quarter guarantee, raising concerns about the application of the provision to H-2A workers who are brought into the country through associations that may move the worker from one employer to another during the course of the contract. In response to anecdotal information USDA included in its response to our draft report, we conducted limited follow-up interviews, including interviewing the employer, employer’s agent, and Labor officials involved in an H-2A application from Arkansas. While the individuals interviewed disagreed on some of the facts of the case, the interviews served to confirm our concern about the extent to which H-2A contract periods were accurately estimated. Specifically, the grower told us that the workers were only needed through the middle of August while the job order and H-2A application identified the expected period of employment to last until December 31. Furthermore, our discussions with the ETA certification official raised concerns about requirements for positive recruitment under emergency applications. USDA officials agreed that the 60-day time requirement for filing H-2A labor certification applications is problematic in that it is difficult for employers to precisely estimate their date of need 60 days in advance and that it may limit the success of recruiting domestic workers who are currently employed. USDA also agreed with our conclusion that INS’ role in the petition process is unnecessarily burdensome and supported our recommendation that the H-2A application process be reduced from 60 to 45 days. However, USDA objected to our recommendation to amend the Immigration and Nationality Act so that, as long as the authority for approval of H-2A visa petitions remains with Labor, Labor would be required to complete all applications at least 7 days before the date of need, rather than 20 days. We recommend that the total H-2A application process be reduced to 45 days in combination with reducing the certification requirement to 7 days to maintain the period of time Labor has to certify the labor shortage. This maintains the existing period of time available for recruitment of domestic workers. We disagree with USDA’s statement that “the certification date has no bearing on the opportunities for domestic workers because positive recruitment is required both before and after certification.” Under current regulations, employers must provide evidence that they have complied with the positive recruitment requirements set forth in Labor’s acceptance of the H-2A application. Labor reduces the number of H-2A openings certified on the basis of information the employer provides on the results of positive recruitment efforts, adjusted for estimates of the number of workers who will not report for work. Positive recruitment efforts after the certification have no bearing on the number of H-2A openings approved. USDA expressed concern that the remaining 7 days do not allow enough time for H-2A workers to obtain visas and travel to the worksite. Our recommendation does not reduce the time allowed for this step in the process. Under current law, workers cannot obtain visas until employers have processed visa petitions through INS within the 20 days allowed. As we reported, estimates of the time required to process petitions through INS can reduce the remaining time to fewer than 7 days. | Pursuant to a legislative requirement, GAO reviewed various aspects of the H-2A nonimmigrant guestworker program, focusing on the: (1) likelihood of a widespread agricultural labor shortage and its impact on the need for nonimmigrant guestworkers; and (2) H-2A program's ability to meet the needs of agricultural workers, both at present and if a significant number of nonimmigrant guestworkers is needed in the future. GAO noted that: (1) a sudden widespread farm labor shortage requiring the importation of large numbers of foreign workers is unlikely to occur in the near future; (2) there appears to be no national agricultural labor shortage, but localized labor shortages may exist for specific crops or geographical areas; (3) although many farmworkers--an estimated 600,000--are not legally authorized to work in the United States, the Immigration and Naturalization Service (INS) does not expect its enforcement activities to significantly reduce the aggregate supply of farmworkers; (4) INS expects limited impact from its enforcement activities because of the prevalence of fraudulently documented farmworkers and INS' competing enforcement priorities; (5) in fiscal year (FY) 1996, less than 5 percent of the 4,600 INS worksite enforcement efforts were directed at agricultural workplaces; (6) INS conducts enforcement efforts largely in response to complaints, and it receives few complaints about agricultural employers; (7) INS officials in both field and headquarters positions stated unanimously that operational impediments prevented the agency from significantly reducing the number of unauthorized farmworkers; (8) the prevalence of unauthorized and fraudulently documented farmworkers does, however, leave individual growers vulnerable to sudden labor shortages if INS does target its enforcement efforts on their establishments; (9) although few agricultural employers seek workers through the H-2A program, those that do are generally successful in obtaining foreign agricultural workers on both a regular and an emergency basis; (10) during FY 1996 and the first 9 months of FY 1997, the Department of Labor approved 99 percent of all H-2A applications; (11) however, both employers and Labor officials have difficulty meeting time frames specified by law and regulation; (12) because Labor does not collect key program management information, it is unable to determine the extent and cause of missed time frames; (13) the multiple agencies and levels of government implementing the program may result in redundant oversight and confusion for both employers and workers; and (14) while INS enforcement efforts are unlikely to create a significant increase in demand for H-2A workers, changes in H-2A program operations could improve the ability of growers to obtain workers when needed--whether or not a nationwide labor shortage exists--and better protect the wages and working conditions of both domestic and foreign workers. |
Both FAA and ACI have estimated the costs of planned airport capital development. Our analysis indicates that recent funding levels would cover the costs estimated by FAA, but not all the costs estimated by ACI. Options for addressing the potential difference between funding and planned development estimates include increasing or reallocating Airport Improvement Program (AIP) grant funds and removing the current cap on passenger facility charges. The estimated costs of planned airport capital development vary depending on which projects are included in the estimates. According to FAA’s estimate, which includes only projects that are eligible for AIP grants, the total cost of airport development will be about $46 billion, or over $9 billion per year, for 2001 through 2005. FAA’s estimate is based on the agency’s National Plan of Integrated Airport Systems, which FAA published in August 2002. ACI’s estimate includes all of the projects in FAA’s estimate, plus other planned airport capital projects that may or may not be eligible for AIP grants. ACI estimates a total cost of almost $75 billion, or nearly $15 billion per year, for 2002 through 2006. Projects that are eligible for AIP grants include runways, taxiways, and noise mitigation and noise reduction efforts; projects that are not eligible for AIP funding include parking garages, hangars, and expansions of commercial space in terminals. Both FAA’s and ACI’s estimates cover projects for every type of airport. As table 1 indicates, the estimates are identical for all but the large- and medium-hub airports, which are responsible for transporting about 90 percent of the traveling public. ACI’s estimates are about twice as large as FAA’s for these airports. According to FAA’s analysis of the planned capital development for 2001 through 2005, airports will use (1) 61 percent of the $46 billion for capacity enhancement, reconstruction, and modifications to bring airports up to the agency’s design standards and (2) 39 percent to fund safety, security, environmental, and other projects. See figure 1. Neither FAA’s nor ACI’s estimate includes funding for terminal modification projects that are needed to accommodate the new explosives detection systems. ACI estimates that terminal modifications will cost about $3 billion to $5 billion over the next 5 years. From 1999 through 2001, the 3,364 airports that make up the national airport system received an average of about $12 billion per year for planned capital development. The single largest source of these funds was bonds, followed by AIP grants and passenger facility charges. (See table 2.) It is important to note that the appropriated AIP funding for fiscal year 2002 totaled $3.2 billion and that the authorized AIP funding for fiscal year 2003 is $3.4 billion. However, because data for funding from other sources were not available for these years, we used the figures from 1999 through 2001, the most recent years for which consistent data were available. The amount and type of funding vary depending on the airport’s size. For example, as shown in figure 2, the large- and medium-hub airports depend primarily on bonds, while the smaller airports rely principally on AIP grants. Passenger facility charges are a more important source of revenue for the large- and medium-hub airports because they have the majority of commercial service passengers. If the funding for airport capital development remains at about $12 billion a year over the next 5 years, it would cover all of the projects in FAA’s estimate. However, it would be about $3 billion less per year than ACI’s estimate. Figure 3 compares the average annual funding airports received from 1999 through 2001 with FAA’s and ACI’s annual planned development for 2001 through 2006. This difference is not an absolute predictor of future funding shortfalls; both funding and planned development may change in the future. However, it does provide a useful indication of where funding differences may be the greatest. The difference between past funding and planned development is proportionally greater for smaller airports than for large- and medium-hub airports. If the smaller airports were to continue to receive an average of about $2.4 billion per year, they would be able to fund about 73 percent of the estimated cost of their total planned development. In comparison, large- and medium-hub airports would be able to fund about $9.4 billion per year, or about 80 percent, of the estimated cost of their total planned development. It is important to note that while the airlines may be experiencing financial problems, most large airports have very solid credit ratings and could, if necessary, issue more debt without facing exorbitant interest rates. Figures 4 and 5 illustrate the differences between funding levels and estimated planned capital development at smaller and at large- and medium-hub airports. The primary reason that smaller airports would be able to fund 73 percent of their planned development, rather than the 52 percent reported we reported in 1998, is that they have benefited significantly from the increases in AIP grants, which is a larger source of funding for smaller airports than it is for larger airports. Of the $2.4 billion in AIP grant funds that airports received each year, on average, from 1999 through 2001, smaller airports received almost 63 percent, whereas large- and medium- hub airports received about 37 percent. Smaller airports have received an increasing share of AIP grants primarily because of statutorily required changes in the distribution of these funds. For example, in AIR-21, the Congress increased the funding for two categories that primarily or exclusively benefit small airports—the state apportionment fund and the small airport fund—and created general aviation entitlement grants, which also benefit smaller airports. Options are available to increase airport funding or to make better use of the existing funding. These options, some of which were authorized or implemented as part of AIR-21, include increasing the AIP grant funding for smaller airports, increasing passenger facility charges, and using innovative financing approaches. The various options would benefit different types of airports to varying degrees. To help address the difference between funding and planned development, AIR-21 provided that up to $150,000 a year in AIP grant funds be made available to all general aviation airports for up to 3 years for airfield capital projects such as runways, taxiways, and airfield construction and maintenance projects. In our report issued yesterday, we reported that since the program’s inception in fiscal year 2001, general aviation airports have received a total of about $325 million, which they have used primarily to help build runways, purchase navigational aids, and maintain pavements and airfield lighting. Most of the state aviation officials and general aviation airport managers we surveyed said the grants were useful in meeting their needs, and some suggested that the $150,000 grant limit be increased so that general aviation airports could undertake larger projects. However, a number of state officials cautioned that an increase in the general aviation entitlement grant could cause a decrease in the state apportionment fund, which states use to address their aviation priorities. Another option would be to increase or eliminate the cap on passenger facility charges. This option would primarily benefit larger airports, because passenger facility charges are a function of the volume of passenger traffic. However, under AIP, airports that collect passenger facility charges must forfeit a certain percentage of their AIP formula funds. These funds are subsequently divided between the small airport fund, which is to receive 87.5 percent, and the discretionary fund, which is to receive 12.5 percent. Thus, smaller airports would benefit indirectly from any increase in passenger facility charges. In our 1999 report on passenger facility charges, we estimated that a small increase in passenger facility charges would have a modest effect on passenger traffic. At that time, we estimated that each $1 increase would reduce passenger levels by about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent. Since AIR-21 raised the cap on passenger facility charges from $3.00 to $4.50, the full effect of the increase has not been realized because only 17 of the 31 large-hub airports (55 percent) and 11 of the 37 medium- hub airports (30 percent) have increased their rates to $4.50. Additionally, 3 large-hub airports and 6 medium-hub airports do not charge a passenger facility fee. The reluctance to raise passenger facility charges is likely to be the result of several factors, including the views of airlines, which are opposed to any increase in passenger facility charges because an increase would raise passenger costs and reduce passenger traffic. Nonetheless, if all airports were to increase passenger facility charges to the current ceiling, additional revenue could be generated. FAA has introduced other mechanisms to make better use of existing funding sources, the most successful of which has been letters of intent, a tool that has effectively leveraged private sources of funding. A letter of intent represents a nonbinding commitment from FAA to provide multiyear funding to an airport beyond the current AIP authorization period. Thus, the letter allows the airport to proceed with a project without waiting for a future AIP grant because the airport and investors know that allowable costs are likely to be reimbursed. A letter of intent may also enable an airport to receive a more favorable interest rate on bonds that are sold to refinance a project because the federal government has indicated its support for the project. FAA has issued 64 letters of intent with a total commitment of about $3 billion; large- and medium-hub airports account for the majority of the total. Other approaches to making better use of existing funding resources were authorized under AIR-21. Specifically, the act authorized FAA to continue its innovative finance demonstration program, which is designed to test the ability of innovative financing approaches to make more efficient use of AIP funding. Under this program, FAA enabled airports to leverage additional funds or lower development costs by (1) permitting flexible local matching on some projects, (2) purchasing commercial bond insurance, (3) paying interest costs on debt, and (4) paying principal and interest debt service on terminal development costs incurred before the enactment of AIR-21. FAA has provided about $31 million for smaller airports to test these innovative uses of AIP funding. According to FAA officials, the results of the program have been mixed. The most popular option for airports has been flexible matching, which has resulted in several creative loan arrangements. Ensuring the efficient operation of the national airspace system is an important reauthorization issue that is vital to improving mobility and supporting economic growth. Despite the overall decline in air traffic since September 11, demand is gradually increasing, and at some airports, especially those in the Midwest, recovery is progressing more rapidly. To avoid the congestion and delays that plagued air traffic before September 11, FAA, airlines, and airports are continuing to pursue capacity-enhancing efforts, such as building new runways, making more efficient use of existing capacity, and better managing the acquisition of air traffic control technology. Figure 6 illustrates congestion at a major airport. In December 2002, FAA published the most recent version of its Operational Evolution Plan, a 10-year plan to increase the capacity and efficiency of the national airspace system, primarily by focusing on building runways. If successfully carried out, the plan would substantially increase capacity and improve efficiency. However, FAA faces several challenges in implementing the plan. First, the success of the plan depends on adequate funding and on the consensus of FAA’s aviation industry partners. Yet according to the most recent version of the plan, the timing and implementation of some activities may be in jeopardy because of the current economic situation and the uncertain viability of some industry participants. For example, the plan calls for the airline industry to invest $11 billion in new equipment for aircraft. FAA is currently reviewing the ability of the airlines to make this investment. Second, as noted, the plan relies heavily on runway development to increase capacity, but the most recent version reports mixed results in building new runways. While the plan indicates that one new runway will be built, it points out that another runway has been cancelled and the construction of six additional runways has been delayed because of local situations. Furthermore, building new runways would be difficult at several of the most delay-prone airports, such as La Guardia, Newark, Kennedy, Los Angeles, and San Francisco, because these airports either are out of room or would face intense local opposition. Persistent delays at key airports such as these will continue to create “choke points” that slow air traffic throughout the system. In addition, AIR-21 requires the phaseout of slot restrictions at Chicago O’Hare by July 1, 2002, and at LaGuardia and John F. Kennedy airports by 2007. Because slot restrictions limit the number of gates at an airport, their phaseout could lead to an increase in air traffic. According to the Operational Evolution Plan, FAA is undertaking a number of efforts to address problems at choke points, such as rerouting aircraft and adding technology. Our work has found that airports face many of the same challenges and delays in building new runways that FAA reported in the Operational Evolution Plan. In January 2003, we reported that airports spent about 10 years planning and building recently completed runways and expect to spend about 14 years on runways that are not yet completed. Several external factors affect how much time is spent planning and building runways, and several airports with unfinished runway projects identified significant challenges that had delayed their projects’ completions. While many airports believed that completing the environmental review phase was a significant challenge, they also described other phases of the runway development process as equally challenging. For example, airport officials in Los Angeles and Boston said that they faced significant challenges in reaching agreement with community interest groups during the planning phase. In Boston, differences with these groups have led to lengthy litigation. Other airports said that mitigating the potential impact of aircraft noise on the surrounding community continues to be a challenge because of heightened community concerns about noise. Although there may be no single solution to all of the issues involved in planning and building runways, the federal government and airport authorities have taken some actions. For example, a recent executive order is designed to streamline the environmental review of transportation infrastructure projects. In addition, FAA has taken several actions to increase communication and coordination and streamline the planning and environmental review of runway projects. Some airports said these actions could help airports resolve challenges more quickly; however, we believe it is too early to assess the impact of these actions on the runway development process. Our work has shown that airports have also tried to address the challenges in building runways by, for example, involving local stakeholders, such as community groups, at the beginning of the process and reaching early agreement on how to mitigate the adverse effects of runway projects. Airports said these efforts helped to facilitate the completion of their projects and could be useful for other airports considering runway projects. However, the variety of situations that airports described and the different levels of challenges they face make it difficult to generalize from one airport’s experience to another’s. Recognizing that building new runways is not always a practicable way to increase capacity at some airports, we identified three alternatives to building runways: Add capacity by using nearby airports that have available capacity or by building new airports. Find ways to manage and distribute demand within the system’s existing capacity by, for example, limiting the number of takeoffs and landings during peak periods or limiting the ability of aircraft, other than those operated by airlines, to use especially crowded or sensitive airports (under current law, all aircraft have equal access to even the largest airports). Develop other modes of intercity travel, such as high-speed rail, where metropolitan areas are relatively close, to form an integrated, intermodal transportation network. These alternatives would require extensive change, could conflict with the interests of one or more key stakeholder groups, and would often be costly. Nevertheless, they may be essential to accommodate expected increases in the demand for efficient transportation services or to address security and other concerns prompted by the terrorist attacks. To facilitate their implementation, we believe that the federal government will need to assume a central role. Accordingly, we have recommended that the Department of Transportation (DOT) begin a more extensive evaluation of initiatives to address flight delays, including intermodal solutions and a dialogue with the aviation community and other transportation stakeholders as a basis for developing a comprehensive blueprint for addressing the nation’s long-term transportation needs. DOT has recognized the need for more and better long-range planning on the potential use of such measures, but its efforts are in the beginning stages. The current hiatus in air traffic growth creates an opportunity for such planning to take place. To increase the safety, capacity, and efficiency of the national airspace system, FAA undertook a major effort in 1981 to modernize and replace aging air traffic control equipment. This effort has been plagued by cost overruns, schedule delays, and performance shortfalls. In 1995, we designated it as high risk, and we continue to designate it as such. Inefficiencies in the air traffic control system contributed to some of the delays in the system that peaked in 2000. At that time, FAA estimated that modernizing equipment along with other changes, such as redesigning the airspace, would increase capacity by 5 to 15 percent. Originally, FAA planned to complete its modernization in 10 years at a cost of $12 billion. Now, two decades and $35 billion later, FAA estimates that it will need nearly $16 billion more through fiscal year 2007 to complete key projects, including the Standard Terminal Automation Replacement System (STARS), the Wide Area Augmentation System (WAAS), the Next- Generation Air/Ground Communications (NEXCOM), the Local Area Augmentation System (LAAS), the Integrated Terminal Weather System (ITWS), and free flight initiatives, which FAA’s Operational Evolution Plan recognizes as a new way of managing air traffic that is expected to help lower costs for the airlines and help the aviation system accommodate more flights. While FAA is making progress in managing the air traffic control modernization, key programs continue to experience cost, schedule, and performance problems. As a result, resources have not been spent cost- effectively and improvements in capacity and efficiency have been delayed. Table 3 shows the status of three major programs that we have been monitoring. DOT’s Inspector General has noted similar problems with the Local Area Augmentation System—a new precision approach and landing system that is expected to boost airport arrival rates under all weather conditions— and the Integrated Terminal Weather System—which provides enhanced weather information. FAA planned to begin operating the Local Area Augmentation System in 2004, but it will not meet that milestone because of additional development work, changing requirements, and unresolved safety certification issues. In addition, the estimated production costs for the Integrated Terminal Weather System, originally expected to be about $286 million, have tripled. Our work has also identified free flight implementation issues. Free flight is a new approach to air traffic management that replaces highly structured rules and procedures with a more flexible system based on collaboration between air traffic controllers and pilots. The use of new free flight technologies and procedures is expected to increase the efficiency and capacity of the airspace system and help to avoid gridlock by improving operations in various segments of flight. In 2001, we made several recommendations to improve the implementation of free flight, including improving training for air traffic controllers and establishing detailed tracking of costs, schedules, and benefits. FAA has begun to address our recommendations. However, several outstanding issues remain. For example, the airlines are not likely to voluntarily equip their fleets with new technologies to support free flight until their business improves. Since 1995, we have made over 30 recommendations to address the root causes of FAA’s modernization problems. Although FAA has made progress in addressing these root causes, more remains to be done, including the following: Improve immature software capabilities. FAA has developed an integrated framework for improving its software acquisition, software development, and systems engineering processes. In addition, FAA has continued to increase the number of system development projects that use this integrated framework. However, FAA still does not require all systems to achieve a minimum level of progress within the framework before being funded. Improve cost-estimating and cost-accounting practices. FAA has developed a standard work breakdown structure and established an historical database for tracking systems’ estimated costs and other information. Furthermore, FAA has made progress in implementing its cost-accounting system. However, the agency has not yet fully instituted rigorous cost-estimating practices—that is, FAA is not yet incorporating actual costs from related system development efforts in its processes for estimating the costs of new projects. Most recently, we reported that the cost estimates for the Standard Terminal Automation Replacement System are unreliable because FAA did not follow its own acquisition guidance. Change organizational culture. FAA issued an organizational culture framework in 1997 and is working to implement it. However, in 2000, the DOT Inspector General followed up on problems that we first identified in 1996 and reported that FAA’s culture remains a barrier to successful acquisition project management and that integrated teams, a key mechanism to deliver more cost-effective and timely products, are not working well because FAA’s culture continues to operate in vertical “stovepipes,” which conflict with the horizontal structure of team operations. Our 2000 report on the Wide Area Augmentation System also found that the integrated teams were not working as intended. We found that competing priorities between two key organizations that are part of the system’s integrated team negated the effectiveness of the team’s approach for meeting FAA’s goals for the system. As FAA moves forward with modernization in the current economic climate, it will be important for the agency to ensure that it is spending its resources on the projects that will provide the most return. This may require reprioritizing projects in the agency’s investment portfolio, cooperating more closely with private industry to leverage federal dollars and share the risk of investments, and seeking other opportunities to reduce costs and operate more efficiently. Such activities would be under the purview of the Air Traffic Services Subcommittee and the chief operating officer, a position created by AIR-21 to oversee the air traffic control system and FAA’s modernization program. However, FAA has not yet hired a chief operating officer to direct these efforts. As problems with the air traffic control modernization program mounted in the early 1990s, FAA attributed the delays in implementing air traffic control projects, at least in part, to burdensome governmentwide human capital rules and federal acquisition regulations that impeded its ability to hire, train, and deploy personnel and to acquire equipment and systems. In response to these claims, the Congress exempted FAA from many federal laws governing human capital and acquisitions, and the agency began implementing human capital and procurement reforms in 1996. As we reported last week, FAA has implemented the majority of its human capital reform initiatives, but it has not yet completed this effort. (Fig. 7 shows the status of several key initiatives.) For example, it has not implemented a new compensation system for about 20 percent of its 50,000 employees—those staff whose unions have not reached agreements with FAA. Among the factors affecting FAA’s progress in implementing this initiative were the wide range of skills represented in FAA’s workforce and the multiple unions representing FAA employees. FAA has not developed data to assess the effects of its human capital reforms. For example, it has not systematically surveyed managers and employees or analyzed their views on the new compensation system. Although FAA human capital officials cited positive effects of the system, nearly two-thirds (110 out of 176) of the managers and employees we interviewed disagreed or strongly disagreed that the new system is fair to all employees. The lack of data on the effects of its human capital reforms is an indication that FAA has not fully incorporated elements that are important to effective human capital management into its overall reform effort. These elements include data collection and analysis, performance goals and measures, and links between reform goals and program goals. Evaluations of FAA’s human capital reforms have cited these shortcomings, but FAA has not developed specific steps and time frames for building the missing elements into its human capital management and for using these elements to evaluate the effects of its initiatives, make strategic improvements, and hold the agency’s leadership accountable. Addressing these weaknesses and developing a more strategic approach to its human capital reforms is particularly important as FAA faces the likelihood of hiring thousands of air traffic controllers in the next decade to replace retiring controllers. While the exact number and timing of the controllers’ departures is impossible to determine, FAA’s and our analyses show that the attrition rate will grow substantially in the near and long term as thousands of controllers hired over a 3- to 4- year period in the 1980s become eligible to retire. In June 2002, we reported that FAA’s strategy for replacing controllers was generally to hire new controllers only when current, experienced controllers leave—an approach that makes it challenging to ensure that well-qualified new controllers are available when needed. For example, we found that FAA’s hiring process did not adequately take into account the time needed to fully train replacements, which could take up to 5 years; there was uncertainty about agency’s tools for screening and testing the aptitude of applicants; and the agency had not addressed the resources that may be needed to train these replacements. We recommended, among other things, the development of a comprehensive workforce strategy to address FAA’s impending controller needs. While FAA has made some changes in this area since our report appeared, it remains to be seen whether the agency’s actions will be sufficient to ensure that qualified new controllers are available when needed. Figure 8 shows an air traffic controller monitoring and handling air traffic. As part of its procurement reforms, FAA introduced an acquisition management system to reduce the time and cost to deploy new products and services. In 1999, we found that while this was a good first step in establishing a structured investment management approach for selecting and controlling the agency’s investments, the system had weaknesses in its selection, control, and evaluation phases that impeded FAA’s ability to manage its investments effectively and make sound decisions about continuing, modifying, or canceling projects. We concluded that correcting these weaknesses would increase the likelihood that FAA’s projects would meet established cost and schedule objectives and contribute to measurable improvements in the agency’s mission performance, and we made several recommendations designed to improve the agency’s selection, control, and evaluation of its information technology investments. Recently, we found that FAA has improved its investment management processes, but that more remains to be done. For example, FAA is now overseeing investment risks and capturing key information from the investment selection process in a management information system. FAA has also developed guidance for validating costs, benefits, and risks, and expects to finalize this guidance by early 2003. However, FAA has not yet implemented processes for evaluating projects after implementation in order to identify lessons learned and improve the investment management process. Because its procurement reform effort is not complete, major projects continue to face challenges that could affect their costs, schedule, and performance. Safety has always been and continues to be FAA’s highest priority. FAA has taken a number of important steps to improve aviation safety; however, planning and implementation could be more effective in some cases. Reducing fatal aviation accidents is key to improving aviation safety. FAA’s centerpiece for reaching this goal is Safer Skies, an initiative that dates back to 1998, when FAA and aviation industry representatives worked together to identify the major causes of fatal accidents and to design and implement preventive actions. Safer Skies is intended to reduce the fatal accident rate for commercial aviation by 80 percent and to reduce the number of fatal accidents for general aviation to 350 by 2007. Because many preventive actions have not yet been fully implemented, it may be too early to assess their effectiveness. Achieving the initiative’s goals will require FAA to systematically implement these preventive actions and to maintain good data to monitor their progress and evaluate their effectiveness. As of last week, 44 preventive actions had been undertaken—of which 16 are completed and 28 are under way, according to FAA. Improving the effectiveness of FAA’s inspections of airline operations is key to improving aviation safety. The FAA Administrator has noted that perhaps the greatest support the agency can provide to the industry is a robust safety oversight role that will not waver in difficult times. FAA’s new inspection program, the Air Transportation Oversight System, is central to this oversight role. The program aims to ensure not only that airlines comply with FAA’s safety requirements but also that they have operating systems to control risks and prevent accidents. We found that FAA had not completed many critical steps, such as developing guidance and creating usable databases to capture information, before implementing the new inspection system in 1998. As a result, the agency’s ability to conduct effective inspections remains limited. FAA has begun to address some of these problems. However, according to a 2002 review by the DOT Inspector General, many of the problems persist, and the program’s implementation remains inconsistent because FAA has not established strong oversight and accountability procedures. These problems limit FAA’s ability to conduct more systematic, structured inspections; analyze the resulting data to identify safety trends; and target its resources to the greatest aviation safety risks. Finally, the Congress has endeavored to keep unsafe pilots out of the cockpits of commercial aircraft by requiring that carriers perform preemployment checks on pilot applicants. We found that carriers have increasingly requested the required records since the Pilot Records Improvement Act took effect in 1997. In 2000, nearly half of the nation’s large commercial airlines reported deciding not to hire pilots because of this information. However, our data analyses and surveys of carriers showed that a few carriers did not request all required records. In a few cases, hiring carriers reported never receiving the records. Delays in providing the records can be costly for both carriers and pilots because the carrier is not allowed to use the pilot to fly passengers or cargo until the records have been received. In addition, because FAA did not update its guidance when the law was amended, carriers and pilots lack awareness of some provisions, and FAA inspectors are not prepared to review compliance. In response to our recommendations, FAA has updated its guidance and is taking additional steps to better inform carriers, pilots, and inspectors of the law’s requirements. In conclusion, Mr. Chairman, the aviation industry and the national economy are still struggling to recover their health. Analysts nonetheless expect the demand for air travel to rebound, and the nation’s aviation system must be ready to accommodate the projected growth safely and securely. Sustaining recent funding levels for planned capital development should allow the majority of airport capital improvements to move forward, but it will not address the costly terminal modifications needed to accommodate explosives detection systems. Options such as additional federal grant funding or increases in passenger facility charges could make more funding available for airport improvements; however, competition for federal budget dollars and concerns about the impact of higher charges on airline ticket sales may limit the practicality of these options. Enhancing the capacity and efficiency of the national airspace system through runway development and air traffic modernization is critical to preparing for the projected growth in demand for air travel. Today, we have a window of opportunity to prepare for this growth without the pressures of congestion and flight delays. Yet we also face public and private constraints on spending that require us to accomplish these improvements as efficiently as possible. Setting priorities among projects, identifying opportunities for streamlining the runway development process, and fully implementing human capital and procurement reforms should help to ensure efficiency. Finally, moving forward with aviation safety initiatives is essential to restore and maintain the public’s confidence in air travel. To determine how much planned development would cost over the next 5 years, we obtained planned development data from FAA and ACI. ACI provided its estimate to us in January 2003, and we are still analyzing the data on which the estimate is based. To determine the sources of airport funding, we obtained capital funding data from FAA, the National Association of State Aviation Officials, Thomson Financial, and a survey we conducted of 400 general aviation and reliever airports. We obtained funding data from 1999 through 2001, because they were the most recent years for which consistent data were available. We screened the planned development and funding data for accuracy and compared funding streams across databases where possible. We also clarified ambiguous development or funding source information directly with airports. We did not, however, audit how the databases were compiled, except for our own survey. However, we have not finished analyzing our survey data, and the results presented in this testimony are still preliminary. We performed our work from May 2002 through February 2003 in accordance with generally accepted government auditing standards. This concludes my statement. I would be pleased to answer any questions you or other members of the Committee might have. For further information on this testimony, please contact Gerald Dillingham at (202) 512-2834. Individuals making key contributions to this testimony include Jon Altshul, Bonnie Beckett, Tammy Conquest, Howard Cott, Elizabeth Eisenstadt, James Geibel, Charles D. Ireland, Edward Laughlin, David Lehrer, Maren McAvoy, Matthew Sakrekoff, John W. Shumann, Teresa Spisak, Richard Swayze, Larry Thomas, and Alwynne Wilbur. Aviation Finance: Implementation of General Aviation Entitlement Grants. GAO-03-347. Washington, D.C.: February 11, 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. Aviation Infrastructure: Challenges Related to Building Runways and Actions to Address Them. GAO-03-164. Washington, D.C.: January 30, 2003. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 2003. Air Traffic Control: Impact of Revised Personnel Relocation Policies Is Uncertain. GAO-03-141. Washington, D.C.: October 31, 2002. Airport Finance: Using Airport Grant Funds for Security Projects Has Affected Some Development Projects. GAO-03-27. Washington, D.C.: October 15, 2002. National Airspace System: Status of FAA’s Standard Terminal Automation Replacement System. GAO-02-1071. Washington, D.C.: September 17, 2002. Options to Enhance the Long-term Viability of the Essential Air Service Program. GAO-02-997R. Washington, D.C.: August 30, 2002. Aviation Safety: Better Guidance and Training Needed on Providing Files on Pilots’ Background Information. GAO-02-722. Washington, D.C.: August 30, 2002. Air Traffic Control: FAA Needs to Better Prepare for Impending Wave of Controller Attrition. GAO-02-591. Washington, D.C.: June 14, 2002. Aviation Finance: Distribution of Airport Grant Funds Complied with Statutory Requirements. GAO-02-283. Washington, D.C.: April 30, 2002. Department of Transportation, Transportation Security Administration: Aviation Security Infrastructure Fees. GAO-02-484R. Washington, D.C.: March 11, 2002. Applying Agreed-Upon Procedures: Airport and Airway Trust Fund Excise Taxes. GAO-02-380R. Washington, D.C.: February 15, 2002. National Airspace System: Long-Term Capacity Planning Needed Despite Recent Reduction in Flight Delays. GAO-02-185. Washington, D.C.: December 14, 2001. Air Traffic Control: FAA Enhanced the Controller-in-Charge Program, but More Comprehensive Evaluation Is Needed. GAO-02-55. Washington, D.C.: October 31, 2001. National Airspace System: Free Flight Tools Show Promise, but Implementation Challenges Remain. GAO-01-932. Washington, D.C.: August 31, 2001. Air Traffic Control: Role of FAA’s Modernization Program in Reducing Delays and Congestion. GAO-01-725T. Washington, D.C.: May 10, 2001. Aviation Safety: Safer Skies Initiative Has Taken Initial Steps to Reduce Accident Rates by 2007. GAO/RCED-00-111. Washington, D.C.: June 30, 2000. 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. National Airspace System: Persistent Problems in FAA’s New Navigation System Highlight Need for Periodic Reevaluation. GAO/RCED/AIMD-00-130. Washington, D.C.: June 12, 2000. Federal Aviation Administration: Challenges in Modernizing the Agency. GAO/T-RCED/AIMD-00-87. Washington, D.C.: February 3, 2000. Air Traffic Control: Status of FAA’s Implementation of the Display System Replacement Project. GAO/T-RCED-00-19. Washington, D.C.: October 11, 1999. | Much has changed since the Congress enacted the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21) 3 years ago--the downturn in the nation's economy and the terrorist attacks of September 11, 2001, have taken a heavy toll on aviation. Competition for federal funding has also grown. The reauthorization of AIR-21 provides an opportunity for the Congress and the Federal Aviation Administration (FAA) to focus on several challenges to improving the national airspace system. These challenges include (1) funding planned airport capital development, (2) increasing capacity and efficiency, (3) implementing human capital and procurement reforms, and (4) ensuring aviation safety. This testimony is based on ongoing and published GAO work. The information on funding and development, obtained from FAA and the Airport Council International (ACI), a key organization representing the airport industry, is preliminary and therefore subject to change. Funding planned airport development: Estimates vary as to the annual cost of planned airport capital development over the next 5 years, from FAA's estimate of about $9 billion to the airport industry's estimate of about $15 billion. If airports continue to receive about $12 billion a year for planned capital development--the average for 1999 through 2001--they would be able to fund all of the projects included in FAA's estimate, but would fall about $3 billion short of the industry's estimate. Increasing capacity and efficiency: Recently, airports have taken about 10 years to develop runways, and ongoing runway projects are expected to take even longer. The federal government and airports have taken actions to expedite runway development, but it is still too early to assess the impact of these actions. FAA's management of costly air traffic control acquisitions has improved, but cost, schedule, and performance problems remain. Implementing human capital and procurement reforms: FAA is making progress in implementing human capital and procurement reforms, but it has not fully implemented a new compensation system, in part because it has to negotiate with multiple unions, and it is not yet systematically evaluating the results of reforms in either area. Ensuring aviation safety: The Safer Skies program, which focuses on identifying and correcting the causes of aviation accidents, and FAA's redesigned program to inspect airline operations are two important aviation safety initiatives. While both programs have made good starts, some challenges remain. The Safer Skies program, which began in 1998, is not fully implemented, and the inspection system has encountered startup problems with inspector training and guidance. |
Mass transit includes four main components––heavy rail, commuter rail, light rail, and bus. Heavy rail systems—subway systems like New York City’s transit system and Washington, D.C.’s metro—typically operate on fixed rail lines within a metropolitan area and have the capacity for a heavy volume of traffic. Commuter rail systems typically operate on railroad tracks and provide regional service (e.g., between a central city and adjacent suburbs). Light rail systems are typically characterized by lightweight passenger rail cars that operate on track that is not separated from vehicular traffic for much of the way. Large bus transit service is characterized by vehicles powered by diesel, gasoline, battery, or alternative fuel engines contained within the vehicle. According to the American Public Transportation Association (APTA), 10.7 billion trips were taken on mass transportation in 2008 —the highest number of trips taken on U.S. mass transportation in 52 years. According to TSA, transit officials, and transit experts, certain characteristics of mass transit systems, such as multiple access points and limited barriers to access, make them inherently vulnerable to terrorist attack and therefore difficult to secure. High ridership, expensive infrastructure, economic importance, and location in large metropolitan areas or tourist destinations also make them attractive targets for terrorists because of the potential for mass casualties and economic damage. Because of the expense of operating and securing a transit system, the costs are often shared among several entities. According to the Department of Transportation’s (DOT) Federal Transit Administration (FTA), almost all U.S. mass transit systems receive funds from public and private sector sources to maintain a public service that is provided and managed locally, since revenues from customer fares, on average, account for 40 percent of system operating costs. For example, FTA provides financial assistance to public transportation through its Large Urban Cities Grant Program which provides funding to urban areas through a formula- based allocation. Owners and operators of public transit systems are also responsible for ensuring the security of their systems. According to a 2004 APTA survey, transit agencies had more than $6 billion in transit security investment needs. To help defray the costs of securing U.S. transit systems, DHS has provided transit security grant funding to transit agencies since 2003. Beginning in fiscal year 2005, the DHS appropriations acts have provided annual appropriations for mass transit security, including the TSGP, which focused specifically on mass transit security. Table 1 outlines the TSGP allocations for fiscal year 2006 through fiscal year 2009. Both DHS appropriations acts and the Implementing Recommendations of the 9/11 Commission Act (9/11 Commission Act) outline requirements for security funding for mass transit and provide timelines for the issuance of grant program guidance and decisions. In addition to appropriating funding to the TSGP, DHS appropriations acts have provided deadlines for the issuance of grant guidance, the application period, and when DHS must act on applications. The 9/11 Commission Act required the Secretary of Homeland Security to establish a program for making grants to eligible public transportation agencies for security improvements, and DHS fulfilled this requirement through the TSGP. Although the TSGP considered risk prior to the passage of the 9/11 Commission Act, the act created additional requirements for the TSGP, including that recipients of public transportation funds be selected based on risk and that projects address items identified in security assessments or plans. It also outlined permissible use of funds and placed a limitation on the percentage of funds used for operational costs. Responsibility for administering mass transit security funding has changed numerous times within DHS since 2003. DHS’s Office of Domestic Preparedness administered the Urban Area Security Initiative (UASI) grant program from fiscal year 2003 to fiscal year 2005. During fiscal year 2006, the administration of the TSGP was transferred to TSA and the Office of Grants and Training within DHS’s Preparedness Directorate. TSA became the lead federal agency for determining the security priorities eligible for funding and developing the criteria for evaluating applications, while DHS’s Office of Grants and Training became responsible for grant management. The Post-Katrina Emergency Management Reform Act of 2007 transferred most offices within the Preparedness Directorate into FEMA; however, policy responsibilities, such as setting grant priorities and funding decisions, remained with TSA. As a result, during fiscal year 2007, the Office of Grants and Training was transferred to FEMA. In fiscal year 2008, FEMA’s Grant Programs Directorate became responsible for administering TSGP grants. Risk management has been endorsed by Congress, the President, the Secretary of Homeland Security, GAO, and others as a way to direct finite resources to areas that are most at risk of terrorist attack. Risk management is a continuous process that includes the assessment of threats, vulnerabilities, and consequences to determine what actions should be taken to reduce or eliminate one or more of these elements of risk. DHS released the NIPP, which created, in accordance with Homeland Security Presidential Directive 7 (HSPD-7), a risk-based framework. The NIPP, issued in 2006 and updated in 2009, sets forth guidance for agencies with critical infrastructure protection responsibilities, such as TSA, for the prioritization of protection initiatives and investments across sectors to ensure that government and private sector resources are applied where they offer the most benefit for mitigating risk. TSA created six transit security fundamentals that it states are the foundations for a successful security program, and the agency uses these fundamentals to prioritize TSGP projects. For the fiscal year 2008 and 2009 grant cycles, TSA established a systematic process to rank these priorities in awarding grant funds. To do this, TSA established project effectiveness groupings—groups of project types that TSA ranked in order of priority based on their ability to reduce risk—into which transit agency projects were placed. For example, in fiscal year 2008, there were four possible groupings (project types) for agency projects. The highest priority for that year focused on projects aimed at developing security plans and providing employee security training. See appendix II for the project effectiveness groupings for fiscal year 2008. DHS uses a risk model to help determine the transit agencies eligible for TSGP funds. Both TSA and FEMA share responsibility for the TSGP risk model, with TSA providing most of the data inputs to the model that is managed by FEMA. The TSGP’s risk methodology is similar to the methodology used to determine eligibility for other DHS state and local grant programs. For example, the methodology for determining basic eligibility for the TSGP is derived from the UASI grant program—both models identify and use the same urban areas and both the UASI and the TSGP risk models calculate risk scores for each urban area. See appendix III for additional details on the TSGP model. There are three stages of the TSGP grant cycle; allocation, award, and distribution, as discussed in figure 1. TSGP grant guidance is created annually by TSA and FEMA and provides an overview of the TSGP, the application materials needed to apply for funding under the program, and DHS management requirements. Tier II gencie compete for nd. Agencie’ project re reviewed y NRP nd Exective Commitee nd rnked based on rind other fctor. TSA nd T I gennd. DHS nno llon, bu not flied. When trit gencielfill ll grnt reqirement nd FEMA complete review, fnd re released. their project when the rd nnonced. Tier I gencieve 90 d to detil how they will implement the project. For fiscal year 2007, DHS had 75 days to release the grant guidance once the appropriations act had passed, and for fiscal year 2008, DHS had 30 days to release the grant guidance once the appropriations act had passed. Beginning in fiscal year 2009, Tier I transit agencies submit specific project information for award decisions prior to DHS award announcements. Using the TSGP risk analysis model, DHS develops risk scores, which are used to identify the highest-risk regions and the transit agencies within those regions that are eligible for funding. These regions are then placed into one of two tiers based on their risk scores to determine initial funding allocations; however, these allocations may change when DHS begins reviewing projects. Tier I: DHS determines the regions at the highest risk of a terrorist attack and selects transit agencies within those regions eligible to receive Tier I funding. Each Tier I region is given a target allocation based on its share of risk (as determined by the model). Each region, through discussions among transit agencies and TSA officials in the regional transit security working groups (RTSWG), decides which projects to fund on a collaborative basis. Each Tier I region has a RTSWG that includes eligible transit agencies, law enforcement agencies, and Amtrak (if stations exist in the region). Tier II: Lower-risk regions and certain transit agencies in those regions make up the Tier II group. The Tier II allocation is a set amount of funding allocated for all Tier II regions combined. Transit agencies in this tier apply for funding on a competitive basis—whereby their projects are evaluated against all other Tier II agency projects proposals, instead of funding decisions being determined collaboratively, as with the Tier I RTSWGs. After DHS announces target allocation amounts through the release of the grant guidance, Tier I and Tier II transit agencies have 45 days from the release of the guidance to apply for funding. During the award process, DHS evaluates transit agencies’ projects and determines which projects to fund, although the evaluation process for Tier I and Tier II agencies is different. Once the application period closes for Tier I and II, the DHS appropriations act states that DHS has 60 days to act upon the application, which DHS has defined as the length of time taken to review the applications, make the award decisions, and announce final allocations. In fiscal year 2008, as shown in figure 2, DHS created a three-part scoring methodology for evaluating projects that included an oject quality agency’s risk score, its project effectiveness grouping, and a project quality score, that included a regional collaboration factor. score, that included a regional collaboration factor. In fiscal year 2009, DHS used a similar scoring methodology, although this methodology was applied differently to Tier I and Tier II agencies, as described below. DHS has encouraged all TSGP applications to have a regional coordination component that demonstrates an investment strategy based on a regional security strategy. Many Tier I and Tier II regions have more than one transit agency operating, so coordination of federal TSGP investments is encouraged and is reflected in the regional collaboration component of the overall project score. Tier I: In fiscal year 2006, each region’s eligible transit agencies competed for the target allocation. Under this process, transit agencies’ applications were reviewed by an NRP consisting of subject matter experts from DHS, TSA, and FTA. An executive committee, consisting of senior officials from TSA, reviewed the NRP recommendations, the Secretary of Homeland Security made the final selections for funding, and awards were announced. In fiscal year 2007, DHS introduced a new process to award grants to Tier I agencies that involved direct negotiations between TSA and each RTSWG to identify the grant-funded projects that TSA would approve. Under this approach—known as the cooperative agreement process—award announcements were made, and transit agencies had 90 days to submit to DHS their investment justifications which provided additional details on how the transit agency would implement the awarded security projects. TSA collaborated with the transit agencies to finalize the investment justifications. Once these steps were completed, TSA officially approved the projects. In fiscal year 2008, TSA applied a more systematic approach for determining project funding. For Tier I regions, project scores were determined by weighing various factors, including the project effectiveness grouping, the transit agencies’ risk scores, and a regional collaboration factor. According to TSA officials, project quality was not as important a factor for Tier I agencies because TSA participated in the project development process through the RTSWG, which they believed helped ensure quality. DHS made award announcements to Tier I agencies based on the project concepts discussed in the RTSWG; however, as in the fiscal year 2007 process, final project approval was not completed at that time. DHS officials plan to use the same procedures in fiscal year 2009, except that they expect investment justifications to be completed prior to the award announcements and final project approvals are to be completed at the time of award. Tier II: DHS has used a competitive approach for awarding funds to Tier II agencies. From fiscal year 2006 to fiscal year 2008, projects submitted were reviewed and ranked by an NRP. After reviewing the transit agency risk scores and submitted projects, the panel developed a recommended slate of projects, including proposed funding amounts. An executive committee consisting of senior officials from TSA, DHS, and FTA then reviewed the recommendations as well as the risk scores of the transit agencies. The Secretary of Homeland Security made the final selections for funding, and then funding was announced. The evaluation criteria used by the panel have evolved from fiscal years 2006 through 2008, as shown in appendix V. Unlike Tier I agencies, Tier II agencies received their final project funding amount for each fiscal year at the time of award announcement. DHS plans to continue with this approach for Tier II agencies for fiscal year 2009. TSGP funds cannot be disbursed to transit agencies until FEMA ensures the agency’s compliance with federal grant management requirements, such as the National Environmental Policy Act. Since fiscal year 2008, TSA has approved transit agency projects (for both Tier I and II projects) and then forwarded them to FEMA’s Grant Programs Directorate (GPD) for review. GPD is responsible for ensuring that all grant projects adhere to federal grant requirements, including all environmental and historical preservation (EHP) requirements. FEMA’s Office of Environmental and Historical Preservation (OEHP) assists with the EHP reviews. GPD reviews projects identified as having limited EHP impacts, while OEHP reviews projects needing a more extensive environmental and historical review. Until FEMA is satisfied that all requirements have been met, no grant funding can be released to transit agencies to begin projects. However, once funds are awarded, transit agencies must complete the grant project within the designated performance period for the grant year. The TSGP’s performance periods have ranged from 24 to 36 months depending on the grant year and project type to be completed. FEMA has discretion to extend the performance period, if necessary. For Tier I regions with multiple states, one state administrative agency is designated for the entire region. The DHS Appropriations Act for fiscal year 2009 required funding to be provided directly to the transit agencies, removing the state administrative agency from the grant process. As a result, going forward transit agencies will be responsible for all state administrative agency duties, including submitting grant applications. DHS has established an approach for allocating and awarding TSGP funds using a risk model that incorporates the elements of risk and is intended to allocate funding to the highest-risk regions and transit agencies; however, the model could be strengthened to measure variations in vulnerability across regions. Furthermore, TSA revised its process and focus for the TSGP on numerous occasions since 2006, but transit stakeholders expressed concern about these revisions and their impact on funding flexibility. DHS uses a model to assess the risk to each transit agency region that includes the three elements of risk––threat, vulnerability, and consequence; however, the model does not measure variations in vulnerability, which limits the model’s overall ability to assess risk. As we reported in June 2008, measuring vulnerability is considered a generally accepted practice in assessing terrorism risk. However, DHS did not specifically measure vulnerability for each region and the associated transit agencies in the model. DHS reported that it did not measure region and transit agency vulnerability because it lacked data on the differences in vulnerability among transit agencies. Therefore, DHS decided to hold this variable constant in the risk formula. However, holding vulnerability constant may be problematic because, for example, a region may be highly vulnerable to one mode of attack but have a low level of vulnerability to another depending on a variety of factors, such as countermeasures already in place. TSA officials acknowledged the need to incorporate vulnerability into the risk model as a method for refining the results, but cautioned that measuring variations in vulnerability would require time and resources. As a result, officials reported that they were considering using transit agency vulnerability assessment results as a source of vulnerability information. To do this, FEMA officials acknowledged that they must be able to consistently compare assessments across agencies and regions, which may prove difficult given the variations in scope and methodology of these assessments. A FEMA official stated that the risk model is designed to incorporate other data, including vulnerability information, when it becomes available. A TSA official noted that TSA is considering looking into past vulnerability assessments and its Baseline Assessment for Security Enhancements (BASE) reviews for vulnerability information that might be used in the model. TSA officials also remarked that they consider ridership to be the major known vulnerability factor. A TSA official remarked that ridership represents the number of people exposed by an attack, which is a proxy for the openness of the system, station, or both. However, the risk model also uses ridership to measure consequence, so its link to vulnerability does not add additional information about how risk may vary across regions. Without accounting for variations in vulnerability, the effectiveness of the risk analysis model may be limited in that it may not fully consider important differences in regions and transit systems that could affect their vulnerability to attack and the risk scores may not be as precise. A more precise risk analysis could affect the allocations of funds to Tier I or Tier II regions because allocation is determined in part by the risk share. Using its TSGP risk model, DHS placed transit agencies into one of two tiers based on the risk of a terrorist attack occurring within a region, and then allocated funding to those tiers based on risk. In the fiscal year 2007 model, Tier I represented approximately 80 percent of the total risk of all regions assessed by the model, and Tier II represented the other 20 percent. In the fiscal year 2008 model, Tier I represented approximately 93 percent of the total risk to all regions assessed by the model, and Tier II represented the other 7 percent. Our analysis of the risk model and the funding allocated through the TSGP for fiscal years 2007 and 2008 showed that almost 90 percent of grant funds were allocated to the highest-risk transit agencies—that is, those agencies in Tier I. Furthermore, during fiscal years 2007 and 2008, the funding allocated to Tier I regions was based on a region’s risk share, which was determined by its share of the total risk for all Tier I regions in the model. Our analysis of the three grant cycles between fiscal year 2007 and 2008 showed that almost 90 percent of grant funds were allocated to the highest risk transit agencies—that is, those agencies in Tier I. Tier II received approximately 10 percent of the grant funds. After DHS allocated funds to Tier I regions, transit agencies worked within their respective RTSWGs in negotiating with TSA to identify which projects would be funded with the target allocation—known as the cooperative agreement process. TSA officials believe that the cooperative agreement process ensured project quality because under this approach TSA was able to work closely with transit agencies to develop security projects. Additionally, in an effort to ensure that grant money is spent on worthwhile projects, the grant guidance permits TSA to transfer funding among regions if fewer quality applications are submitted from one region and higher-priority security projects exist elsewhere. As a result, during fiscal year 2008, TSA transferred funds between Tier I regions and from Tier II to Tier I regions. Although TSA worked with each Tier I region during the fiscal year 2008 grant cycle, TSA officials reported that some regions did not submit enough projects that exceeded the minimum project score required to receive funding. As a result, one Tier I region saw a reduction in its target allocation. According to TSA officials, these reductions occurred because they did not want to fund poor quality projects just because funds were available in a particular region. As a result, in fiscal year 2008, Tier I gained an additional $13.7 million from Tier II, and $7.5 million from the Freight Rail Security Grant Program, for a total of $21.2 million. Five of the eight Tier I regions received awards above their target allocations such as the New York City region, which received $21 million more than its target allocation. The San Francisco Bay Area, which was the only Tier I region to see a reduction, received $2.8 million less than its target allocation. Although DHS allocated funding to tiers based on risk, the specific Tier II transit agency awards were not closely linked to risk. Unlike its cooperative agreement process used to award funds for Tier I agencies, DHS uses a competitive awards process for Tier II agencies and does not negotiate the approval of security projects with the Tier II agencies as it does with the Tier I agencies. Before fiscal year 2008, the executive committee considered agency risk after the NRP had scored the agency projects based on their investment justifications; however, the risk score was not part of a standard methodology or formula for determining funding. This process changed in fiscal year 2008 when TSA began using Tier II agency risk scores as one part of its three-part scoring methodology to determine project competitiveness. Because applicants compete for Tier II funds on a project-by-project basis, Tier II grant awards were not solely based on transit agency risk. Rather, other factors also determined grant funding. Specifically, our review of the NRP scores showed that project quality was a major factor in determining if an agency received grant funding. For example, a lower-risk agency with a high-quality project was more likely to receive funding than a higher risk agency with a low-quality project, based on the NRP’s assessment. TSA reported that Tier II agencies submitted projects with proposed investments totaling $37 million during fiscal year 2008, although DHS initially awarded $16.9 million of the total $36 million allocated to Tier II agencies. TSA officials reported that this occurred because many projects were ineligible because of such things as insufficient information, lack of live monitoring for closed-circuit television projects, or a focus on law enforcement instead of security. Because there were not enough high- quality projects submitted to fulfill the $36 million allocation for Tier II, according to TSA, the Secretary of Homeland Security made the decision to recompete—that is, allow agencies to resubmit projects for funding— for an additional $6 million. To accomplish this, TSA provided written feedback to Tier II agencies that received partial funding or no funding from the initial fiscal year 2008 grant cycle and invited them to reapply for the $6 million. The initial and recompeted TSGP funding for fiscal year 2008 resulted in DHS awarding about $23 million to all Tier II agencies. DHS officials stated that the decision to recompete $6 million ensured that the fiscal year 2008 funding for Tier II agencies was equal to the amount of funding Tier II agencies received in fiscal year 2007. TSA officials stated that all eligible projects recommended by the NRP were funded with the initial $16.9 million. However, TSA officials commented that during the recompete, there were more eligible requests than funding available because of their efforts to provide feedback on unsuccessful applications. Transit agencies submitted $9.1 million worth of eligible projects for the $6 million in funds, thus projects were funded based on total project scores until the funds were exhausted. TSA officials noted that several initially deficient applications were modified based on feedback, resubmitted, and then approved. The types of projects eligible for funding and the specific projects TSA has focused on have changed each grant year since 2006—making long-term planning difficult, according to officials we interviewed from 8 of 30 transit agencies and numerous stakeholders at TSGP after-action conferences held in September and October 2008. These changes, such as the projects that would receive priority for funding, concerned transit agencies because they meant that the agencies had to change their proposals in some cases. For example, results from 28 TSA BASE reviews completed from December 2006 through January 2007 indicated that security training was an area needing improvement at many transit agencies and was a critical vulnerability that needed to be addressed immediately. As a result, after DHS released the fiscal year 2007 grant guidance in January 2007, TSA officials notified all transit stakeholders in February 2007 that the top funding priority for fiscal year 2007 would be changed to training for key frontline employees. TSA informed the transit agencies that this training would be given elevated priority when the investment justifications were evaluated for funding merit, and projects that included training would be funded ahead of other projects. While this change may have been necessary to adjust to a changing security environment, the change resulted in transit agencies having less than 2 weeks to decide whether they wanted to change their grant applications and refocus them on this priority area. See appendix VI for a listing of grant priorities for fiscal years 2006 through 2009. Another change in the grant program that transit stakeholders expressed concern about occurred in the fiscal year 2008 grant cycle when DHS changed its methodological approach for evaluating applications. Before fiscal year 2008, the NRP evaluated Tier II grant projects for project quality––including how those projects addressed the grant priorities. In contrast, Tier I grant projects were determined by negotiations between TSA and the RTSWG. However, in 2008 DHS introduced a new scoring methodology for Tiers I and II, which was explicitly outlined in DHS’s grant guidance that year. According to TSA officials, the change in scoring methodology was based on stakeholder feedback that DHS be more transparent and clear about funding priorities and exactly how projects would be prioritized and ranked. However, 28 of 40 transit stakeholders we interviewed (30 transit agencies and 10 state administrative agencies) and numerous stakeholders at TSGP after action conferences held in September and October 2008 noted that the TSGP provides limited flexibility to pursue projects that have been identified as transit agency security needs. Officials from one state administrative agency said that prioritizing security projects puts forward- thinking agencies at a disadvantage because if they have already completed projects that address TSA’s highest funding priorities, then obtaining funding for alternative projects is difficult. Transit officials from one agency said the grant priorities provide incentives for agencies to potentially buy things they do not want or need, and that these technologies will eventually just sit on the shelf. TSA officials stated that the TSGP is a limited fund that must be allocated to best maximize the use of scarce resources based on risk. TSA officials also reported that they receive requests in excess of available funding, and therefore cannot fund all eligible requests, necessitating a prioritization and ranking schema and clear guidance on allowable project types. Officials from five large Tier I transit agencies that have chemical biological detection systems, or would like to install such systems, expressed concerns that they could no longer receive funding to install these detection systems. The TSGP listed chemical and biological detection as an allowable expense for the grant program from fiscal years 2005 through 2007; however, TSA did not fund chemical and biological projects during fiscal years 2007 and 2008 and listed them as an unallowable expense for the first time in the fiscal year 2008 guidance. TSA made this determination because its threat reports and security assessments determined that improvised explosive devices (IED) and improvised incendiary devices (IID) are the most common means of attacking mass transit, and the training of frontline employees needed to be addressed immediately. However, in fiscal year 2009 chemical and biological detection systems became eligible, and TSA officials stated that they may fund chemical and biological detection systems for fiscal year 2009 because some agencies have demonstrated that they can use this technology effectively and restoring this eligibility may allow agencies to enhance their response and recovery capabilities. Similar concerns over flexibility were outlined in recommendations from the Mass Transit Security Sector Coordinating Council to the Government Coordinating Council led by TSA in December 2007. The transit industry members of the council were concerned about the imbalance among the priorities listed in the fiscal year 2007 grant guidance and noted that transit agencies are in the best position to determine the balance of funding between capital and operating initiatives. They specifically noted that more predictability and flexibility in implementing priorities cited in the grant guidance is needed to allow agencies to engage in long-term planning of security initiatives, allowing agencies to more easily fund projects on a multiyear basis. According to TSA officials, the collaborative efforts between TSA and eligible transit agencies in the Tier I regions, combined with the project effectiveness groupings that cite eligible security enhancement measures in a prioritized listing, are intended to enhance predictability and flexibility. In an effort to improve the TSGP, TSA and FEMA held a conference in September 2008 to obtain feedback from transit agencies and state administrative agency officials on the fiscal year 2008 grant cycle. At that conference, transit agency stakeholders continued to express concerns about the need for greater flexibility and that funding decisions should be informed by the regional strategies that they have put into place. For fiscal year 2009, DHS has reported changing the scoring methodology to address transit agency concerns over limited flexibility. Specifically, DHS added a grouping for other mitigation activities that allows some of the project types that were previously excluded. Furthermore, DHS has not explicitly excluded any type of project and has enabled transit agencies to explain to DHS the priority groupings into which they believe their project should be placed. The decision about project placement, however, continues to lie with DHS and projects that fall outside of the established project effectiveness groupings are given the lowest-priority score. While this change could alleviate transit agencies’ concerns about limited flexibility, it is too soon to determine whether it will address agency concerns and allow them to secure funding for their highest security needs. DHS has met the statutory timeline requirements in allocating and awarding grants. However the two agencies that manage the TSGP—TSA and FEMA—lack defined roles and responsibilities, and the approval of grant projects and completion of administrative requirements for grants awarded in fiscal years 2006 through 2008 took many months. Additionally, delays also occurred after projects were passed to FEMA for administrative and environmental reviews because of backlogs and reported resource constraints. TSA and FEMA have attempted to address these delays by approving projects earlier in the grant process, issuing guidance, and adding resources. Because of these delays, project funds were often not available to transit agencies for months, and in some cases years, after being awarded, and as a result, only 3 percent of grant money has been spent as of February 2009. While TSA and FEMA share responsibility for managing the TSGP, the two agencies have not defined and documented their roles and responsibilities in a memorandum of understanding (MOU), or through similar means. TSA’s responsibilities fall primarily in the award process and include, among other things, identifying grant priorities, while FEMA’s responsibilities include administering the grant management process to ensure compliance with applicable laws, rules, and regulations. The roles and responsibilities of the two agencies related to the award and postaward processes are in the grant guidance. For example, the guidance states that FEMA has the lead for designing and operating the administrative mechanisms needed to manage the grant program. However, there is no documentation articulating the working arrangement between the two agencies. For example, it is not part of FEMA’s procedures to notify TSA when funding is released to the state administrative agencies and transit agencies, despite TSA officials reporting several requests for access to this information. As a result, TSA officials reported that because they do not have this information, it is difficult for them to respond when transit agencies contact them with questions about their grants. As we reported in October 2005, many agencies face a range of barriers when they attempt to work collaboratively. To enhance and maintain effective collaboration, we reported that agencies engage in practices such as establishing joint strategic plans to achieve common outcomes as well as instituting compatible policies, procedures, and other means to operate across agency boundaries. Additionally, agencies can strengthen their commitment to work collaboratively by articulating their agreements in documents, such as MOUs, interagency guidance, or interagency planning documents. Standards for Internal Control in the Federal Government also requires agencies to delegate authority and responsibility throughout their organizations. Articulating roles and responsibilities for managing the TSGP could strengthen TSA and FEMA’s ability to ensure that activities, processes, and resources are aligned to achieve a common outcome and ensure smooth coordination during the grant process. TSA officials stated that a formal MOU and guidance documents between TSA and FEMA would be beneficial, while FEMA officials stated that they believed the two agencies are working together effectively. DHS met the requirements of the TSGP to release grant guidance and act on grant applications as defined by DHS; however, additional agency actions are to be completed before specific transit agency projects and funding levels are approved and transit agencies can begin projects. Since fiscal year 2007, DHS appropriations acts have established timelines for DHS to release the TSGP guidance and act upon transit agency applications. For fiscal years 2007 through 2009, DHS met the requirements to release the grant guidance within 75 days for fiscal year 2007 and 30 days for fiscal years 2008 and 2009. The appropriations acts also set timelines for DHS to act upon the grant applications within 60 days, but until 2009, this did not include approving projects. DHS policy defined the requirement to act upon grant applications as reviewing the applications, making the award decisions, and announcing final allocations. DHS met the requirements to act upon the grant applications within 60 days, as defined by DHS, for fiscal years 2007 and 2008. While there are specific statutory deadlines for releasing grant guidance and acting on grant applications, there are no statutory deadlines once the projects are approved and are passed to FEMA for review and funding release to transit agencies. However, even though allocation amounts were announced by DHS within the statutory time frames during fiscal years 2006 through 2008, none of the Tier I regions had their projects approved by TSA at the time of award because TSA procedures allowed for approval after the award. For example, during fiscal year 2007, TSA did not begin approving Tier I projects until more than 5 months after the award date. One Tier I region did not receive project approval for its fiscal year 2007 grant projects until November 2008, or 15 months after the award date. As such, although DHS met the statutory deadlines for acting upon grant applications within the time frames established in legislation, project approval was not yet completed. In contrast, all Tier II agencies involved in the competitive process, which evaluates all projects at once, had all of their projects approved by TSA when the awards were announced. Delays in approving grant projects after awards were announced have been attributed to TSA and the transit agencies involved in the cooperative agreement process taking months to agree upon projects. According to TSGP grant guidance, the cooperative agreement process is valuable because it provides greater flexibility and allows TSA to work directly with transit agencies to quickly adapt to changes as situations arise during the grant cycle. However, this cooperative process has also resulted in significant time passing between the award and final project approval dates. According to TSA data, during the fiscal year 2006 grant cycle, the average project took 9.7 months to receive approval. During the initial grant cycle in fiscal year 2007, the average project approval took 7.1 months. During the supplemental grant cycle in fiscal year 2007, the average project approval took 5.5 months. Furthermore, at the time of our review, there was still one Tier I region whose project from a previous grant cycle had not yet been approved. Specifically, as of January 2009, a Chicago region project totaling $2.9 million had not been approved from the fiscal year 2006 grant cycle even though the fiscal year 2006 performance period ended in March 2009. In contrast, Tier II agencies involved in the competitive process have their projects approved at the time of the award and thus do not experience these delays. TSA officials stated that some of the delays were caused by a provision in the DHS appropriations act for fiscal year 2009, which provided that the program could not include a cost share requirement for grants made available for fiscal years 2008 and 2009. According to TSA officials, the removal of this cost share requirement caused a disruption because some transit agencies had to modify their projects, their budgets, or both, which resulted in final project approval and disbursement delays. One state administrative agency official in a Tier I region said that delays in funding approval make program performance period extensions a necessity. Further, the official stated that because some projects are complex and involve multiple partners, delays can have a ripple effect and slow project completion. In addition, as grant program periods are extended, it is possible for multiple grant years to occur simultaneously, making them a greater challenge to manage effectively. A TSA official reported that as of late March 2009, all Tier I projects for fiscal year 2008 were approved. A TSA official said that TSA has made progress in managing project approval time frames by changing some of its procedures for fiscal year 2009, but also noted that some of the delays in previous years could be attributed to transit agency procedures as well. For example, a TSA official noted that some transit agencies are required to have projects approved by their boards of directors or state legislatures—efforts which contributed to the length of time between award and project approval. For example, one state administrative agency official said that transit agencies cannot begin projects until state legislatures approve the projects. The official noted that this process can take time, especially if the legislature is not in session. According to TSA, during fiscal year 2009 funds are to be awarded directly to individual transit agencies; therefore, when DHS announces the awards, each transit agency’s funding amount must be finalized at that time. On April 8, 2009, in conjunction with the award announcement, DHS issued final allocation amounts for transit agencies for fiscal year 2009. As a result of this administrative change, TSA officials noted that they expected the project approval letters to be sent to FEMA soon after the award announcement. Once TSA approves projects and award amounts are finalized, FEMA takes responsibility for ensuring compliance with federal requirements; however, backlogs in FEMA’s review processes have resulted in delays in distributing project funding. One requirement that has caused delays involves ensuring compliance with the National Environmental Policy Act, which requires the consideration of the environmental impacts of proposed actions as well as reasonable alternatives to those actions. FEMA’s GPD works in conjunction with FEMA’s OEHP to complete the Environmental and Historical Preservation (EHP) reviews of each project. GPD reviews projects that have no, or limited, EHP impacts, and OEHP reviews those projects needing a more comprehensive environmental and historical preservation review. Before April 2007, DHS’s Office of Grants and Training and TSA shared responsibility for managing the TSGP. According to OEHP officials currently managing the EHP review process, when FEMA assumed responsibility for administering the TSGP in April 2007, they discovered that the EHP requirements had not been fully integrated into the TSGP and that there was a lack of institutional knowledge among DHS’s staff about how to manage the EHP process and TSGP requirements. This lack of experience, in combination with the lengthy process of collecting the necessary EHP information from grant applicants, led to a backlog of EHP reviews from fiscal years 2005 through 2007. According to FEMA officials, there is a need for additional personnel to address the EHP backlog and other anticipated workload issues. According to GPD officials, the backlog created by pending EHP reviews led to a sizable workload for GPD’s limited staff. In addition, GPD officials estimated that when transit agencies begin applying directly to FEMA for TSGP grants in fiscal year 2009, instead of going through their state administrative agencies, this approach will generate a fivefold increase in TSGP applications as individual transit agencies apply rather than state administrative agencies. In February 2009, GPD officials reported that several efforts are under way to manage their workload. For example, GPD expects to hire six more program analysts—in addition to the two already in place––to manage the expected workload increase. FEMA officials also reported in February 2009 that they expected to have these new staff hired and in place by March or April 2009. Additionally, GPD reported that it augmented its staff with contractor support in December 2007, to reduce the time for EHP reviews and expedite the release of funds. In March 2009, GPD officials said that they planned to expand the contract within 2 months to include another person for EHP support. They also reported that they are in the process of conducting a workforce study, to commence in late spring 2009, to determine staffing needs for the additional workload, and expect to have this study completed by the end of fiscal year 2009. In a separate effort to address the backlog of EHP reviews, in 2007 OEHP developed new guidance for conducting environmental reviews. The new guidance is aimed at addressing the backlog and heavy workload brought about by the integration of GPD grants into FEMA by focusing GPD and OEHP staff resources on project reviews with the greatest potential for environmental impact. FEMA officials reported that the backlog prior to the release of the guidance resulted in projects taking several weeks to several months for EHP approval, depending on the complexity and level of review. Officials also reported that the internal processing time has improved by 50 percent since the EHP guidance was released, and the guidance has also helped to identify the need for EHP training for external and internal stakeholders. See appendix VII for FEMA’s EHP review project types. Additionally, DHS revised its grant guidance for fiscal year 2009 to clarify to grant recipients the EHP information that they should submit so that FEMA can begin reviewing their projects. The intention of this revision was to reduce the amount of time between collecting the information and beginning the EHP review process. Despite these efforts, there remains a backlog of grant projects awaiting review. According to FEMA officials, as of March 2009, 72 projects were still in review, accounting for $88 million. Twenty-four were projects from fiscal year 2006, and 48 projects from fiscal year 2007. FEMA officials further noted that a large number of these projects were in EHP review. As of March 2009, FEMA’s EHP regulations were disaster focused, and have not been revised since 1996—before DHS existed. FEMA officials reported in March 2009 that the agency would revise its environmental regulations to be more inclusive of all types of projects, including non disaster homeland security grants, that FEMA funds. However, FEMA did not have a timeline for when the new regulations would be published. Best practices for project management call for milestone dates, among other factors, in carrying out a project successfully. Establishing milestones could help FEMA ensure that revisions to its environmental regulations are conducted as management intended. From fiscal years 2006 through 2008, DHS awarded about $755 million in transit security grants; however, as of February 2009, only about $21 million, or 3 percent, of this total had been expended by transit agencies largely because of TSA’s lengthy cooperative agreement process, the EHP backlog, and delays in receiving disbursement approval from FEMA. As of February 2009, for fiscal years 2006 through 2008, approximately $334 million dollars has been distributed to transit agencies and approximately $421 million is still being held pending review (with the majority of the held funds from fiscal year 2008). As might be expected, more recent fiscal years showed higher unexpended balances. However, low grant expenditures by transit agencies was commonly reported across all TSGP grant years, as shown in figure 3, and are related to many transit agencies receiving authorization to spend their grant dollars near the end of each 2 to 3 year grant performance period. FEMA officials reported that transit agencies may choose to draw down their award at any time during the performance period. Our analysis of TSA project approval and FEMA grant adjustment notices (GAN) from fiscal year 2006 or release of funds memos for fiscal year 2007 showed that it could take up to 20 months for transit agencies to receive approval to begin projects, which accounted for a significant portion of the grant performance period. FEMA used GANs and release of funds memos to notify the state administrative agency and the transit agency that they may begin a project. In fiscal year 2006, state administrative agencies may have received more than one GAN for each project. The first GANs were to notify the state administrative agencies to “obligate and expend” the funds, which meant that they could begin the projects. However, this did not mean that they could draw down any funding. Only upon receipt of the “obligate, expend, and draw down” GAN could the funds be withdrawn. This two-part GAN process created some confusion among transit stakeholders and, in fiscal year 2007, FEMA clarified the GAN process. In fiscal year 2008, FEMA changed this procedure again to include the use of a single release of funds memo, which allowed transit agencies to draw down funds. See figure 4 for the average amount of time it took for transit agencies to receive approval from TSA and FEMA to om TSA and FEMA to begin projects after the grant award date. begin projects after the grant award date. In addition to the delay between announcing awards and obtaining final project approvals, 25 of 40 transit stakeholders we interviewed, including state administrative agency officials, also reported time delays in receiving their grant monies. Furthermore, numerous transit stakeholders attending the TSGP after-action conferences raised concerns about the time it took to receive awarded funds after projects were approved, and stated that they believed the process was broken. They also reported that they believed the performance period needed to start when the GANs were received, not when awards were announced. For example, during fiscal year 2006, one Tier I transit agency was awarded $4 million for a new integrated security response center, but the agency did not receive approval to begin the project until June 11, 2008. As a result, unless this transit agency receives an extension, it will have less than 10 months to complete the project to stay within the original 30-month performance period. A transit agency official told us that the agency requested an extension until June 30, 2010, to complete this project, and was awaiting FEMA’s response. In addition, in December 2008, a state administrative agency official for one state sent a request to FEMA for a 2-year extension to the performance period for the entire state’s fiscal year 2006 TSGP grant because the “delays from the federal level have left many of these projects without a chance of success during the performance period.” Transit stakeholders also said that concerns about funding delays have hampered their ability to effectively plan for and manage projects. For example, one transit agency official said that because of delays in receiving grant funding the agency is constantly seeking extensions, which are often not approved for longer than 3 months. In addition, another transit agency official stated that state procurement processes can take additional time to complete, which can also reduce the amount of available time to complete the project within the performance period. FEMA officials noted that 2006 was an unusual year for the grant program because the multiple GANs they issued to state administrative agencies resulted in confusion among transit agencies about when projects could begin or when they could start spending money. As a result of the delays encountered in the fiscal year 2006 grant process, FEMA officials stated in March 2009 that they were notifying transit agencies of one-year extensions for all fiscal year 2006 grants that were set to end on March 31, 2009. Despite the concerns over funding delays, FEMA has not established or communicated time frames for providing grant funding to transit agencies once projects have been approved by TSA. In April 2004, we reported that timely awarding of grant funds is imperative to provide the intended benefit of the grant program. Additionally, the purpose of the TSGP is to provide funding to owners and operators of transit systems to protect critical surface transportation infrastructure and the traveling public. Ensuring the timely distribution of grant funds is essential for ensuring that transit system owners and operators receive necessary funds early enough in the performance period to complete their security projects. While the purpose of the TSGP is to provide funds to protect critical surface transportation infrastructure and the traveling public, the program lacks a plan and related milestones for developing measures to track progress toward achieving program goals. While FEMA reported that it was beginning to develop measures to better manage its portfolio of grants, TSA and FEMA have not collaborated to produce performance measures for assessing the effectiveness of TSGP-funded projects, such as how funding is used to help protect critical transportation infrastructure and the traveling public from possible acts of terrorism. Further, FEMA does not yet have performance measures in place for its administrative duties, such as measuring the time taken to complete reviews of financial and administrative requirements. As we reported in October 2005, to enhance and maintain effective collaboration, agencies should engage in practices to achieve common outcomes and establish compatible policies, procedures, and other means to operate across agency boundaries. Additionally, according to best practices for project management, the development of a project management plan—which defines how the project is executed, monitored and controlled, and closed—is a key element of project management. Best practices for project management also call for milestone dates, among other factors, in carrying out a project successfully. FEMA officials reported in October 2008 that while they were in the process of establishing baselines and targets for measures identified through the Program Assessment Rating Tool (PART) requirement, additional work was needed to develop meaningful measures. FEMA officials stated that performance measures for the TSGP are likely to focus on the increased security capabilities of the transit agencies, such as the number of canine teams a transit agency deploys. In addition, FEMA has also been developing a cost-to-capability assessment that officials report will allow them to analyze grant program accomplishments from fiscal years 2003 through 2007. Still in its early stages, the cost-to-capability assessment focuses on efforts to measure a jurisdiction’s capability to prevent and respond to various types of disasters compared to a target level of capability. Although TSA has lead responsibility for surface transportation security, a TSA grant program official stated that TSA does not have any role in FEMA’s cost-to-capability assessment and only learned about it in late 2008. This official also reported that the assessment raised some concerns as it might not be tailored appropriately to each transportation mode. TSA officials reported that they are considering using the BASE review and TSA inspectors to develop and monitor performance measures for the TSGP; however, TSA officials reported not taking any action to develop performance measures because of resource constraints for managing the program. As we have reported, federal programs contributing to the same or similar results should collaborate to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. Until TSA and FEMA collaborate to develop a plan with related milestones, it will be difficult for the agencies to provide reasonable assurance that measures are being developed to ensure that the program is achieving its stated purpose of protecting critical surface transportation infrastructure. FEMA is responsible for conducting both a budget review and programmatic review of grant projects including reviews of EHP requirements. However, despite this role, FEMA does not have a mechanism for systematically collecting data on the status of individual grant projects throughout this review process, including tracking the status of the reviews it conducts and the release of funds to transit agencies. Although FEMA has systems to track financial information related to all of its grant programs, these systems do not allow FEMA to track the status of grant reviews, such as EHP reviews. As a result, GPD staff reported that they created a spreadsheet to track this information, including identifying when TSGP funds were released once requirements were met. Under this tracking process, each program analyst was responsible for maintaining accurate records in the spreadsheet. However, TSA did not have access to it and, until February 2009, the information was not monitored for accuracy. Further, we found inconsistencies between FEMA’s spreadsheets and data collected through FEMA’s financial systems, including the amount of funding being held pending EHP and other reviews. For example, we found that the total amount of funds on hold in the GPD internal spreadsheets was not equal to the hold amounts in FEMA’s financial systems. GPD officials told us that FEMA’s financial systems were the official record for the awards. A FEMA official reported that there are multiple information systems involved in managing the TSGP. FEMA is in the process of implementing a new consolidated grants management system—expected to be operational for the TSGP by October 2009. According to FEMA, the new system is to include functions that support the application process and is expected to be fully operational throughout DHS in 2011. Although the system will not initially support the tracking of grant disbursements, FEMA officials reported that their intention is to have the system support these functions in future releases. However, FEMA officials did not have a specific date for when these capabilities would be available. In addition, as of March 2009, there was no mechanism for TSA to gain access to grant review or financial information, even though TSA officials reported requesting information regarding when funds were released to transit agencies so that they could track this information. Standards for Internal Control in the Federal Government requires agencies to ensure that pertinent information is recorded and communicated to management and others within the entity in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Moreover, systematically collecting data on the status of grant projects throughout the grant process could strengthen FEMA and TSA’s ability to effectively manage the program. Similarly, the GPD is responsible for the financial controls and audits of the TSGP to ensure that funds are appropriately disbursed and used in accordance with grant requirements. However, the agency does not have a plan for targeting its monitoring activities related to the use of grant funds once projects have been implemented. GPD officials said that their office conducts on-site visits to transit agencies to collect information on the use of grant funds, but because of a lack of staff resources, their efforts have mostly been limited to the largest Tier I transit agencies that either have not spent their grant funding or were not able to complete projects within the designated grant period. GPD officials said that they also conduct document reviews, including reviewing quarterly financial reports, progress reports, and special conditions to release funds. Although they reported having limited resources, GPD officials said that they were able to conduct approximately 24 site visits during fiscal years 2006 through 2008, attend numerous RTSWG meetings, and interact with transit agencies at conferences as part of their efforts to monitor the awards. GPD officials also reported creating a monitoring tool for the fiscal year 2007 grant cycle to be used during on-site visits, and officials stated that the agency plans to modify the tool each grant year based on the specific grant requirements for that year. GPD officials also reported that the tool has been used by GPD program analysts during their site visits. While GPD’s monitoring tool will likely strengthen the agency’s ability to monitor grant activities, GPD lacks a plan to delineate how and when this monitoring will take place. GPD officials acknowledged that a robust monitoring plan needs to be implemented with processes in place to ensure that the agency visits each transit agency at least once a year. According to grants management best practices, monitoring grantee performance helps ensure that grant goals are reached, and it is important that agencies identify, prioritize and manage potential at-risk recipients. For example, one federal agency with grant-making responsibilities has created monitoring plans that include criteria to perform risk assessments, which consider factors affecting a grantees ability to effectively manage grants. This information could be used to prioritize monitoring activities given GPD’s limited personnel. In addition, in September 2006 we reported on the value of feedback provided through performance monitoring plans and tools such as site visits. Moreover, TSA officials stated that their agency currently has no role in the oversight of grant expenditures, but believed that the use of its inspectors to provide grant oversight would be a key component of the overall approach to mass transit security. TSA’s surface transportation security inspectors, who are located throughout the United States, interact with transit agencies for other purposes on a regular basis, and could be used for on-site monitoring. In October 2005, we reported that leveraging resources is vital to achieving effective collaboration. A monitoring plan would provide GPD with a road map for how it will carry out its monitoring activities to help ensure that it is effectively using its limited resources. In addition, by working collaboratively with TSA and its surface inspectors, who have security expertise, GPD could leverage existing resources to ensure that transit agencies are complying with security specifications set out in TSGP grant guidance and the agencies’ own investment justifications. As terrorist attacks on transit systems overseas have made clear, even with a variety of security precautions in place, mass transit systems that move high volumes of passengers daily remain vulnerable to attack. Risk management has been endorsed by the federal government as a way to direct finite resources to those areas at greatest risk of a terrorist attack. While DHS uses a risk-based process to allocate funding for the TSGP, without considering possible variations in vulnerability in the risk model, the risk scores developed through the model are not as precise as they could be, which could affect the allocation of funds to Tier I and Tier II agencies. In addition, articulating roles and responsibilities for managing the TSGP could strengthen TSA and FEMA’s ability to ensure that activities, processes, and resources are aligned to achieve a common outcome and ensure smooth coordination during the grant process. Further, TSA’s delays in approving projects and FEMA’s backlog of project reviews are contributing to delays, which negatively affect the ability of transit agencies to complete their projects within grant performance periods. However, TSA has made changes to the project approval process for fiscal year 2009, which resulted in all projects being approved at the same time as the grant award announcement. FEMA has also reported plans to modify its approach for managing the administrative requirements of the TSGP, including revising its environmental regulations to be more inclusive of all the types of projects, including nondisaster homeland security grants. While FEMA has not reported a time frame for completing this process, establishing milestones to complete this modification could help FEMA ensure that revisions to its environmental regulations are conducted in a timely manner. We have also previously reported on the importance of performance monitoring in grant programs. Monitoring the implementation of TSGP grant projects is vital to ensure that transit agencies are complying with security specifications set out in the TSGP guidance and in the agencies’ own investment justifications. A monitoring plan that details how and when monitoring will take place could improve GPD’s ability to plan for this important oversight function and help it ensure that it is effectively using its limited resources. A monitoring plan, which includes a method for leveraging TSA resources, would also put GPD in a better position to monitor grant implementation by working collaboratively with TSA to leverage the security expertise of TSA’s surface transportation security inspectors which will help FEMA address its resource limitations related to monitoring. In addition, while FEMA’s consolidated grants management system should allow FEMA to better manage data collection, the system being developed is not expected to allow FEMA to collect data on the status of grant activities throughout the grant process or to provide TSA with access to this information, both of which are vital to ensuring effective program management. Moreover, until the system is established and able to track TSGP grants to allow for effective oversight and management of TSGP funds, FEMA could benefit from establishing an interim process that tracks the necessary information and share this information with TSA, its TSGP partner. Finally, performance measures are fundamental to the successful management of federal programs. As we have reported, federal programs contributing to the same or similar results should collaborate to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. Until TSA and FEMA collaborate to develop a plan with related milestones for jointly measuring the effectiveness of TSGP, it will be difficult for the agencies to provide reasonable assurance that measures are being developed to ensure that the program is achieving its stated purpose of protecting critical surface transportation infrastructure and that accountability and effective stewardship of public resources exist. Finally, the absence of information on the expected time frames for making funds available to transit agencies once projects are approved can hinder transit agency efforts to design and implement projects within the designated performance periods of the grant. We are making seven recommendations to help strengthen the implementation and oversight of the TSGP. To strengthen DHS’s methodology for determining risk, we are recommending that the Secretary of Homeland Security develop a cost- effective method for incorporating vulnerability information into future iterations of the TSGP risk model. To strengthen the administration, oversight, and internal controls of the TSGP, we are recommending that the Secretary of Homeland Security direct TSA and FEMA to take the following four actions: Define TSA’s and FEMA’s respective roles and responsibilities for managing the TSGP in an MOU or similar document. Develop a cost-effective plan for monitoring the use of grant funds once projects have been implemented, including a strategy for leveraging resources that could allow TSA surface transportation security inspectors to assist in monitoring the grant projects to ensure that the projects meet the security requirements set out in TSGP guidance. Develop an interim solution to systematically collect data and track grant activities until FEMA’s grants management system can perform these functions, and ensure that both agencies have access to these data. Collaborate to develop a plan and milestones for measuring the effectiveness of the TSGP and its administration. In addition, we recommend that the Secretary of Homeland Security direct FEMA to take the following actions: Establish a time frame for revising environmental regulations to be more inclusive of nondisaster homeland security grant programs. Establish and communicate time frames for making funds available to transit agencies once FEMA receives project approvals from TSA. We provided a draft of this report to DHS and DOT for review and comment. DOT did not provide comments. DHS provided written comments on May 15, 2009, which are reprinted in appendix VIII. In commenting on the report, DHS reported that it concurred with all seven recommendations and discussed actions it has taken or planned to take to implement them. With regard to our first recommendation that DHS strengthen its methodology for determining risk by developing a cost-effective method for incorporating vulnerability information into future iterations of the TSGP risk model, DHS concurred with the recommendation and said that it would make appropriate adjustments in the fiscal year 2010 grant cycle. DHS concurred with our second recommendation that TSA and FEMA’s respective roles for the administration and oversight of the TSGP be defined and documented in an MOU or similar document. DHS reported that TSA and FEMA will work collaboratively to develop the MOU before the fiscal year 2010 grant cycle and share it with external stakeholders to ensure that the responsibilities and relationships between TSA and FEMA are clear. DHS also concurred with our third recommendation that it develop a cost- effective plan for monitoring the use of grant funds and leverage TSA surface transportation security inspectors to assist in monitoring these projects. Specifically, DHS reported that FEMA would work toward developing a cost-effective monitoring plan to include the use of surface transportation security inspectors in such instances when their transit security expertise would be appropriate for monitoring grant program functions. Because FEMA would be utilizing TSA personnel with numerous other responsibilities to help with this monitoring, it is especially important that the two agencies work together to coordinate this effort and conduct the monitoring as efficiently as possible. For example, TSA’s surface transportation security inspectors currently monitor transit agencies through the BASE reviews and could monitor grant implementation concurrently with those reviews. DHS stated that it concurred with our fourth recommendation that TSA and FEMA develop an interim solution to systematically collect data and track grant activities until FEMA’s grants management system can perform these functions, and ensure that both agencies have access to these data. DHS also stated that TSA and FEMA will identify appropriate channels for data collection and tracking as well as information sharing so that both agencies have access to all appropriate information to ensure accurate and consistent record keeping. In addition, DHS reported that it has taken action to modify FEMA tracking logs and project spreadsheets to collect additional information to track projects to improve its collection and tracking of grant information. However, given that FEMA does not know when the grants management system will be able to systematically collect data and track grant activities, it is critical that FEMA develop and implement this interim solution to collect and track key grant information as quickly and accurately as possible. With regard to our fifth recommendation that TSA and FEMA collaborate to develop a plan and milestones for measuring the effectiveness of the TSGP and its administration, DHS stated that it concurred with the recommendation. DHS reported that a collaborative written plan with established goals and milestones will be designed and implemented as part of the MOU or other formal agreement between TSA and FEMA. DHS concurred with our sixth recommendation that FEMA establish a time frame for revising environmental regulations that consider nondisaster homeland security grant programs. However, in its comments on this recommendation, DHS stated that FEMA’s environmental regulations apply to nondisaster grants. We did not intend to suggest that the regulations did not currently apply to nondisaster grants. Rather, we are recommending that FEMA establish a time frame for completing its plans to revise regulations that are currently focused on emergency management program issues to be more inclusive of the types of issues associated with nondisaster grant programs. In response to this comment, and to clarify our point, we revised the recommendation to reflect that the environmental regulations apply to all FEMA grant programs, but that FEMA should establish time frames for revising the regulations to be more inclusive of nondisaster grants. DHS also stated that FEMA is currently working with DHS to update these procedures and is targeting completion of this effort for the end of calendar year 2009. However, DHS noted that these efforts could be extended if delays occur because of additional time needed to complete procedural changes. With regard to our seventh recommendation that FEMA establish and communicate time frames for making funds available to transit agencies once FEMA receives project approvals from TSA, DHS concurred. Specifically, DHS also reported that FEMA will make every reasonable effort to establish and communicate time frames for releasing funds to TSGP grantees once FEMA receives approval of grant projects from TSA. However, DHS noted that the release of funds often depends on the responsiveness of grantees in submitting required documents and thus FEMA would work proactively to obtain required information. DHS also reported that FEMA would release grant funds within 3 to 5 days, if all required EHP and budget information is received from grantees, and appropriate clearances are provided by OEHP and the FEMA financial analyst. However, our recommendation also intended that FEMA establish timeframes for when its internal reviews would be completed once it receives all of the required documents to facilitate a timely distribution of TSGP awards. FEMA’s OEHP already has time frames for completing its EHP review process and a related performance metric to assess its effectiveness in meeting these time frames. Establishing such time frames for its other internal reviews and communicating those to transit agencies could help improve transit agency efforts to implement projects within the designated performance periods of the grant. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, the Secretary of Transportation, the Director of the Office of Management and Budget, and interested congressional committees. The report also is 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) 512-8777 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. The objectives of this report were to determine the extent to which (1) Transit Security Grant Program (TSGP) funds are allocated and awarded based on risk, and grant requirements have changed since 2006; (2) the Department of Homeland Security (DHS) has allocated, awarded, and distributed TSGP grants in accordance with statutory deadlines and leading practices for collaborating agencies; and (3) DHS has evaluated the effectiveness of the TSGP as well as investments made using funds awarded through the TSGP. To determine the extent to which TSGP funds are allocated and awarded based on risk, we analyzed guidance documents outlining best practices for effectively implementing a risk management framework, including the DHS National Infrastructure Protection Plan (NIPP), the Transportation Security Sector Specific Plan (TS-SSP), and GAO’s risk management framework. We obtained the Transportation Security Administration (TSA) and the Federal Emergency Management Agency’s (FEMA) risk analysis model for the TSGP for fiscal years 2007 and 2008. We analyzed the model for these fiscal years to determine the process by which DHS used the model to estimate risk—by incorporating threat, vulnerability, and consequence information—as well as how the model was used to divide regions into Tier I (higher risk) and Tier II (lower risk), and make allocations to tiers and regions and the extent to which these allocations were tied to the region’s or transit agency’s share of risk. We also interviewed officials from TSA and FEMA as well as FEMA’s contractor, Digital Sandbox, to understand what information was included in the model and how the model was managed between the two agencies. We did not evaluate the quality of the information or data included in the model, but instead evaluated the model for how it incorporated the required elements of risk. We determined the reliability of the model by discussing methods of entering and maintaining data with agency officials. On the basis of these discussions, and our review of the processes used to collect the data, we determined that the data were sufficiently reliable for the purposes of this report. To determine the extent to which grant requirements have changed since fiscal year 2006, we analyzed TSA’s grant guidance and grant priorities for fiscal years 2006 through 2009, and attended TSA and FEMA presentations to transit agencies prior to the release of the grant guidance as well as after-action conferences for the fiscal year 2008 grant cycle. Additionally, we interviewed TSA and FEMA officials about the TSGP grant determination process used in fiscal years 2006, 2007, and 2008––including TSA’s scoring methodology for Tier I and II and the national review panel criteria used for Tier II––and about the changes made to the process for fiscal year 2009. We also interviewed 30 mass transit and passenger rail operators that have applied for, received grant funding, or both to gain their perspectives on how the grant requirements have changed since fiscal year 2006 and the impact that these changes have had on the grant process. The agencies we interviewed represent 75 percent of the nation’s total mass transit and passenger rail ridership based on information we obtained from the Federal Transit Administration’s National Transit Database and the American Public Transportation Association. We selected this nonprobability sample of transit agencies based on (1) varying levels of ridership, (2) eligibility to receive TSGP grants, (3) varying levels of risk (Tier I versus Tier II), (4) expert recommendation, and (5) geographic dispersion. Because we selected a non-probability sample of mass transit and passenger rail agencies, the information obtained from these site visits cannot be generalized to all transit agencies nationwide. Table 2 lists the mass transit and passenger rail agencies we included in our interviews. During site visits to mass transit and passenger rail agencies, we interviewed grant managers and transit agency security officials responsible for developing TSGP grant applications. Further, we interviewed state administration agency officials directly involved in the TSGP to determine how the administration of the program worked between the state administration agencies and TSA and FEMA. We discussed the TSGP, either in person or by teleconference, with the SAA’s in Washington, D.C., and the following states: Washington, Illinois, Minnesota, California, Texas, Georgia, Florida, Massachusetts, and New York. To determine the extent to which DHS has allocated, awarded, and distributed TSGP grants in accordance with statutory deadlines and leading practices for collaborating agencies, we reviewed a variety of applicable laws, guidelines, and best practices. To determine DHS’s compliance with statutory deadlines, we analyzed TSGP requirements in the DHS appropriations acts for fiscal years 2007, 2008, and 2009 against DHS’s TSGP actions to release grant guidance and act upon grant applications. Additionally, we interviewed officials from FEMA’s Grants Preparedness Directorate (GPD) and the Office of Environmental and Historical Preservation (OEHP) to determine what actions were being taken to meet the requirements of the National Environmental Policy Act. To determine DHS’s compliance with federal guidance, we compared FEMA controls for the TSGP, including how grant monies are monitored through FEMA’s financial systems and spreadsheets, with criteria in Standards for Internal Controls in the Federal Government. To determine the extent to which DHS followed leading practices for collaborating agencies, we compared plans and procedures in place between TSA and FEMA to manage the program with criteria in our October 2005 report. To determine the status of grant funding since 2006, we reviewed the length of time between grant allocation and grant distribution. This required reviews of extensive grant documentation, including reviewing original grant award dates for fiscal years 2006 through 2008, analyzing grant project approval dates from TSA, reviewing grant adjustment notice (GAN) and release of funds memos from FEMA, as well as grant distribution and drawdown information from FEMA’s financial system and internal spreadsheets. We compared this information against the records of three state administrative agencies for states with large Tier I transit agencies to determine the accuracy of the dates and financial information we gathered and returned to FEMA for explanations when we found discrepancies. We also reviewed grant guidance and grant requirements to determine the performance period during which agencies had to spend grant funding. Additionally, we interviewed TSA grant management officials and FEMA GPD and OEHP officials to gain additional information on how the grant process works at each stage––allocation, award, and distribution. Our analysis also included interviews with officials from the transit agencies listed in table 2 to gain additional information on how grants are allocated and awarded as well as the length of time involved to complete the grant process. To determine the extent to which DHS has evaluated the effectiveness of the TSGP as well as investments made using funds awarded through the TSGP, we reviewed the following documents for guidance on performance measures for infrastructure protection grant programs as well as for any measures related to the TSGP: the National Preparedness Guidelines, the NIPP, the TS-SSP–mass transit modal annex, and the TSGP grant guidance. Additionally, we reviewed the guidance on leading practices for collaborating agencies as well as best practices for project management. To determine whether TSA or FEMA had implemented any measures for the administration of the TSGP, we interviewed TSA grant management officials as well as officials in FEMA’s GPD and OEHP. Finally, to identify the extent to which TSA and FEMA are measuring TSGP investments, we reviewed the Office of Management and Budget’s Program Assessment Rating Tool, which identified baselines and targets for measures for the infrastructure protection grants. We conducted this performance audit from September 2007 to June 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. DHS-approved behavior recognition detection courses Immediate actions for security threats/incidents Employee security threat assessments (e.g., background checks) The TSGP risk model accounts for risk to both intracity rail (subway and commuter rail) and bus systems. The rail and bus scores are combined to determine the total transit risk for the region. Within each mode, the threat index accounts for 20 percent of the total risk score while the vulnerability and consequence indexes account for 80 percent. DHS’s measurement of vulnerability and consequence is mainly a function of the consequences of a successful terrorist attack, represented by a population index, the total number of trips made on a system in a given year, and a national infrastructure index, which focuses on critical assets that if attacked would cause severe losses of life because of their particular vulnerabilities and damage mechanisms. Figure 5 shows the TSGP risk model. Table 3 shows the Tier I regions for 2009, and table 4 shows the Tier II regions for 2009. Bus project types included inventory control improvements, increased perimeter security, training and awareness, emergency response and preparedness, and implementation of technology-driven surveillance. Rail project type included use of passive measures, development and enhancement of improvised explosive devices, mitigation capabilities, and mitigation of high conseuence risks. Same as Rail. Same as Rail. Same as Rail. Projects include interoperable communications, evacuation plans, and antiterrorism security enhancement measures for low-density stations. In addition to the contact named above, Dawn Hoff, Assistant Director; Daniel Klabunde, Analyst-in-Charge; and Martene Bryan, Senior Analyst, managed this assignment. Jason Berman, Charlotte Gamble, and Su Jin Yon made significant contributions to the work. Chuck Bausell and William Chatlos assisted with design, methodology, and data analysis. Linda Miller and Lara Kaskie provided assistance in report preparation, and Tracey King provided legal support. | From fiscal years 2006 through 2008, the Department of Homeland Security (DHS) has allocated about $755 million dollars to transit agencies through its Transit Security Grant Program (TSGP) to protect transit systems and the public from terrorist attacks. GAO was asked to evaluate the extent to which (1) TSGP funds are allocated and awarded based on risk; (2) DHS has allocated, awarded, and distributed TSGP grants in accordance with statutory deadlines and leading practices for collaborating agencies; and (3) DHS has evaluated the effectiveness of the TSGP and its investments. To address these objectives, GAO reviewed the TSGP risk model, fund allocation methodology and program documents, such as TSGP guidance, and interviewed DHS and transit officials, among other steps. DHS has used a risk analysis model to allocate TSGP funding and award grants to higher-risk transit agencies, although transit agency officials have expressed concerns about changes that have occurred since the TSGP's inception, such as revised priorities. The TSGP risk model includes all three elements of risk--threat, vulnerability, and consequence--but can be strengthened by measuring variations in vulnerability. DHS has held vulnerability constant, which limits the model's overall ability to assess risk and more precisely allocate funds. Although the Transportation Security Administration (TSA) allocated about 90 percent of funding to the highest-risk agencies, lower-risk agency awards were based on other factors in addition to risk. In addition, TSA has revised the TSGP's approach, methodology and funding priorities each year since 2006. These changes have raised predictability and flexibility concerns among transit agencies because they make engaging in long-term planning difficult. DHS met the statutory timeline requirements for allocating and awarding grants, but the two agencies that manage the TSGP--TSA and Federal Emergency Management Agency (FEMA)--lack defined roles and responsibilities, and only 3 percent of the funds awarded for fiscal years 2006 through 2008 have been spent as of February 2009. There is no documentation articulating the roles and responsibilities of the agencies, and grant information has not been passed between the two agencies which affected TSA's ability to share grant status information with transit agencies. DHS met statutory deadlines for releasing grant guidance and acting upon applications, but management and resource issues have resulted in delays in approving projects and making funds available, including (1) lengthy project negotiations between transit agencies and TSA; (2) a backlog of required environmental reviews; and (3) a reported lack of personnel to conduct required reviews. As a result, according to FEMA records, as of February 2009, transit agencies have spent about $21 million of the $755 million that has been awarded for fiscal years 2006 through 2008. This spending rate is, in part, caused by agencies receiving authorization to spend grant dollars late in the grant period. Despite concerns over delays, FEMA has not communicated time frames for providing funding. In April 2004, GAO reported that timely grant awards are imperative to provide intended benefits. DHS has reported taking some actions to address delays, including shortening project approval times and hiring staff, but the effectiveness of these efforts is unknown. Although FEMA has taken initial efforts to develop measures to assess the effectiveness of its grant programs, TSA and FEMA lack a plan and related milestones for developing measures specifically for the TSGP, and thus DHS does not have the capability to measure the effectiveness of the program or its investments. Without such a plan, it will be difficult for TSA and FEMA to provide reasonable assurance that measures are being developed to assess the effectiveness of the program as intended. While FEMA is responsible for the financial controls and audits of the TSGP, it does not have a mechanism to systematically collect data and track grant projects throughout the grant process. As a result, FEMA cannot assess whether awards are timely or funds are being used effectively to reduce risk and increase transit system security |
Project sponsors can begin constructing and operating New Starts projects upon the successful completion of specific project development milestones and upon obtaining an FFGA from FTA. To obtain an FFGA, project sponsors are required by law to go through a planning and project development process, which is divided into three phases: alternatives analysis, preliminary engineering, and final design, followed by construction. In the alternatives analysis phase of the New Starts process, project sponsors identify the transportation needs in the corridor and evaluate a range of modal and alignment alternatives to address the locally identified problems in a specific corridor. Project sponsors complete the alternatives analysis phase by selecting a locally preferred alternative (LPA), which is the New Starts project that FTA evaluates for funding. During the preliminary engineering phase, project sponsors refine the design of the LPA, taking into consideration all reasonable design options and estimating each option’s costs, benefits, and impacts (e.g., financial or environmental). When the preliminary engineering phase is completed and federal environmental requirements are satisfied, FTA may approve the project’s advancement into final design, after which FTA may recommend the project for an FFGA. To help inform administration and congressional decisions about which projects should receive federal funding, FTA distinguishes among proposed projects by evaluating and assigning ratings to various statutorily prescribed evaluation criteria—including both project justification and local financial commitment criteria—and then assigning an overall project rating. Once a project obtains an FFGA, the project sponsor can begin constructing and, subsequently, operating it. PMOCs oversee project sponsors’ management of New Starts projects, starting when a project prepares to enter the preliminary engineering phase and continuing through the beginning of operations. The main oversight reviews that a PMOC conducts before FTA recommends a project for an FFGA include an evaluation of the project’s risk, scope, cost, schedule, and project management plan, as well as the project sponsor’s technical capacity and capability. (See table 1.) In addition, PMOCs conduct monthly and quarterly oversight reviews. For some reviews that PMOCs conduct, such as real estate reviews, PMOCs retain the services of subcontractors with specific industry experience. PMOCs perform many of these reviews repeatedly throughout the New Starts process, tailoring them to the stage of a project’s development. For example, FTA directs PMOCs to review a project sponsor’s technical capacity and capability three times—before the project enters the preliminary engineering phase, enters the final design phase, and again when the sponsor requests an FFGA. According to FTA guidance, some reviews, such as the technical capacity and capability review, require more detail during the early stages of a project (i.e., during preliminary engineering); however, during later stages of a project (i.e., during final design or FFGA) these same reviews may only require an update of earlier findings. See appendix II for a full list and description of the reviews PMOCs conduct. In contrast to PMOCs, who focus on project management oversight, FMOCs oversee how project sponsors will fund the capital and operating costs of the proposed project as well as the existing systems. FMOCs conduct two types of financial assessments: Local financial commitment assessments are short, less detailed reviews which evaluate whether a project is supported by a stable and reliable capital financial plan and whether the project sponsor can fund the operations and maintenance of an existing transit system once the new transit project is built. These assessments also review the amount of funding that comes from sources other than New Starts, such as federal formula grants and state and local funding. Financial capacity assessments, which are more detailed reviews, analyze a project sponsor’s financial condition and capability to fulfill its current and future financial obligations. While PMOCs provide continuous oversight of projects, FMOCs have oversight responsibilities at defined points in the project development process. Specifically, FMOCs conduct financial assessments before a project enters preliminary engineering and final design stages and before an FFGA is awarded. Figure 1 illustrates the New Starts project development process and shows when PMOCs and FMOCs conduct their oversight. FTA officials rely on PMOCs and FMOCs to provide critical input into FTA’s decisions on project advancement and funding. This input— including the PMOCs’ and FMOCs’ findings, recommendations, and professional opinions—comes through reports that PMOCs and FMOCs submit to FTA on the results of their reviews, as well as through discussions that these contractors have with FTA officials on these results. PMOC oversight efforts help FTA ensure that a federally funded transit project’s scope, schedule, and cost are well developed and that the project’s design and construction conform to applicable statutes, regulations, and guidance. Furthermore, these efforts keep FTA informed of a project’s status and support FTA’s decision on whether to advance the project to the next phase of development or recommend the project for an FFGA. For example, FTA officials said that based on a PMOC’s technical capacity and capability review, they determined that a project sponsor did not have sufficient staff—such as engineers and senior project managers— with the requisite qualifications and experience to advance the project from the preliminary engineering to the final design phase. Separately, FMOCs help ensure that project sponsors have sufficient financial capacity to build and operate the proposed project as well as the existing system. Specifically, FTA uses the analyses and reports that FMOCs prepare, such as local financial commitment assessments, to develop each project’s local financial commitment rating. FTA also uses FMOCs’ financial assessments to anticipate financing problems and to foster dialog with project sponsors about their ability to carry out planned projects. For example, one FMOC we interviewed said its cash flow analysis of a project found that the sponsor’s forecast of the project’s schedule and cost would result in a cash flow shortfall. As a result, the relevant FTA regional office had an early indication of possible problems, and both FTA and the sponsor were able to proactively address the project’s financing issues. In another instance, the FMOC determined that the project sponsor, as part of the review of one of the 10 projects in our sample, did not have the financial capacity to move forward on a project, and because of this FMOC’s recommendation to FTA, FTA did not advance the project to the next phase of development. FTA procures project management and financial management oversight services in accordance with the Federal Acquisition Regulation (FAR), which prescribes uniform policies and procedures for all executive agencies to acquire goods and services. Under these contracts, PMOCs and FMOCs provide oversight services, such as those described earlier, to support FTA’s oversight of a number of grant programs, including New Starts. FTA awards contracts for PMOC oversight services for 5 years and for FMOC oversight services for a base year, with four 1-year options to extend, for a maximum of 5 years. Funding for these contracts is provided through statutory set-asides made available annually for specific FTA grant programs. FTA is currently authorized to use up to 1 percent of section 5309 capital investment program funds for oversight, whic includes PMOC and FMOC activities. Federal agencies have discretion to determine what services they need to procure and, based on the services being procured, what procurement procedures are appropriate. One of the guiding principles of the FAR is to deliver products or services that represent the “best value”—that is, the acquisition outcome that provides the greatest overall benefit in response to the agency’s requirements. An agency can obtain “best value” by using, for example, the General Services Administration’s (GSA) Multiple Award Schedule program or using competitive negotiations. To acquire the services of FMOCs, FTA follows procedures prescribed in the FAR. For local financial commitment assessments, it uses GSA’s Multiple Award Schedule, as described in the FAR, and for financial capacity assessments, FTA uses eligible firms certified under the Small Business Administration’s (SBA) 8(a) Business Development Program. FTA recently revised its approach to procuring PMOC services for two primary reasons, the first of which was to expand the pool of available PMOCs. Prior to 2009, FTA awarded contracts for PMOC services to architectural and engineering firms in accordance with the Brooks Act and its implementing regulations in the FAR, which prescribe specialized policies and procedures for procuring “architect-engineer services.” However, during the August 2004 through September 2009 contract period, a growing number of mergers and acquisitions reduced the pool of available architectural and engineering firms from 16 to 13. Partly in response to this decrease in the number of contractors, FTA officials reviewed the services its PMOCs were providing and determined that they did not constitute “architectural and engineering services” within the meaning of the Brooks Act and the FAR. Accordingly, FTA stopped using Brooks Act procedures and, in 2009, began using the competitive negotiation procedures described in the FAR. Negotiated acquisitions allow trade-offs between cost or price and noncost factors and allow the government to accept other than the lowest priced proposal, provided that each factor’s relative importance is clearly stated in the contract solicitation. As part of the 2009 procurement process, FTA officials said, they separately evaluated the technical and cost proposals of potential contractors and considered both qualifications and cost before starting negotiations, whereas under the Brooks Act and its implementing regulations, they had ranked competing firms on the basis of their qualifications and then started negotiations on cost. FTA’s second primary reason for changing its procurement procedures was to reduce the potential for conflicts of interest. Many of the contractors who FTA could potentially use as PMOCs have the knowledge and skills not only to oversee transit projects for FTA, but also to support project sponsors directly through an independent contract between the contractor and a project sponsor. When a project sponsor contracts directly with a contractor for work, this contractor becomes ineligible to oversee that sponsor’s project for FTA as a PMOC, since this dual role working for the project sponsor and providing oversight of the project for FTA would constitute a conflict of interest. As a result, FTA identifies conflicts of interest among its PMOCs before assigning a PMOC to a New Starts project by analyzing whether a PMOC has contracted to work for a project sponsor. According to FTA officials, FTA’s flexibility in assigning PMOCs to New Starts projects was increasingly limited as mergers and acquisitions reduced the pool of available firms during the 2004 through 2009 contract period. However, FTA officials indicated that their flexibility with assigning contractors has increased with this new group of contractors. The change in FTA’s PMOC procurement procedures has increased the number of available contractors. In 2009, when FTA first used the FAR’s competitive negotiation procedures to procure PMOCs, the pool of available contractors increased from 13 to 19, an increase of over 46 percent. According to FTA officials, this increase in the size of the PMOC pool has helped increase competition when the contractors in the pool compete for assignment to a New Starts project. FTA officials noted further that the change in procurement procedures did not exclude professional architectural and engineering firms from competing for the contracts, but rather opened the competition to a wider group of contractors. According to FTA officials, of the 19 contractors in the 2009 pool, 11 are contractors who worked as PMOCs during the 2004 through 2009 contract period, and 8 are project management contractors who are participating for the first time as prime contractors. Additionally, the change in FTA’s PMOC procurement procedures has had the benefit of expanding small businesses’ participation in the PMO program, according to FTA officials. They noted that during the 2004 through 2009 contract period, one PMOC was a small business and one additional small business participated in the PMO program as part of a mentor/protégé program. But as part of the change in its procedures, FTA reduced the minimum number of hours required of PMOCs over the 5-year contract period, which encouraged participation from small businesses. Under the most recent procurement, conducted using competitive negotiations, 3 PMOCs were small businesses. However, the change in FTA’s procurement procedures may have some negative effects, according to PMOCs. In their view, the competitive negotiation process has affected their staffing for FTA work and puts more emphasis on cost than did the Brooks Act process. For example, two contractors we spoke with said PMOCs may have to use less experienced personnel to provide oversight, and spend more time and money training them, because they perceive that FTA now places increased emphasis on cost as an evaluation factor during its procurement process. According to these contractors, the most recent contract awards resulted in ceiling prices for hourly compensation that were both lower than expected and lower than the rates under the previous contracts. With the lower ceiling prices, they said, some contractors may have to provide less experienced staff to FTA to avoid exceeding the ceiling price per hour. For example, officials from one PMOC noted that under the previous contract, the firm regularly used a leading industry expert to perform New Starts risk management reviews. However, under the new contract, the expert’s hourly labor rate exceeded FTA’s ceiling price and the PMOC had to use a different consultant from the same firm who was less qualified and could not provide the same level of quality. In addition, PMOC officials stated that more documentation is required under the new procedures but the additional requirements have not added value to the process. For example, they said that FTA asked the PMOCs to propose prices and identify staff for 44 labor categories, but noted that 95 percent of PMOC activities are completed using only a handful of the 44 labor categories. Finally, two of the contractors we spoke with speculated that FTA’s use of competitive negotiations could discourage some contractors from offering proposals for future PMOC solicitations. Despite these concerns, FTA officials maintain that the use of competitive negotiations has not affected staffing or put greater emphasis on a contractor’s price. FTA officials stated that there should be no decline in the quality of the personnel provided by PMOCs because prior to any change in the personnel assigned to a contract, FTA officials review the résumés of the incoming and outgoing staff to ensure any personnel changes will meet FTA’s qualification requirements. For example, an FTA official noted that, for one PMOC contract, FTA recently rejected 20 percent of the proposed changes to contractor staff because the proposed personnel did not meet the qualifications specified in the contract that was awarded. Additionally, although FTA officials acknowledged that cost was an evaluation factor reviewed in the award of the 2009 PMOC contracts, they noted that it was weighed fifth among the eight factors and subfactors considered during the evaluation of proposals. Furthermore, despite contractors’ concerns about ceiling prices, FTA officials explained that the ceiling prices were negotiated and agreed to by the PMOCs and FTA, and were based on rates that had been audited by the Defense Contract Audit Agency (DCAA). FTA officials also noted that if a PMOC’s overhead rates increase, the contractor may have an opportunity to negotiate new contract rates, subject to a review by DCAA. FTA sets expectations for contractors through contracts, task orders, and written guidance. After signing a contract with a contractor, FTA issues task orders which it expects the contractor to complete over the term of the contract. FTA provides guidance for PMOCs—known as Project Management Oversight Procedures—and guidance for FMOCs to assist the contractors in the oversight reviews that they are required to conduct. FTA further defines its expectations for PMOCs through work orders, which identify shorter-term products and deadlines, along with expected labor hours. For example, one task order covering 5 years directed the PMOC to deliver up to three project management plan (PMP) reviews, among other reviews, in accordance with the Project Management Oversight Procedures. The related work order refines this expectation by directing the PMOC to complete one of these reviews within the first 12 months and estimates the number of labor hours needed to do so. The scope of the work defined in the work order depends on the phase of the sponsor’s project development, prior oversight work done, and other factors. Both FTA regional and headquarters project management officials are involved in monitoring PMOCs, while the FTA Office of Planning and Environment at headquarters monitor FMOCs. The regional Task Order Manager has the day-to-day responsibilities for overseeing PMOC products and activities. For example, the Task Order Manager regularly reviews contractor vouchers and invoices and monitors the status of PMOC activities. Furthermore, both headquarters and regional officials, including planners and engineers, review the reports for accuracy and approve the reports that PMOCs develop to document the results of their oversight activities. FTA program management officials at headquarters also ask specialists within FTA, such as officials from FTA’s Office of Civil Rights, the Office of the Chief Counsel, and other offices as needed, to review PMOC reports. Separately, for FMOCs, FTA’s Office of Planning and Environment officials are responsible for monitoring FMOC work and use monthly FMOC status reports to do so. These reports include information on work completed and scheduled, problems encountered, FMOC labor hours, and items requiring FTA action. FTA officials provide feedback to PMOCs and FMOCs on these work products, including edits, questions, and corrections to reports provided to FTA. In addition to reviewing reports, FTA officials meet with PMOCs and FMOCs to monitor their performance. According to FTA officials, these meetings keep FTA informed of PMOCs’ findings, issues of concern, and recommendations for FTA or project sponsor action. For example, FTA meets quarterly with the PMOCs as a group for a briefing on major issues of concern and provides an opportunity for PMOCs to ask questions. FTA regional officials and PMOCs indicate that in addition to these meetings, FTA regional staff talk with PMOCs as needed. Several FTA regional managers we spoke with hold scheduled biweekly teleconferences and monthly meetings with the PMOCs, and according to FTA officials, many PMOCs participate in the biweekly calls between FTA and the project sponsors. FTA officials discuss a project’s progress and items to keep it on track, and review PMOC reports with PMOCs prior to project sponsor meetings. For example, FTA officials noted that PMOCs may contact the FTA task order manager for clarification of an oversight requirement. In addition, according to FTA officials, FTA provides training to PMOCs on FTA’s expectations and the administration of the oversight contracts usually through annual PMOC conferences, quarterly PMOC conference calls, webinars, and the annual engineers’ meeting. Furthermore, according to FTA officials, some regions provide additional training during meetings with PMOCs. Because of the periodic nature of FMOC oversight, FTA holds meetings with FMOCs, as needed, when the FMOC is performing a specific task. FTA indicated that if FMOCs have questions they can e-mail or phone FTA. FTA officials have recently taken steps to improve their multilayered performance evaluation system for PMOCs. FTA annually evaluates its PMOCs on four criteria—cost, quality, timeliness, and business relations. In the past, FTA found that the performance levels for these four criteria were not defined with enough specificity and were not applied consistently to PMOCs. To improve the application of these criteria, FTA headquarters officials organized a team from the regional offices and developed a worksheet in 2008 that defined these four criteria and related levels of performance to help improve consistency in the application of the criteria. For example, prior to this improvement, a “good rating” for timeliness of performance was defined simply as “there are no, or minimal, delays that impact achievement of contract requirements.” With the enhancements due to the worksheet, FTA could evaluate, among other things, the extent to which the PMOC identified problems early, the PMOC provided the project sponsor with timely technical assistance that added value to the project, and the PMOC met the original completion date for task assignments or deliverables. In addition, for the 2009 contract, FTA developed Acceptable Quality Levels (AQL) to improve the objectiveness of the quality criterion. FTA applies AQLs to evaluate the quality of PMOC reports against FTA’s Oversight Procedures. According to FTA officials, the AQLs are a means of documenting FTA’s quality expectations for reports and oversight activities. FTA incorporates the results of the AQLs into its worksheet and uses the results of the worksheet and the AQLs to assign a numerical rating for each of the four evaluation criteria. FTA contracting officials have indicated that if there is a performance issue with a contractor, the contractor is notified, either by phone or by letter, and that such action has resulted in rectification of the performance issue. FTA also informally obtains feedback on contractor performance from project sponsors. While some project sponsors provided both solicited and unsolicited feedback, others indicated they would like to have a more formal mechanism for evaluating contractor performance. Once FTA officials have gathered performance information and evaluated a contractor, using the AQLs and the internally developed worksheet, they annually place the evaluation and supporting information into the Contractor Performance System (CPS)—a multiagency system used to collect, maintain, and disseminate contractor performance evaluations for federal departments and agencies. According to FTA officials, contractors are forwarded a copy of the completed evaluation form. A contractor has 30 days to respond to or appeal an evaluation, whereupon FTA again reviews the evaluation. After 30 days, the evaluation is considered official and CPS delivers the finalized evaluation into the Past Performance Information Retrieval System (PPIRS)—a federal system that collects information on contractor performance across all federal agencies. See figure 2 for FTA’s current performance evaluation approach for PMOCs. In general, PMOCs considered the reviews, evaluations, and feedback provided by the FTA as positive and helpful in improving their ability to carry out their oversight responsibilities. The evaluation and feedback process is still new and implementation is still underway and, as such, two regional managers noted they had not yet used AQLs to evaluate PMOCs. Similarly, one PMOC indicated that FTA had not gone over AQLs with them. FTA’s Office of Planning and Environment directs and evaluates FMOC work. FTA indicated that because there are fewer reports and the FMOC work is periodic and not continuous, the Office of Planning and Environment handles all contractor assignments and performance evaluations. According to the FTA’s Office of Planning and Environment, it has determined that the use of an AQL worksheet for consistency in evaluations is not necessary since one office reviews all of the FMOCs’ work. The Office of Planning and Environment provides the contractor evaluation form to the Office of Procurement, which enters the data into CPS. FTA officials, contractors, and project sponsors cited numerous examples of how FTA’s use of oversight contractors has improved project and financial management. For example, one project sponsor noted that feedback from the PMOC on the project management plan helped ensure that the plan documents were complete and covered project costs adequately. On a different project, officials from the project sponsor noted that the PMOC’s risk management review helped identify program risks that might have affected the project’s budget. These stakeholders also noted that the FMOC’s financial oversight has helped improve projects. For example, an FMOC’s independent assessment of a New Starts project confirmed that the project sponsor had the resources to construct and operate the project, despite a complex financing approach. In another case, an FMOC determined that the New Starts project did not have the financial capability to continue and recommended to FTA that the project not advance to the next project development stage. Furthermore, we have previously reported on how FTA’s use of PMOCs and FMOCs has benefited both project sponsors and FTA. Specifically, we observed that FTA’s oversight program has helped improve project sponsors’ controls over project costs, schedules, quality, and safety. We noted that the PMO program has provided FTA with a better understanding of the issues surrounding complex construction projects and an increased awareness of potential problems that could lead to schedule delays or cost increases. PMOCs and FMOCs also provide FTA with additional expertise. Since the inception of its Project Management Oversight program, FTA has supplemented its own staff as well as used the expertise of PMOC staff, and later, FMOC staff, who have specialized areas of expertise beyond that of most FTA staff, to help oversee New Starts projects. Since the New Starts program has grown significantly while FTA’s staff size has stayed the same, FTA officials have used these oversight contractors to help compensate for this human resource gap. For example, FTA officials noted that while PMOCs are not FTA employees, the PMOCs help serve as FTA’s “eyes and ears” at project sites. Finally, in addition to oversight services, PMOCs occasionally provide technical assistance on behalf of FTA to project sponsors. Such assistance may include providing information and instruction in project management and project analysis practices, or sharing technical expertise in transit project design and construction. In the course of providing oversight, PMOCs are to notify FTA about any opportunities for project sponsors to benefit from technical assistance. FTA officials stated that New Starts projects have benefited from the technical assistance that PMOCs and FMOCs provided to project sponsors. However, while PMOCs and FMOCs can provide technical assistance in the form of examples or best practices, project sponsors are responsible for deciding how to proceed. For example, FTA assigned a PMOC to provide guidance to a project sponsor to help clarify safety requirements. As part of this process, the PMOC provided the project sponsor with examples of best practices used to meet safety requirements. The project sponsor used these best practices to resolve its safety issues and noted that having access to the PMOC and its specialized skills provided clarity and helped resolve the safety issue quickly. Finding the right balance between protecting federal investments through project management oversight and advancing projects through the project development process is challenging. As noted above, FTA’s project management oversight program is intended to strengthen the management and monitoring of major transit projects. However, determining the appropriate level of oversight that is needed for a project is a delicate task, since in certain cases, too much or too detailed oversight could slow a project’s progress. We have previously reported that one option FTA could consider to reduce the burden placed on project sponsors and move projects more quickly through the New Starts project development process is to tailor the level of oversight to the risks of a New Starts project (indicated, for example, by the project’s cost or complexity). FTA has developed procedures to assist PMOCs in ensuring that a project’s scope, schedule, and cost are in balance and that the project follows applicable federal requirements, but FTA has indicated that it also tailors PMOC oversight to each project. Specifically, FTA’s Oversight Procedures for PMOCs serve as guidance on how PMOCs should conduct their work; however, according to FTA officials, the Oversight Procedures are written to allow flexibility in the assignment of task and work orders based on the specific needs of a project. According to FTA officials, while some reviews in the Oversight Procedures are conducted for all projects that undergo PMOC oversight, such as project management plan reviews, FTA officials may decide not to have a PMOC conduct certain reviews or may ask the PMOC to conduct a more detailed review than is described in the Oversight Procedures. For example, FTA officials in an FTA region told us that they did not require the PMOC working on a project in their region to conduct a technical capacity and capability review because the PMOC was familiar with the project sponsor’s technical capacity and capability, the project sponsor had recently completed three other New Starts projects on time and within budget, and there was no change in project sponsor staff. In another example, an FTA official in another region asked the PMOC overseeing one of the projects in that region to conduct a real estate review that was not completely specified at that time in the Oversight Procedures because of concerns about the project sponsor’s real estate management approach. FTA officials noted that it is impossible to anticipate all requirements and cover them all in the Oversight Procedures. Therefore, FTA officials stated, it is possible to deviate from the Oversight Procedures if the deviations are clearly documented in the work order. Despite FTA’s efforts to tailor its oversight, four project sponsors we spoke with said that the level of oversight and PMOC involvement in a project sometimes seem excessive or detailed, making it difficult for them to spend time developing the project. For example, one project sponsor we interviewed said that FTA has layered additional oversight on projects in response to problems that FTA faced in other projects in other regions. In this case, project sponsor officials said that some of the additional oversight was not applicable to its project and that the project ended up spending time and resources addressing additional oversight requirements rather than developing the project. In addition, this project sponsor said that the level of PMOC involvement on their projects is also excessive because PMOC oversight is detailed. For example, rather than providing broad oversight over the project’s schedule, the project sponsor officials said that the PMOC requested very detailed information regarding the schedule. According to the project sponsor, as a result of this level of oversight, they had to hire more staff, which increases project costs. FTA currently oversees project sponsors in accordance with the Project Management Oversight Rule (PMO rule). In September 2009, FTA issued an Advance Notice of Proposed Rulemaking (ANPRM) to obtain public comment on proposed modifications to the rule intended to increase the effectiveness of its oversight approach. As part of the ANPRM, FTA is considering changes to the PMO rule that could potentially base the level of oversight on risk. According to FTA officials, amending the rule to emphasize its risk-informed process would formalize and standardize FTA’s current practice of tailoring its PMOC oversight to each project. A few project sponsors who provided comments to FTA on the ANPRM said that the level of oversight could be tailored to the experience of the project sponsor, with sponsors with more experience in the New Starts process undergoing less detailed oversight. Two of these project sponsors also suggested that oversight could be tailored to the level of federal investment. FTA is currently evaluating comments it received from stakeholders on this ANPRM, and expects to issue the Notice of Proposed Rulemaking in late 2010. FTA faces challenges in ensuring that it has specialized expertise and staff to oversee the growing number of complex capital projects, including New Starts projects. FTA, in its 2009 ANPRM, noted that the agency is participating in a larger number of megaprojects. These megaprojects often involve technology, design, or construction elements, such as tunnels, that make a project more complex. For example, one megaproject that is currently seeking New Starts funding from FTA requires the construction of two new tunnels under a river. To ensure that technologies, design, or construction elements, such as tunnels, do not increase the costs and schedules of the complex projects, FTA requires oversight by individuals who have specialized knowledge and experience in these areas. Furthermore, FTA officials said that the number of projects in FTA’s Small Starts program is growing and some Small Starts are fairly large, complex projects, particularly those nearing the $250 million total capital cost threshold of the program. Thus, demand for FTA oversight resources is growing. The challenges associated with the growing number of large projects and the additional demands they place on FTA’s oversight are particularly significant given that FTA’s staffing levels have remained about the same since 1982. The financing of New Starts projects has also become more challenging. To cover the large dollar amounts of some New Starts projects, particularly the megaprojects, project sponsors are borrowing more money to finance their projects and are increasingly relying on innovative financing methods, such as public-private partnerships and value capture strategies. In addition, because of the current economic climate, state finances are stretched, forcing state project sponsors to finance these projects through multiple sources or less traditional means. For example, another New Starts project we reviewed is using an innovative approach to finance an extension of an existing system. This project is funded through a variety of new revenue sources, including bonds backed by future revenue collections from a toll road. As states use such new funding methods for projects, the financial capacity oversight work that FMOCs conduct for FTA also becomes more involved, requiring more effort and time to understand the funding approaches and ensure that project sponsors can sufficiently fund their proposed projects, and also maintain and preserve their current transit systems. As noted earlier, PMOCs and FMOCs provide FTA with access to specialized experience and knowledge and additional staff support, and FTA has taken actions to use these contractors to a greater extent to address the challenges related to the growing size and complexity of New Starts projects. For example, FTA is involving PMOCs and FMOCs earlier in the project development process. FTA, beginning in 2006, began to assign PMOCs to oversee New Starts projects when the sponsor applies to enter into preliminary engineering, rather than waiting until the project is already in that stage. FTA officials said that identifying and addressing problems at an earlier stage has helped them ensure that the projects are more likely to stay within budget and on schedule. According to project sponsors we spoke with, ensuring that a project is on schedule is important because delays can significantly increase project costs. Minimizing the potential for increased project costs and delays is particularly relevant for large projects that present greater risks of project cost increases or schedule delays because they use unique technology, design, or construction elements. Additionally, in 2008, FTA began to ask its FMOCs to conduct financial capacity assessments before projects entered into final design (with an update performed at the FFGA stage), rather than waiting until the projects were at the FFGA stage. FTA officials told us that this change helps them identify financing problems earlier, allowing project sponsors more time for corrective actions. Specifically, FTA officials stated that a project sponsor may need additional time to identify additional sources of funding if FTA’s review found that there was insufficient funding or financial capacity to undertake the project. In addition, FTA noted in its 2009 ANPRM that it is considering a potential revision to the PMO rule that would better reflect the current environment of a larger federal transit program and an increased number of larger, more complex projects. Specifically, through this ANPRM, FTA is seeking comments from stakeholders on how FTA should best use its PMOCs to provide specialized expertise when needed; how the agency should use PMOCs to supplement its limited staff in overseeing increasingly complex, major capital projects; whether the use and role of PMOCs should be expanded to overseeing projects other than major capital projects; and at what stage FTA should assign PMOCs to New Starts projects, among other things. FTA is also considering whether it should expand the PMO rule to include a focus on project management, in addition to its current focus on project oversight. FTA officials explained that the expanded focus would establish performance expectations for project sponsors on certain project management areas. For example, the PMO rule could be expanded to include a requirement that project sponsors have sufficient staff in place to demonstrate that they have the capacity and capability to develop their project. FTA officials explained that by ensuring that project sponsors have the appropriate project management skills, the sponsors can better control their project costs and schedules. Effective oversight management of FTA’s New Starts program and project sponsors’ advancement of transit projects through the New Starts program depend, in part, on effective communication. We have noted that an effective communication strategy should facilitate an honest two-way exchange with, and allow for feedback from, stakeholders. Such communication is central to forming the effective internal and external partnerships that are vital to a program’s success. GAO has also noted that relevant and timely information is needed for an agency to achieve its objectives. FTA has multiple avenues through which it communicates with project sponsors about its oversight activities. Among its efforts, FTA informs project sponsors of the steps they need to take in the New Starts funding process; addresses New Starts issues through training workshops, guidance letters, circulars, and quarterly meetings with the project sponsor and the PMOC in attendance; and provides feedback on PMOCs’ reports on sponsors’ projects. Furthermore, in 2008, FTA developed checklists to provide detailed information to project sponsors on the submittals required for each project development phase. Sponsors have indicated they found this tool and the meetings to be very helpful in understanding FTA’s and PMOC’s oversight requirements. However, three project sponsors we spoke with stated that communications with FTA and PMOCs were not consistently timely, which delayed their response to FTA’s concerns. For example, one project sponsor we interviewed noted that during final design the sponsor was informed of a level boarding issue pertaining to the Americans with Disabilities Act, which negatively affected the project’s schedule and cost. The project sponsor said that these effects might have been avoided if FTA had raised the issue with the project sponsor earlier in the preliminary engineering stage. In addition, another project sponsor we interviewed said that waiting for FTA to approve its readiness reviews led to additional costs, since the project consultants were idle during this time. Some of the consultants cost the project up to $50,000 to $200,000 per month and the project sponsor risked losing these consultants to other projects. A third sponsor indicated that it gets final reports months later, by which time the reports can be outdated. This practice can raise issues that may have already been addressed, can affect relations with other funding sources, and can result in late project delivery. These apparent delays may occur for a number of reasons. FTA officials noted that project sponsors sometimes provide information that is incomplete or inaccurate, resulting in additional review time and delays. An FTA headquarters official explained that they may delay providing sponsors with final oversight reports until they make a decision, positive or negative, to move to the next phase of project development. Similarly, an FTA regional official we spoke with stated that they have delayed sharing reports with project sponsors when the reports included sensitive information, such as the impact of risk assessment on cost estimates used as the basis for FTA funding decisions, which affect ongoing funding negotiations between the project sponsor and FTA. In addition, an FTA regional official and a PMOC noted that because FTA uses a team approach to oversee the New Starts program, there are many people involved in reviewing these final reports, which might increase the time needed for reviews. For example, after the FTA regional office initially reviews a report focused on a capital cost estimate review, the report is reviewed by FTA headquarters officials, including those from the program management office who supervise the regional officials and PMOC technical work. Furthermore, FTA’s Office of Planning and Environment as well as other officials, including representatives from the Office of Chief Counsel and Office of Civil Rights, also review PMOC reports as needed. FTA has acknowledged that its current New Starts process can be lengthy and frustrating. In an October 2009 speech, the FTA administrator stated that FTA currently has a decision-making process that is frustrating, lengthy, and incomprehensible, and that FTA is working on a streamlined decision-making process; he cautioned however, that the decision may not always be to approve a project. Finally, as noted previously, FTA officials said that they are involving PMOCs earlier in the project development process to avoid problems. In addition to communication delays, three project sponsors we spoke with said that they provide a considerable amount of documentation to the PMOCs and FTA and do not get clear written reactions to this information. Five out of the six FTA regions we interviewed indicated that they do not consistently provide project sponsors with draft PMOC reports. FTA’s oversight procedures for PMOCs direct the PMOCs to discuss draft report findings with project sponsors before finalizing reports. FTA officials stated that PMOCs are expected to confirm the facts of the draft report with project sponsors. An FTA official indicated that the PMOCs are expected to share the facts with the project sponsor, and that project sponsors are “generally aware” of the issues identified in the oversight reports because of its communications with PMOC and FTA officials. Project sponsors believe getting draft reports could help them (1) ensure that PMOCs and FTA have the proper, most up-to-date information, and (2) understand the context of concerns or requests for more information. We provided a draft of this report to DOT for its review and comment. DOT officials generally agreed with our findings and provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees and the Secretary of Transportation. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or wised@gao.gov. 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. Under the Safe, Accountable, Flexible, Efficient Transportation Equity Act - A Legacy for Users (SAFETEA-LU), we are required to report annually on the Federal Transit Administration’s (FTA) New Starts process. Accordingly, the objectives of this report were to review (1) how the FTA uses contractors to oversee New Starts projects and how the agency procures, monitors, and evaluates the contractors’ services, and (2) the benefits of FTA’s oversight approach and the challenges FTA faces in conducting its oversight. Our review focused on oversight activities that project management oversight contractors (PMOC) and financial management oversight contractors (FMOC) conduct between the preliminary engineering stage of the New Starts project development process and the full-funding grant agreement (FFGA) stage that inform FTA’s recommendations for New Starts funding. Furthermore, we focused on New Starts projects, and not on Small Starts or Very Small Starts projects, since FTA does not generally assign PMOCs to Small or Very Small Starts projects. To address our two objectives, we reviewed relevant legislation and FTA documents. Specifically, we reviewed SAFETEA-LU and other relevant legislation, such as the Surface Transportation and Uniform Relocation Assistance Act (STURAA), which authorized the project management oversight program and provided funding for these oversight activities. In addition, we reviewed and analyzed FTA documents, including procedures, guidance, and performance evaluation criteria for PMOCs and FMOCs. We also reviewed FTA’s 1989 project management oversight rule; FTA’s Advanced Notice of Proposed Rulemaking (ANPRM), which seeks public comment on a proposed amendment to this rule, and FTA information on the agency’s budget for its project and financial management oversight programs. In addition to these efforts, to determine how FTA procures oversight contractors, we reviewed FTA’s procurement solicitations for PMOCs and FMOCs, reviewed GAO bid protest decisions, and interviewed FTA procurement officials in headquarters. Furthermore, we reviewed procedures for acquisition under the Brooks Act and the Federal Acquisition Regulation (FAR), including procedures for competitive negotiations. We also conducted interviews on topics related to our two objectives. In particular, we interviewed FTA officials in headquarters who are responsible for managing and planning New Starts projects, as well as officials familiar with the budget for FTA’s project and financial management oversight programs. Furthermore, we interviewed representatives from associations familiar with the New Starts program, such as the American Public Transportation Association and the New Starts Working Group. Finally, we focused our review on 10 New Starts projects that FTA recommended for FFGAs between fiscal year 2006 to fiscal year 2011. For each of these 10 projects, we conducted semistructured interviews with the project sponsors responsible for implementing the projects and the PMOCs, FMOCs, and FTA regional officials responsible for overseeing the projects. We judgmentally selected the 10 projects to include a range in (1) transit mode (i.e., heavy rail, light rail, commuter rail, or bus); (2) total project cost (from $117 million to $8.7 billion); (3) amount of federal funding (from 26.7 percent to 80 percent of total project costs); and (4) geographic area. Our sample also includes project sponsors who have been recommended for multiple FFGAs by FTA. We interviewed all of the project sponsors by telephone except the sponsor for the Dulles Corridor Metrorail project, which is located near enough to Washington, D.C., for us to interview the sponsor in person. Because the projects were selected as a nonprobability sample, the results cannot be generalized to all projects or the New Starts oversight process as a whole. Table 2 lists the 10 New Starts projects we focused on for our review. We conducted this performance audit from January to September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 describes the oversight reviews conducted by PMOCs and described in the Federal Transit Administration’s (FTA) Project Management Oversight Procedures, which were most recently revised by FTA in May 2010. According to FTA officials, the procedures described in this guidance were new to the project management oversight contracts awarded in 2009 contracts, but are based on the program guidance instructions for project management oversight contractors (PMOC) used in prior contracts. Funding for PMOC and FMOC activities is provided through statutory set- asides made available annually for specific FTA grant programs. Federal law currently authorizes FTA to use up to 1 percent of amounts made available for its major capital investments, including New Starts, for project management oversight, to fund the oversight activities of both PMOCs and FMOCs. According to FTA, this funding is pooled with funding that is authorized for FTA’s other oversight activities and then allocated across FTA’s grant programs. FTA obligates funding upon award of a contract to a PMOC or FMOC. Table 4 describes obligations made for project management oversight and financial management oversight activities for the New Starts program, as well as other FTA grant programs. According to FTA officials, the funding amounts obligated for oversight activities varies annually. FTA officials stated that this funding is allocated for program management oversight and financial management oversight activities based on where each capital project, including New Starts projects, is in the project development process and the oversight activities anticipated for each project in the coming budget year. In addition to the contact named above, Catherine Colwell, Assistant Director; Eli Albagli; Lauren Calhoun; Roshni Davé; Elizabeth Eisenstadt; Brandon Haller; Kristine Hassinger; Matthew Voit; and William Woods made significant contributions to this report. | Many states, cities, and localities are building or planning mass transit projects to meet the nation's transportation needs. The New Starts program--administered by the U.S. Department of Transportation's (DOT) Federal Transit Administration (FTA)--is an important source of new capital investment in mass transportation, providing grants to project sponsors (e.g., state and local government authorities), for the construction of major transit facilities. FTA uses contractors--known as project management oversight contractors (PMOC) and financial management oversight contractors (FMOC)--to help oversee the planning, construction, and financing of major capital projects, including those funded under the New Starts program. This report, as mandated by law, discusses (1) how FTA uses PMOCs and FMOCs to oversee New Starts projects and how the agency procures, monitors, and evaluates the contractors' services; and (2) the benefits of FTA's oversight approach and the challenges FTA faces in conducting its oversight. GAO reviewed applicable statutes, FTA guidance, regulations, and budget data, and interviewed DOT officials, project sponsors, contractors, and industry stakeholders. GAO is not making any recommendations in this report. DOT officials generally agreed with GAO's findings and provided technical comments, which we incorporated as appropriate. FTA procures PMOC and FMOC services to provide critical input into FTA's decisions regarding New Starts projects. Specifically, the reviews that PMOCs conduct keep FTA informed of a project's status and support the agency's decision on whether to advance or fund the project. Separately, financial assessments conducted by FMOCs help the agency ensure that project sponsors--which can be state or local government authorities that implement New Starts projects--have sufficient financial capacity to build and operate their projects. Although PMOCs and FMOCs have different oversight roles, services for both are procured in accordance with the Federal Acquisition Regulation (FAR). FTA recently changed how it procures PMOC services. Prior to 2009, FTA awarded PMOC contracts only to architectural and engineering firms for their services using specialized procedures in the FAR; however, in part to expand the pool of available PMOCs, FTA revised its procurement approach and now uses the competitive negotiation procedures in the FAR which permit cost and noncost tradeoffs. Using competitive negotiations has increased the pool of contractors available for FTA projects, and while some PMOC officials expressed concerns that the changes have affected the quality of staff provided for FTA work and put more emphasis on cost, FTA officials said that they have not observed any negative effects. FTA monitors PMOCs and FMOCs by setting performance expectations and using a multilayered system to evaluate their performance. Recently, FTA has taken steps to improve its contractor performance evaluation system to help ensure that its regional offices conduct evaluations consistently. FTA officials, contractors, and project sponsors identified benefits of FTA's oversight approach. For example, FTA officials and project sponsors said that FTA's oversight approach has improved project management, supplemented existing FTA staff, and provided insights through technical assistance and expertise from PMOCs and FMOCs. However, FTA's oversight program faces some challenges, including balancing project management oversight and advancing projects, managing the larger, more complex projects entering the New Starts portfolio, and communicating with project sponsors. FTA has taken some actions to address these challenges. To more effectively balance oversight and project advancement, FTA developed procedures to assist PMOCs with their oversight responsibilities and issued an Advance Notice of Proposed Rulemaking on, among other things, the extent to which the level of its oversight should be based on risk. As part of FTA's effort to oversee larger, more complex projects, FTA has directed its PMOCs and FMOCs to conduct oversight activities earlier in project development, helping identify potential problems earlier. To improve communications, FTA developed checklists which project sponsors found helpful in understanding FTA's oversight requirements. However, some project sponsors we spoke with said that FTA's communications were not consistently timely or clearly documented, thus delaying sponsors' responses and, sometimes, project time frames. FTA recognizes that the New Starts process can be lengthy, but officials indicate that project sponsors do not always provide FTA needed information. |
Despite their commitment to halve global hunger by 2015, efforts of host governments and donors, including the United States, to accelerate progress toward that goal have been insufficient, especially in sub-Saharan Africa. First, host governments have provided limited agricultural spending, with only eight meeting their 2003 pledge to direct 10 percent of government spending to agriculture. Second, multilateral and donor aid to African agriculture generally declined from the 1980s to around 2005. Third, U.S. efforts to reduce hunger, especially in sub-Saharan Africa, have been constrained by resource and scope limitations. Although African countries pledged in 2003 to direct 10 percent of government spending to agriculture, only 8 out of 38 governments had met this pledge as of 2007, according to the most current available data from the International Food Policy Research Institute. These data represent an increase of four additional countries that met the pledge between 2005 and 2007 (see fig.1.). 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. As of October 2009, according to a senior USAID official, nine countries had signed CAADP compacts, and five more countries were scheduled for a CAADP roundtable process, which defines programs that are to be financed by host governments and donors. Until recent years, donors had reduced the priority given to agriculture. As a result, the share of official development assistance (ODA) from both multilateral and bilateral donors to agriculture for Africa significantly declined, from about 15 percent in the 1980s to about 4 percent in 2006 (see fig. 2). The decline in donor support to agriculture in Africa over this period is due in part to competing priorities for funding and a lack of results from 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 to prioritize social sectors, such as health and education, over agriculture. In recognition of the growing global food security problem, in July 2009, the United States and assembled leaders at the G8 Summit in L’Aquila, Italy, agreed to a $20 billion, 3-year commitment to reverse the declining trend in ODA funding for agriculture. U.S. assistance to address food insecurity has been constrained in funding and limited in scope, especially in sub-Saharan Africa. In recent years, the levels of USAID funding for development in sub-Saharan Africa have not changed significantly compared with the substantial increase in U.S. funding for emergencies. Funding for the emergency portion of Title II of Public Law 480—the largest U.S. food aid program—has increased significantly in recent years, while the funding level for nonemergencies has stagnated. In fact, the nonemergency portion accounted for 40 percent of Title II funding in 2002, but has declined, accounting for only 15 percent in 2008. While emergency food aid has been crucial in helping 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. Also, 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. Launched in 2002, the Presidential Initiative to End Hunger in Africa (IEHA)—which represented the U.S. strategy to help fulfill the MDG goal of halving hunger by 2015—was constrained in funding and limited in scope. In 2005, USAID, the primary agency that implemented 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 (DA) and other accounts. IEHA was 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 was implemented in three regional missions in sub-Saharan 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. 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. Although it purported to be a governmentwide strategy, IEHA was limited to only some of USAID’s agricultural development activities and did not integrate with other agencies in terms of plans, programs, resources, and activities to address food insecurity in sub-Saharan Africa. For example, at the time of our review, because only eight USAID missions had fully committed to IEHA, and the rest of the missions had not attributed funding to the initiative, USAID had been unable to leverage all of the agricultural development funding it provides to end hunger in sub-Saharan Africa. This lack of a comprehensive strategy likely led to missed opportunities to leverage expertise and minimize overlap and duplication. For example, both the Millennium Challenge Corporation (MCC) and USDA are making efforts to address agriculture and food insecurity in sub- Saharan Africa, but IEHA’s decision-making process at the time of our review had not taken these efforts into consideration. In addition, IEHA had not leveraged the full extent of the U.S. assistance across all agencies to address food insecurity in sub-Saharan Africa. 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 (PEPFAR), which is receiving billions of dollars every year. The new administration has committed to improving international food assistance by pledging U.S. leadership in developing a new global approach to hunger, and the Secretary of State has emphasized the importance of a comprehensive approach to sustainable systems of agriculture in rural areas worldwide. The U.S. share of the G8 commitment of $20 billion, or $3.35 billion, includes $1.36 billion for agriculture and related programming in fiscal year 2010 to establish food security, representing more than double the fiscal year 2009 budget request level. In our May 2008 report, we recommended that the Administrator of USAID (1) work in collaboration with the Secretaries of State, Agriculture, and the Treasury to develop an integrated governmentwide strategy that defines each agency’s actions and resource commitments to achieve food security, particularly 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 (2) report on progress toward the implementation of the first recommendation as part of the annual U.S. International Food Assistance Report submitted to Congress. USAID concurred with the first recommendation but expressed concerns about the vehicle of the annual reporting. The Departments of Agriculture, State, and Treasury generally concurred with the findings. Consistent with our first recommendation, U.S. agencies have launched a global hunger and food security initiative and, as part of that initiative, are working to develop a governmentwide strategy to address global food insecurity. In April 2009, the new administration created the Interagency Policy Committee (IPC). In late September 2009, State issued a consultation document—a work in progress—that delineates a proposed comprehensive approach to food security based on country- and community-led planning and collaboration with U.S. partners. According to a senior State official, the consultation document was a product of an interagency working group. Although the document outlines broad objectives and principles, it is still a work in progress and should not be considered the integrated governmentwide strategy that we called for in our 2008 recommendation. A comprehensive strategy would define the actions with specific time frames and resource commitments that each agency undertakes to achieve food security, particularly in sub-Saharan Africa, including improving collaboration with host governments and other donors and developing improved measures to monitor and evaluate progress toward implementing the strategy. In prior products, we have identified six characteristics of an effective national strategy that may provide additional guidance to shape policies, programs, priorities, resource allocations, and standards to achieve the identified results. The consultation document outlines three key objectives: (1) to increase sustainable market-led growth across the entire food production and market chain; (2) to reduce undernutrition; and (3) to increase the impact of humanitarian food assistance. State has also identified five principles for advancing global food security strategy, as follows: comprehensively address the underlying causes of hunger and undernutrition, invest in country-led plans, strengthen strategic coordination, leverage the benefits of multilateral mechanisms to expand impacts, and deliver on sustained and accountable commitments. Regarding our second recommendation for annual reporting to Congress on an integrated governmentwide food security strategy, USAID suggested that, rather than the International Food Assistance Report (IFAR), a more appropriate report, such as the annual progress report on IEHA (which is not congressionally required), be used to report progress on the implementation of our first recommendation. USAID officials stated that they plan to update Congress on progress toward implementation of such a strategy as part of the agency’s 2008 IEHA report, which is forthcoming in 2009. A summary of the 2008 IEHA report, released in September 2009, identified three food security pillars—(1) immediate humanitarian response, 2) urgent measures to address causes of the food crisis, and (3) related international polices and opportunities—used to respond to the 2007 and 2008 global food crisis. However, as we concluded in our 2008 report, IEHA neither comprehensively addresses the underlying causes of food insecurity nor leverages the full extent of U.S. assistance across all agencies to fulfill the MDG goal of halving hunger by 2015, especially in sub-Saharan Africa. Finally, in response to a request from Congresswoman Rosa DeLauro, Chair of the House Committee on Appropriations, Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies, we are currently conducting a review of U.S. efforts to address global food insecurity. Report issuance is planned for February 2010. At that time, we plan to report on (1) the nature and scope of U.S. food security programs and activities and (2) the status of U.S. agencies’ ongoing efforts to develop and implement an integrated governmentwide strategy to address persistent food insecurity by using GAO criteria identified in prior products. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For questions about this testimony, please contact Thomas Melito at (202) 512-9601 or melitot@gao.gov. Individuals who made key contributions to this testimony include Phillip J. Thomas (Assistant Director), Sada Aksartova, Carol Bray, Ming Chen, Debbie Chung, Lynn Cothern, Martin De Alteriis, Mark Dowling, Brian Egger, Etana Finkler, Kendall Helm, Joy Labez, Ulyana Panchishin, Lisa Reijula, and Julia Ann Roberts. International Food Assistance: Key Issues for Congressional Oversight. GAO-09-977SP. Washington, D.C.: September 30, 2009. International Food Assistance: USAID Is Taking Actions to Improve Monitoring and Evaluation of Nonemergency Food Aid, but Weaknesses in Planning Could Impede Efforts. GAO-09-980. Washington, D.C.: September 28, 2009. International Food Assistance: Local and Regional Procurement Provides Opportunities to Enhance U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-757T. Washington, D.C.: June 4, 2009. International Food Assistance: Local and Regional Procurement Can Enhance the Efficiency of U.S. Food Aid, but Challenges May Constrain Its Implementation. GAO-09-570. Washington, D.C.: May 29, 2009. International Food Security: Insufficient Efforts by Host Governments and Donors Threaten Progress to Halve Hunger in Sub-Saharan Africa by 2015. GAO-08-680. Washington, D.C.: May 29, 2008. 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. Maritime Security Fleet: Many Factors Determine Impact of Potential Limits of Food Aid Shipments. GAO-04-1065. Washington, D.C.: September 13, 2004. United Nations: Observations on the Oil for Food Program and Iraq’s Food Security. GAO-04-880T. Washington, D.C.: June 16, 2004. 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. Food Aid Program to Russia Had Weak Internal Controls. GAO/NSIAD/AIMD-00-329. Washington, D.C.: September 29, 2000. 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. Foreign Assistance: North Korea Restricts Food Aid Monitoring. GAO/NSIAD-00-35. Washington, D.C.: October 8, 1999. 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. 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 number of undernourished people worldwide now exceeds 1 billion, according to the United Nations (UN) Food and Agriculture Organization (FAO). Sub-Saharan Africa has the highest prevalence of food insecurity, with 1 out of every 3 people undernourished. Global targets were set at the 1996 World Food Summit and reaffirmed in 2000 with the Millennium Development Goals (MDG) when the United States and more than 180 nations pledged to halve the number and proportion of undernourished people by 2015. In a May 2008 report, GAO recommended that the Administrator of the U.S. Agency for International Development (USAID), in collaboration with the Secretaries of Agriculture, State, and the Treasury, (1) develop an integrated governmentwide U.S. strategy that defines actions with specific time frames and resource commitments, enhances collaboration, and improves measures to monitor progress and (2) report annually to Congress on the implementation of the first recommendation. USAID concurred with the first recommendation but expressed concerns about the vehicle of the annual reporting. The Departments of Agriculture, State, and Treasury generally concurred with the findings. In this testimony, based on prior reports and ongoing work, GAO discusses (1) host government and donor efforts to halve hunger, especially in sub-Saharan Africa, by 2015, and (2) the status of U.S. agencies' implementation of GAO's 2008 recommendations. Efforts of host governments and donors, including the United States, to achieve the goal of halving hunger in sub-Saharan Africa by 2015 have been insufficient due to a variety of reasons. First, host governments' agricultural spending levels remain low--the most current data available show that, as of 2007, only 8 of 38 countries had fulfilled a 2003 pledge to direct 10 percent of government spending to agriculture. Second, donor aid for agriculture in sub-Saharan Africa was generally declining as a share of overall official development assistance (ODA) until 2005. Third, U.S. efforts to reduce hunger in sub-Saharan Africa were constrained in funding and limited in scope. These efforts were primarily focused on emergency food aid and did not fully integrate U.S. and other donors' assistance to the region. To reverse the declining trend in ODA funding for agriculture, in July 2009, the Group of 8 (G8) agreed to a $20 billion, 3-year commitment. The U.S. share of this commitment, or $3.35 billion in fiscal year 2010, represents more than double the fiscal year 2009 budget request for agriculture and related programming. Consistent with GAO's first recommendation, U.S. agencies are in the process of developing a governmentwide strategy to achieve global food security. In September 2009, State issued a consultation document that delineates a proposed comprehensive approach to food security. Although the document outlines broad objectives and principles, it is still a work in progress and should not be considered the integrated governmentwide strategy that GAO recommended. It does not define the actions, time frames, and resource commitments each agency will undertake to achieve food security, including improved collaboration with host governments and other donors and measures to monitor and evaluate progress in implementing the strategy. Regarding GAO's second recommendation, USAID officials plan to update Congress on progress toward the implementation of such a strategy as part of the agency's Initiative to End Hunger in Africa 2008 report, which is forthcoming in 2009. |
The federal government recognizes fusion centers as assets that are critical to enhancing homeland security because they coordinate the gathering, analysis, and dissemination of law enforcement, homeland security, public safety, and terrorism information. Centers also serve as focal points for the two-way exchange of information between federal agencies and state and local governments. As of June 2014, there were 78 fusion centers across the United States, the District of Columbia, and U.S. territories that collectively make up the National Network. These include centers that are statewide or broad in jurisdiction—such as those operated by state police—and regional centers that usually cover large cities with substantial populations and numerous critical infrastructure sites, which may be operated by a city or county law enforcement or emergency management agency. Recognition as a fusion center within the National Network generally requires that the governor of the state make this formal designation; a state or local governmental agency oversees and manages the center; the center has plans and procedures to function as a focal point for sharing law enforcement, homeland security, public safety, and terrorism information; and the center has achieved requisite baseline capabilities as DHS—on behalf of federal interagency partners—determines through an annual assessment of each fusion center’s capabilities. A state or local law enforcement official generally serves as the center director, but non- law enforcement contract personnel can also serve in this capacity as determined by the applicable agency that owns and operates the center. Analyst positions within these centers often make up a substantial portion of the staffing and typically include a combination of state, local, and federal personnel. While each center engages in core information-sharing functions— namely, the receipt, analysis, gathering, and dissemination of threat- related information—some centers focus more broadly on “all-crimes” or “all-hazards,” in addition to terrorism and homeland security information. Fusion centers can issue a combination of situational awareness and analytical products—such as daily or weekly bulletins on criminal or intelligence information and intelligence assessments—which, in general, provide reporting on an emerging threat, group, or crime. Centers primarily create these products for law enforcement entities and other partners within their jurisdiction, such as owners and operators of critical infrastructure. Fusion centers also collect and process tips and leads as part of the Nationwide Suspicious Activity Reporting Initiative (NSI), and provide outreach and training to the private sector and other governmental partners. The 9/11 Commission Act required that the DHS Secretary establish a DHS State, Local and Regional Fusion Center Initiative and that—in coordination with representatives from fusion centers and the states—the department take certain actions to support the initiative. For example, the act requires the Secretary to support federal efforts to integrate fusion centers into the ISE, assign personnel to centers, incorporate fusion center intelligence information into DHS information, provide training, and facilitate close communication and coordination between the centers and DHS. The law also requires the Secretary, in consultation with the Attorney General, to establish guidelines for fusion centers that include standards that fusion centers must address.that centers collaboratively develop a mission statement, identify expectations and goals, measure performance, and determine center effectiveness; create a collaborative environment for the sharing of intelligence and information among federal, state, local, and tribal These include, for example, government agencies, the private sector, and the public, consistent with guidance from the President and the Program Manager for the Information Sharing Environment (PM-ISE); and offer a variety of intelligence and information services and products. Within DHS, I&A’s SLPO is responsible for providing a link among the fusion center; the intelligence community; and state, local, and private sector partners.either part-time or full-time personnel to fusion centers to support center operations and serve as liaisons between the fusion center and federal components. In September 2008, DHS and DOJ jointly published the Baseline Capabilities for State and Major Urban Area Fusion Centers, which the agencies developed in collaboration with the PM-ISE and other federal, state, and local officials. This document identified the capabilities determined necessary to achieve a national, integrated network of fusion centers and detailed the standards necessary for a fusion center to be considered capable of performing basic functions by the fusion center community. In 2010, fusion center directors, in partnership with the federal government, distilled the Baseline Capabilities for State and Major Urban Area Fusion Centers into priorities, including four Critical Operational Capabilities: receive: ability to receive classified and unclassified information from federal partners. analyze: ability to assess local implications of that threat information through the use of a formal risk assessment process. disseminate: ability to further disseminate that threat information to other state, local, tribal, territorial, and private sector entities within their jurisdiction; and gather: ability to gather locally-generated information, aggregate it, analyze it, and share it with federal partners as appropriate. In September 2010, federal, state, and local officials completed the first nationwide assessment of fusion centers to evaluate center capabilities and to establish priorities for federal government support. The assessment process focuses on measuring fusion center implementation of the four Critical Operational Capabilities, as well as four additional Enabling Capabilities (privacy, civil rights, and civil liberties protections; sustainment strategy; communications and outreach; and security). Since 2011, DHS has taken the lead to manage and implement the annual assessment process as a core component of its broader Fusion Center Performance Program. The other two components of the performance program are DHS activities to further develop capabilities and mitigate gaps, as well as an exercise program to evaluate fusion center capabilities in practice, called the Fusion Center Readiness Initiative. While fusion centers are state and locally owned, the federal government has continued to provide federal grant funding to support center operations, in part because the government expects the National Network of Fusion Centers to be a key player in sharing information. The fiscal year 2013 Homeland Security Grant Program guidance also identified the maturation and enhancement of fusion centers as one of five priority areas for HSGP funding. The HSGP consists of three separate programs, two of which states and local jurisdictions have primarily used to help fund fusion centers—the State Homeland Security Program (SHSP) and the Urban Area Security Initiative (UASI). These grant programs are not specifically focused on, or limited to, fusion centers and the fusion centers do not receive direct, dedicated funding from DHS. Rather, a state administrative agency—the state-level agency responsible for managing all homeland security grants and associated program requirements—or an urban area’s working group, which has similar responsibilities, determines the amount of grant funding a fusion center receives. A fusion center typically contributes to the development of a state’s federal grant application by providing information on how the center will use the proposed funding it requests, called an investment justification. As the cornerstone of DHS’s efforts to evaluate how fusion centers are meeting designated standards for the four critical capabilities and four enabling capabilities, the fusion center annual assessment process is serving to assess and monitor capability development for both individual fusion centers and the National Network. To determine capability scores, each fusion center completes an online questionnaire that addresses multiple attributes for each of the eight capabilities, for a collective total of 50 individual attributes. For example, the “gather” capability is composed of 8 total attributes, which include questions to determine if the center has a documented process to manage tips and leads and has identified standing information needs from DHS entities, among other partners. These attributes form the basis by which DHS assesses each fusion center’s progress from year to year. The highest possible score that each fusion center can receive is 100 points. SLPO completed its third iteration of the annual assessment process in 2013, and released its annual report of the aggregate findings from this assessment in July 2014. Results of the 2013 assessment indicate that fusion centers are continuing to increase overall capability scores, and many are nearing full achievement of the 50 individual attributes that the assessment uses as evaluation criteria. Specifically, the average overall capability score reported for the National Network was 91.7 out of 100 in This score represents an improvement of about 3 points from the 2013. 2012 average score of 88.4 and continues an upward trend from the average national score of 76.8 identified in 2011. These increases reflect that fusion centers are continuing to take steps to achieve designated capabilities and mitigate gaps identified in prior years. However, scores also decreased for 1 or more of the capability attributes for 15 centers in 2013, a fact that, according to SLPO officials, highlights the importance of continued monitoring through the annual assessment. The 2013 assessment data cover the time period from August 2012 through July 2013. The overall assessment scores represent fusion centers’ progress in establishing designated baseline capabilities—such as implementing specified policies and procedures—but the scores may not reflect improvements in overall performance or homeland security contributions. That is, the assessment questions are intended to capture the extent to which each fusion center—regardless of size or staffing level—has met baseline capabilities to receive, analyze, gather, and disseminate information. However, the actual output of products and services can vary considerably by center based on risk environment, resource levels, or other factors. For example, 11 individual attributes constitute the “analyze” capability, and represent a broad range of activities, such as having developed an analytical production plan, the ability to access subject matter experts, and being able to contribute to local and national threat assessments. A center may report the successful completion of such activities and improve its overall assessment scores, but the scores do not reflect if the center effectively administered these activities or if they resulted in any considerable impact. For example, developing an analytical production plan may not equate to effectively meeting the plan’s targets or producing the types of reports identified therein. This highlights the importance of further validating these capabilities through other mechanisms, such as the Fusion Center Readiness Initiative and targeted performance metrics, which we discuss later in the report. Nevertheless, the annual assessment process reflects a mechanism for systematically assessing existing baseline capabilities and gaps, and provides fusion centers an indicator of their progress in achieving baseline capabilities. SLPO program management officials noted that they intend for other efforts, including the recent development of additional performance measures, to help capture the extent to which centers are achieving intended results and supporting the federal government’s homeland security mission. All 10 directors of the fusion centers we visited stated that the annual assessment program is an effective process to evaluate their capabilities against a uniform standard, and serves to identify potential opportunities for improvement. For example, directors identified specific actions that their fusion center took to address an individual attribute and improve the center’s capability score, such as developing a plan, policy, or developing additional mechanisms to disseminate alerts. In general, the directors we spoke with stated that the administrative requirements for completing the assessment were reasonable and that center staff could generally complete these steps in a few days. In addition to assessing capabilities and related gaps, 2 directors noted that the assessment can serve as an effective mechanism to familiarize a new director with the center, given the relatively frequent turnover in directors across the National Network. Two directors also said that they use the assessment results to brief center management, such as state homeland security directors, on center operations, and that these results provide information on progress the center made toward achieving baseline capabilities. Further, 5 of the 10 directors we interviewed specifically noted the DHS requirement to utilize the assessment results to inform annual federal grant funding requests. Generally, the directors reported that while the grant requests are routinely focused on maintaining existing capabilities through analytical staff positions and technology platforms, the requests may also target the development of plans or other actions necessary to address attribute gaps, as applicable. With the average assessment score now at almost 92 percent—and many centers achieving the highest possible score of 100—SLPO officials stated that the assessment process is unlikely to drive significant new capability development. The majority of the fusion centers that we visited had achieved scores of over 95 percent, and in 2 cases, center directors did not plan to address the 1 or 2 remaining attributes required for a perfect score because they said the cost and administrative burden outweighed the benefit. One example cited was requiring fusion centers to verify that recipients received all products as intended. These directors continued to support the overall assessment process, but they acknowledged that their focus would likely shift to maintaining existing capabilities rather than trying to achieve new capabilities to close any remaining gaps. Although fusion centers are continuing to mature and are beginning to maintain high scores, SLPO officials said that they do not plan to change the current assessment process or any of the individual attributes to potentially capture additional capabilities. The officials noted that the current process and attributes remain important to help monitor and sustain existing capabilities and protect against possible backsliding as fusion center directors turn over and fusion center funding becomes more constrained. These officials also noted the importance of maintaining a common standard that all fusion centers can achieve, regardless of size, staffing, or location. Moreover, the officials said that they plan to maintain the existing assessment questions to ensure direct comparability of results from year to year. Finally, as discussed later, DHS uses the assessment to collect data to measure progress according to certain performance measures. As the second key component of the Fusion Center Performance Program, SLPO conducts activities to identify common capability gaps across the National Network and provides resources for fusion centers— such as technical assistance and document templates—to help centers address and mitigate these gaps. Within the annual assessment report, SLPO provides a summary of findings regarding National Network capability scores and progress made, and includes data-informed recommendations that are intended to address commonly identified gaps. SLPO also includes specific recommendations for each of the eight capabilities, as well as several overall areas identified as needing improvement. For example, the 2012 report highlighted the need to identify analytical products that meet specific information needs, as well as expanded involvement in local government bodies to promote improved collaboration. As part of information collection efforts during the annual assessment process, SLPO officials noted that they also solicit feedback regarding the quality and effectiveness of federal support activities, such as training and technical assistance, received over the previous 12 months. According to officials, SLPO uses this information to help develop the suite of mitigation resources to be provided in the following year. According to program documentation, the gap mitigation resources are intended to help fusion centers address gaps in capabilities and enhance the knowledge and skills of fusion center personnel. These resources include a combination of guidance and reference materials, as well as targeted training and technical assistance programs. Two key documents comprise the gap mitigation resources—the Gap Mitigation Guidebook and an annual publication of Gap Mitigation Activities. The guidebook notes that this resource is intended to assist fusion centers in developing and implementing plans, policies, or standard operating procedures for each of the critical operating capabilities. It includes plan templates and reference materials that DHS intends to help fusion centers define and document key business processes, such as the protection of privacy and civil liberties. The Gap Mitigation Activities is a dynamic document informed by both the annual assessment results and feedback DHS receives from fusion centers. For example, the 2013 Gap Mitigation Activities “menu” included a total of over 60 activities identified to enhance or sustain fusion center capabilities across each of the core capabilities. Specific resources identified include a combination of new and existing activities intended to enhance and support capability development, including staff exchange programs, risk analysis and product feedback templates, and training and technical assistance designed to educate fusion center personnel on specific subjects, such as basic intelligence analysis. All 10 fusion center directors we visited said that they were aware of DHS’s annual Gap Mitigation Activities—such as its listing of analytical training courses and exchange programs—and the 6 directors that discussed participation in these activities said they were effective. Three directors also specifically referenced the Gap Mitigation Guidebook and said that they utilized a template or other written reference materials contained within the document. In addition, several fusion center directors said that they routinely interact with directors from other centers and one noted they were most likely to address any identified capability gaps by obtaining an example of a plan or policy from another center, or inquiring about their approach to addressing a capability. In general, our interviews with fusion center directors and SLPO headquarters officials indicate that SLPO routinely provided outreach and communications to these fusion centers regarding the mitigation support resources that are available. The Fusion Center Readiness Initiative is a core component of the Fusion Center Performance Program, but it remains in the early stages of development largely because of staffing challenges. According to DHS program documents, this initiative includes the establishment of an annual exercise program that is intended to provide fusion centers an opportunity to apply and evaluate capabilities in an operational context. According to DHS officials, the exercise program is intended to help define capability improvement priorities and identify investment focus areas, as well as provide support and functional consistency across the National Network. The officials noted that limited progress has been made in developing an exercise program since 2012 because of challenges in hiring a candidate to fill a key program management position. However, the officials said that this position was successfully staffed in June 2014. Although the Fusion Center Readiness Initiative is not fully implemented, DHS has taken steps to conduct several drills and exercises involving fusion centers in recent years. For example, in August 2012, SLPO facilitated an exercise incorporating 7 fusion centers and other partners, including representatives from FBI, CBP, and the Transportation Security Administration. This day-long exercise included four objectives that collectively targeted each of the fusion centers’ critical and enabling capabilities. The after-action report identifies 18 individual corrective actions and includes implementation details, such as the entity responsible for taking the action and the expected time frame for completion. According to SLPO officials, efforts are underway to schedule and coordinate additional fusion center exercises. Specifically, the officials noted that they plan to conduct exercises under the readiness initiative every 2 years with participation from a group of 7 to 10 fusion centers. The officials said that the longer-term vision is to conduct up to three exercises per year—as well as drills addressing specific analytical capabilities and communications. SLPO officials also noted the importance of aligning these activities with DHS’s National Exercise Program. Officials from the 10 fusion centers we visited also reported that centers often participate in exercises and drills sponsored by a combination of other federal, state, and local partners. The scope and purpose of these exercises varied and ranged from full-scale exercises simulating a real- world threat scenario to routine drills validating communication and alert notification procedures. Fusion centers also reported on their participation in such exercises as part of publications the centers develop to identify key products and services provided to centers’ partners over the year. Over the past decade, Congress has enacted laws and federal agencies have issued guidance and related documents that help to define expectations for fusion centers, which have evolved from high-level guidance focused on terrorism-related information sharing to more specific guidance that defines expectations for fusion center capabilities, operations, and functions. For example, provisions of the Intelligence Reform Act, as amended, recognize that state and local partners have a role in the sharing of terrorism-related information. In 2005, as states and localities began to create centers, DHS, DOJ, and the PM-ISE issued more specific guidance to fusion centers through Fusion Center Guidelines that recommended procedures for establishing and maintaining centers, training personnel, and producing privacy and civil liberties policies. In conjunction with the guidelines, in 2008, DOJ’s Global Justice Information Sharing Initiative issued Baseline Capabilities for State and Major Urban Area Fusion Centers, which further clarified expectations for fusion center capabilities and management and administrative functions, such as those related to the collection, analysis, and dissemination of information. Based on our analysis of the collective laws and federal agency guidance issued to date, federal agencies have defined expectations for fusion centers related to their role in information- sharing activities.policies. The NFCA—in collaboration with other state, local, and federal entities— developed a national strategy that builds upon federal guidance to further outline key roles and priorities of the National Network from the fusion center perspective. Among the elements included in the strategy is an overview of the current status of the network; the network’s roles in supporting information-sharing activities; and future goals, objectives, and initiatives that the network is to carry out to support national security over the period defined by the strategy, 2014 to 2017. The NFCA strategy was issued in July 2014. The NFCA President noted that the strategy is intended to help standardize how fusion centers function across the network and further clarify the standards established in the baseline capabilities guidance related to the analysis and dissemination of intelligence information, among other things. The strategy also provides specific examples that outline the network’s contributions to national security and the types of services fusion centers provide to state, local, and federal partners, among others. For example, the strategy discusses the centers’ role in vetting information in support of the NSI and also providing analysis that increases the value of analytic products centers produce. Committee on Homeland Security, House of Representatives, Majority Staff Report on the National Network of Fusion Centers (Washington, D.C.: July 2013). outline a broader set of activities the National Network expects to accomplish over the next 3 years, as figure 1 illustrates. The strategy also identifies 37 specific initiatives that support the goals and objectives that further highlight efforts that the National Network expects to complete over the 3 years. For example, 1 initiative related to goal 4 is to work with federal partners to establish a minimum level of engagement and expectations that are uniform and consistent across all regions and field offices related to access to data systems. In addition to the recommendation that centers themselves articulate a national strategy, the majority staff report also called for federal agencies to develop a federal strategy that explains how and why the federal government engages with fusion centers. The NFCA President also noted that a federal strategy could, among other things, provide fusion centers with a better understanding of the methodology federal agencies use to deploy personnel to centers and standardize centers’ access to federal data systems. SLPO officials said that DHS does not plan to develop a federal strategy, since they believe this information currently exists in the various strategy and guideline documents already issued. However, DHS is currently working in coordination with DOJ to develop a Federal Framework for Supporting the National Network of Fusion Centers that a senior I&A official said is intended to help summarize the collective federal efforts guiding support to fusion centers. The official also noted that the framework will include efforts related to assessment and performance programs, resource allocations, governance processes, and analytic standards, among others. In technical comments provided on a draft of this report, DHS noted that the federal framework document will also include strategic objectives and priorities, in addition to identifying current efforts. DHS added that a draft of this updated approach was presented to the Criminal Intelligence Coordinating Council and the Fusion Center and Suspicious Activity Reporting Subcommittee of the Information Sharing and Access Interagency Policy Committee for feedback in September 2014. In coordination with fusion centers and federal partners, DHS has developed 45 performance measures designed to capture standardized data to assess the impact and contribution of fusion centers on information sharing and homeland security. DHS initially reported on five measures in the 2012 fusion center assessment report. For example, one measure included the number of suspicious activity reports that fusion centers submit to the FBI that result in the initiation or an enhancement of an FBI investigation. To build upon these five initial measures, in 2013, DHS began an effort to develop a “logic model” that graphically depicts how fusion center inputs (e.g., funding and personnel), processes (e.g., activities and initiatives), outputs (e.g., products and services), and outcomes (e.g., effect or results) relate to one another. According to DHS’s performance measures definition guide, the logic model was used to develop an additional 40 performance measures, and collectively, the 45 measures are intended to determine the impact of fusion centers and homeland security contributions. The guide notes that, using the logic model, 24 of the measures are defined as outcome measures, which are grouped into six outcome categories, examples of which are illustrated in table 2. According to the guide, 21 of the 45 measures, also based on the logic model, are intended to capture the outputs of key fusion center functions and quantify the number of products or services delivered as a result of a process, such as situational awareness reporting. Examples of such measures are shown in table 3. We assessed SLPO’s 45 performance measures against criteria for successful measures that GAO developed in connection with work conducted on the Government Performance and Results Act of 1993. Specifically, the criteria include key attributes developed to assess performance goals and measures based on a combination of previously established GAO criteria, GPRA, and the IRS Restructuring and Reform Act of 1998, as well as related performance management literature.analysis showed that, collectively, the fusion center performance measures are generally aligned with the successful attributes. For example, among other attributes, the measures are aligned with DHS’s goals and missions, are clearly stated, appear objective, and cover the core activities of the program. While the new measures do not currently incorporate performance targets, as our prior work suggests, SLPO officials stated that they plan to analyze data collected for the measures in 2013 to establish baseline targets for future years. According to the Performance Measures Definition Guide, data obtained from responses to DHS’s annual assessments of fusion centers will provide information to implement some of the 45 measures. Data for other measures will come from internal DHS offices, other federal agencies—such as the FBI—and other fusion center partners, including the National Governors Association and state homeland security advisors. SLPO implemented 34 of the 45 performance measures as part of the 2013 fusion center annual assessment and plans to implement the remaining 11 measures in future assessment cycles as additional data collection mechanisms are established. Since all of the new performance measures have not yet been fully implemented, it is too early to determine how these measures collectively will help assess fusion center contributions to homeland security. For example, 10 of the 11 performance measures that were not implemented as part of the 2013 annual assessment are intended to assess outcomes of fusion center activities related to enhancing homeland security, and SLPO has not yet developed methodologies for collecting the data. An example of an outcome measure not yet implemented is the percentage of key customers—including state homeland security advisors—reporting that fusion center products and services resulted in increased situational awareness of threats within their area of responsibility. According to SLPO officials, these measures are still in development since limitations currently exist to collect data to implement them, but they are taking steps to overcome these limitations. For example, some measures require DHS to put additional data collection requirements into place or develop new systems. Appendix I contains a summary of fusion center performance measures and their implementation status. The 2013 annual report on fusion centers contained results for the 34 measures that SLPO had implemented and noted that over 98 percent of The report also fusion centers provided data related to all 34 measures.highlighted specific measures that show the National Network’s contributions to federal homeland security efforts. For example, the report noted that fusion centers developed about 6,000 products in 2013 and linked 2,250 (37.5 percent) to Homeland Security Standing Information Needs. The report also noted that fusion centers issued 275 collaborative products with federal partners in 2013, a 7.4 percent increase from 256 in 2012. The 2013 annual assessment’s focus on performance measures reflects that DHS and the National Network are taking steps to better capture key results and outcomes of fusion center activities and their overall contributions in support of the homeland security mission. SLPO produces an annual Fusion Center Federal Cost Inventory report that shows the number of federal personnel agencies report that they deployed to fusion centers—either full- or part- time—as well as the non- personnel support agencies provided. Figure 2 shows the number of personnel federal agencies reported deploying to fusion centers from fiscal years 2011 through 2013. The Federal Resource Allocation Criteria—issued by the PM-ISE— defines the general criteria that federal departments and agencies are to use when making deployments and other resource allocations to fusion centers.must designate the fusion center as an official state center and the center must participate in the baseline capabilities annual assessment process. While the criteria provide high-level guidance to federal agencies, they For example, the criteria note that the governor of the state can develop additional criteria to inform deployment decisions, such as how closely the missions of the fusion center and agency align. For fusion centers where agencies have not deployed federal personnel, agencies can provide support through off-site personnel or liaison representatives, who can provide access to federal data systems, among other things. Federal agencies can also provide non-personnel resources to fusion centers, such as training, technical assistance, participation in exercises, security clearance administration, and travel. According to federal cost inventory reports, federal agencies provided fusion centers with non- personnel support totaling about $32.8 million in fiscal year 2011 and about $18 million in fiscal years 2012 and 2013. The 2012 report lists several factors that contributed to the reduction in federal funding between the fiscal years, including continuing federal agencies’ budget reductions and agencies transitioning from the initial costs of developing data systems to maintaining the systems. As of June 2014, I&A had deployed a total of 74 intelligence officers to fusion centers across the National Network, as well as 9 regional directors to manage officer activities. As of this date, I&A had also deployed a total of 6 intelligence analysts to centers, as well as reports I&A officers that collectively cover every fusion center in the network.has developed general guidance that defines the roles and responsibilities for each of these deployed positions, as shown in table 4. Intelligence officers perform a range of activities at fusion centers depending on the center’s size, maturity, capabilities, and needs. For example, at a smaller center we visited, the intelligence officer’s activities included training local intelligence analysts on basic analytic techniques and helping to develop and produce intelligence products. At two large fusion centers we visited that had their own experienced intelligence analysts, the intelligence officers focused on performing more extensive outreach with government and private sector partners and reviewing local analysts’ finished intelligence products prior to dissemination. According to intelligence officers at 2 of the 10 centers we visited, regional directors that supervise intelligence officers allow them flexibility to support the fusion center in the capacity that best benefits center operations. In addition, intelligence officers also stated that regional directors and I&A management communicate expectations to intelligence officers through oral discussion and employee performance plans. These plans describe expectations across a broad set of competencies that include accountability for results, communications, critical thinking, engagement, and collaboration, among others. According to intelligence officers and regional directors we interviewed, these plans also provide a mechanism to identify specific performance goals for the intelligence officer based upon the needs and objectives of the fusion center. For example, according to a performance plan template that we reviewed, an intelligence officer’s goal is to facilitate the fusion centers’ execution of the intelligence cycle. To address this goal, the officer can perform research and identify analytical training opportunities for the fusion center and advocate and facilitate the production of joint analytic products with other centers, among other things. According to 7 of the 10 of the fusion center directors we interviewed, intelligence officers have helped the center develop analytic capabilities. For example, 3 directors noted that officers participate in and arrange intelligence training for the local intelligence analysts at the fusion center. At 1 fusion center, the director emphasized the importance of having the intelligence officer on-site to bring DHS and broader nationwide perspectives on intelligence to the fusion center. One other director noted that the intelligence officer provided the center with a connection to other DHS components in the area of responsibility. Officers also served as a conduit to DHS headquarters personnel and subject matter experts to respond to inquiries on issues such as the annual fusion center assessment process. According to 1 fusion center director, intelligence officers also benefit the center by maintaining effective relationships with external stakeholders such as InfraGard members and the area Protective Security Advisor program. Office of the Director of National Intelligence, Intelligence Community Directive Number 203—Analytic Standards (Washington D.C.: June 21, 2007). deploying analysts to additional fusion centers and expanding the deployments to 2-year rotations. DHS has also deployed reports officers to fusion centers to primarily collect raw intelligence and develop intelligence information reports— formerly known as homeland intelligence reports—which are intended to address the intelligence community’s information requirements. In a 2012 report, congressional staff raised concerns about fusion center intelligence reporting not being timely or of sufficient quality. to senior I&A officials, in response to these concerns, I&A modified procedures for reporting intelligence and training reports officers. For example, according to one regional director, to enhance the quality of reporting, DHS restricted the development and reporting of intelligence information reports to reports officers. Before this change, I&A intelligence officers, among others, were involved in producing homeland intelligence reports for DHS and the intelligence community, which the congressional report notes were, in some instances, unrelated to terrorism and outdated, among other things. One supervisory reports officer we interviewed said that the goal is to standardize the reporting and approval of intelligence reports before releasing them to I&A for further review and then on to the intelligence community. One other reports officer said that I&A also enhanced training for reports officers by increasing the training itinerary from 2 to 3 weeks, in part to spend more time on certain issues— such as cyber security analysis—and place additional emphasis on the quality of reporting over the quantity of reports generated. I&A expanded the reports officer training as part of an officer certification program, which includes supervised on-the-job training as well as an assessment of an officer’s reporting for compliance with standards. United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Federal Support for and Involvement in State and Local Fusion Centers (Washington D.C.: Oct. 3, 2012). As of June 2014, the FBI had deployed 94 intelligence analysts, special agents, and others to 58 fusion centers, and had installed its secure data system (FBINet) at 51 centers. While local field office management makes deployment decisions, FBI headquarters developed guidance in August 2011 that contains several factors local management is to consider when deciding the type of engagement the office will have in supporting a fusion center. These factors include the extent to which the fusion center mission aligns with the FBI’s mission, particularly related to counterterrorism—for example, both organizations share information on terrorism-related activities; FBI management participates in the fusion center governance structure; the fusion center operates in an accredited secure work environment and has a process to receive, handle, store, and disseminate classified information; the fusion center is capable of receiving, analyzing, disseminating, and gathering information that contributes to the understanding of the current threat environment; and the fusion center immediately shares all emerging, terrorism-related information with the FBI, such as suspicious activity reports. In addition to this overarching guidance, in February 2013, the FBI developed guidance identifying the key roles and responsibilities of FBI personnel assigned to work with fusion centers. As noted in the document, this guidance is intended to provide additional policy and governance to the field and facilitate uniformity across the FBI while recognizing that individual roles and responsibilities may vary based on fusion center maturity, operational capability, and other factors. The FBI has identified three types of engagement levels it uses to support fusion centers: enhanced (interaction with centers on a regular and reoccurring basis), basic (interaction with centers on a liaison to part-time basis), and liaison (no dedicated resources but FBI maintains an information sharing relationship with the centers). As of July 2014, of the 78 total fusion centers in the National Network, FBI data showed that 38 centers received enhanced support, 20 centers received basic support, and 19 centers received liaison support. At all 8 of the fusion centers we visited that had FBI personnel deployed, FBI field office management—generally an assistant special agent-in- charge—were involved in the decision to support fusion center activities with personnel and non-personnel resources. Managers at 2 fusion centers said that they also provide guidance and oversight to deployed intelligence analysts and agents regarding their roles and responsibilities, and define general expectations in analysts’ and agents’ performance work plans. The FBI tasks personnel deployed to fusion centers with various duties, which can include performing liaison services with federal, state, local, and private sector partners; reviewing suspicious activity reports for dissemination to fusion center partners; briefing DHS and fusion center personnel on threats; and collaborating with DHS and fusion center staff to develop joint products. FBI officials noted that specific roles and responsibilities for deployed staff also depend on factors such as the size and maturity of the fusion center. For example, at 1 larger center with an established history of FBI engagement we visited, an FBI supervisory intelligence analyst managed the fusion center’s intelligence unit, which consisted of about 35 intelligence analysts. At a smaller center, the FBI intelligence analyst was primarily involved in vetting suspicious activity reports. Among the responsibilities identified by other FBI analysts we spoke with included providing center personnel with intelligence information to enhance situational awareness, intelligence briefings to fusion center leadership, and analysis for the fusion center’s tactical efforts. Fusion center directors at all 10 of the locations we visited generally viewed engagement with the FBI as beneficial to the center. For example, officials at 1 center noted that access to FBINet was particularly helpful to determine if persons of interest had been the subject of any prior investigations. Officials at another center noted that their relationship with the FBI is working well since issues related to how the center vetted tips and leads before submitting them to the FBI for processing have been resolved. Specifically, this center now embeds personnel on a rotational basis with the FBI unit that reviews these tips and leads. At another fusion center, where the FBI’s engagement included a management role in the center’s intelligence unit, center officials said that the bureau recognizes the overall value that the center provides in supporting intelligence activities. CBP and ICE headquarters officials said that local field office management independently makes staff deployment decisions. The officials noted that management generally bases decisions on existing relationships with fusion center personnel and management interpretation of shared mission goals with the center, rather than headquarters-level guidance. For example, one CBP field office determined that because it shared information with the fusion center on issues of mutual interest in the southwest region of the country—such as border security—and both the field office and center provided investigative leads to state, local, and federal law enforcement partners, among other things, the field office would deploy an officer to the center. According to our interviews with headquarters and field office representatives, roles and responsibilities for deployed CBP and ICE personnel can include activities similar to those performed by I&A and FBI personnel—such as providing liaison support for fusion center operations, access to component data systems, and investigative case support— while also supporting the components’ own missions. For example, a CBP supervisory official we interviewed said that the primary responsibilities of one such deployment included an individual supporting the activities of a task force consisting of fusion center partners, as well as engaging with the DHS intelligence analyst that was deployed to the center to develop intelligence products. An ICE intelligence analyst we interviewed said that, in addition to performing ICE-related work priorities, the analyst’s key roles within the center included coordinating investigative activities and providing data in support of the center’s investigative unit. CBP and ICE headquarters officials said that they have not created guidance to date for field office management to consider when making deployment decisions primarily because field offices are decentralized units with the authority to make such decisions independent of headquarters management. However, in June 2014, CBP headquarters officials said that they are developing a strategy to assist the agency in determining the most appropriate locations and mechanisms to provide personnel support to fusion centers and other CBP partners. The officials noted that CBP expects to complete the strategy in fiscal year 2015. According to the officials, the strategy will include several elements, including (1) a listing of all existing CBP partnerships with fusion centers and other agencies, (2) a matrix to evaluate current and potential future partnerships against CBP mission needs and operational requirements, and (3) training and equipment requirements to ensure consistency across all partnerships. ICE headquarters officials did not plan to develop additional guidance to help govern field office personnel deployments. However, DHS is taking additional actions to provide departmental components with information on the support priorities and personnel requirements of individual fusion centers. For example, I&A conducted a survey of fusion centers in 2010— and a follow-up data call in 2012—to help identify fusion center needs for DHS component personnel to meet the centers’ operational mission and requirements. Further, according to a senior I&A official, the forthcoming Federal Framework for Supporting the National Network of Fusion Centers is to include information related to federal resource allocations to fusion centers and is intended to respond, in part, to the efforts called for by the NFCA. DHS also issued the Implementation Guidance for the Federal Resource Allocation Criteria Policy in September 2014. According to the document, this guidance is designed to assist federal agencies in planning and tracking resource deployments. Among the elements included in the guidance are recommended best practices for collecting data on support resources provided to fusion centers. These suggested practices are intended to promote additional consistency across federal agencies and help provide more comprehensive information on the overall federal investment in fusion centers. In fiscal year 2011, FEMA initiated a requirement that each fusion center complete DHS’s annual baseline capabilities assessment to be eligible for HSGP funding, and federal officials began reviewing the grant requests to ensure that proposed projects target the achievement or sustainment of identified capabilities. Since that time, FEMA and SLPO officials have collaborated to help ensure that each fusion center grant request incorporates the results of the annual assessment as part of the investment justification. Specifically, HSGP grant guidance calls for each fusion center investment justification to describe the investment; identify how the investment supports state or urban area homeland security goals and objectives; explain capability gaps that the investment is intended to address; and describe the outcomes the investment is to achieve, among other things. Since fiscal year 2012, the grant guidance also requires the investment justification to further identify the specific capabilities and assessment attributes that the proposed projects are intended to address. According to SLPO officials who are responsible for reviewing these investment justifications, the guidance requires narrative statements that support the justifications to include explicit references to the capabilities covered within the annual fusion center assessment. The officials stated that they review each justification to ensure that these narratives adequately address any identified capability gaps. SLPO officials also noted that the narratives have improved from year -to -year based upon feedback provided to grantees, including that FEMA rejected some requests until it received additional information. Our review of the fiscal year 2013 investment justifications for the 10 fusion centers we visited showed that the narratives routinely referenced targeted capabilities, with most of the narratives focusing on sustaining existing capabilities rather than initiating new ones. For example, the most common areas targeted for funding were maintenance and upgrades of existing technology platforms and sustainment of current staff positions. DHS officials stated that sustainment of existing capabilities would likely be the area of emphasis going forward but noted that these narratives would remain helpful to identify network trends and needs, particularly as funding becomes further constrained. While our review indicated that many of the supporting narratives within the investment justifications lacked explicit details—potentially, in part, because of the focus on sustainment of existing staff positions and technology systems rather than new capabilities—these grant requirements and corresponding review procedures provide a mechanism to help ensure that requested fusion center projects are addressing the achievement of identified baseline capabilities. In September 2010, we reported on Congress’ interest in knowing the amount of federal funding going to support fusion center operations. However, in the past, DHS generally, and FEMA more specifically, have had challenges in tracking this amount because of the way FEMA captured funding data in its systems. Moreover, a 2012 congressional committee report cited concerns regarding DHS’s ability to provide adequate oversight of its financial support for fusion centers. According to FEMA grant management officials, FEMA initiated a new grant requirement for the 2012 grant cycle in part to address these concerns and help ensure more reliable reporting on fusion center grant funding in the future. Historically, FEMA relied upon a keyword search of its grant management system to identify likely fusion center projects and related funding. However, according to the 2012 committee report, depending on the keywords searched, FEMA estimated that grant funding provided to fusion centers from 2003 through 2010 ranged from $289 million to as much as $1.4 billion. Subsequently, FEMA initiated a new requirement for the fiscal year 2012 grant cycle that called for states to submit a separate investment justification for all fusion center projects requested to be funded through the HSGP. As part of this justification, FEMA requires grant applicants to categorize individual fusion center projects among six designated spending categories—equipment, exercises, management and administration, organization, planning, and training. FEMA is to capture this information in its grant management system, which is to allow FEMA to account for aggregate spending in these individual areas across the National Network. FEMA also requires states to specifically identify fusion center projects—via a check mark—on all subsequent reports that these entities submit to FEMA every 6 months, providing the status of project implementation. FEMA’s 2012 grant requirements represent an improvement over keyword searches in identifying fusion center projects and funding, but the data are unreliable, as grantees have incorrectly categorized many projects. Specifically, in response to our request, FEMA provided data indicating that states obligated approximately $124 million of DHS grant funding to support fusion centers across the network in fiscal year 2012. However, upon further review of the individual project descriptions that states reported, FEMA and SLPO officials determined that states incorrectly categorized many fusion center projects. These include cases in which projects supported broader capabilities not directly related to fusion centers—such as emergency management positions—as well as those that were not specifically supporting center operations. For example, one urban area reported obligating $14 million to a fusion center for automated license plate readers and video surveillance equipment, although the center will be one of a number of system users. Given that FEMA identified that the $124 million estimate contained non-fusion- center-related projects, the figure is unreliable for quantifying total federal grant funding provided to support fusion center operations in 2012. As an alternative estimate of fusion center grant funding, SLPO officials provided us with data on annual fusion center budgets that they collected via the annual assessment process. According to these data that fusion center directors reported, centers received approximately $60 million in DHS grant funding to support their operations in fiscal year 2012. We did not independently evaluate the reliability of this estimate; however, an SLPO official stated that the $60 million estimate was generally consistent with the amount remaining from the $124 million figure provided once non-fusion-center-related projects were subtracted. To address this issue, FEMA is planning additional efforts to help states better categorize fusion center projects and improve the reliability of grant reporting. Specifically, for grant awards issued prior to fiscal year 2014, FEMA plans to provide supplemental guidance to grantees in advance of the next reporting period, which ends on December 31, 2014. According to FEMA officials, this guidance will direct grantees to reassess specified projects to determine if they are properly identified as supporting fusion centers. Additionally, the FEMA officials plan to introduce a series of questions within the FEMA grant reporting system by the end of calendar year 2014 to help grantees assess if designated projects should remain categorized as support to fusion centers. These combined efforts, if implemented as proposed, could provide grantees with information they need to make revisions to incorrect categorizations and help address data reliability issues. As proposed, the efforts discussed above could also serve to support the overall enhancement of project-level reporting that FEMA is currently implementing, in part, to address our prior recommendations. Although these efforts are not specific to fusion centers, we reported in February 2012 that FEMA lacked visibility over project-level details—particularly within the SHSP and UASI grant programs—and we recommended that DHS collect project information with sufficient detail to identify potential duplication. DHS concurred with this recommendation and, beginning with the 2014 grant cycle, FEMA started implementing a project-based application and reporting process that is intended to help improve oversight for individual projects. FEMA plans for this initiative to be fully implemented for fiscal year 2015.process is intended to help ensure that FEMA receives more comprehensive information from state grantees about project objectives and overall implementation progress. FEMA officials reported that this The combined efforts of additional guidance and implementation of project-level reporting may help states better categorize fusion center projects, improve the reliability of grant reporting, and enhance oversight of the projects. However, FEMA does not have plans to specifically review state reporting to ensure that grantees act in accordance with the proposed guidance—such as using the drop-down menus as intended— and take steps to revise any misclassified fusion center projects. It is important that projects be accurately categorized, as FEMA uses these data to determine the overall level of federal investment in fusion centers. FEMA officials stated that overall grant monitoring efforts are expected to help improve the reliability of fusion center funding data, but they noted that only a sample of fusion centers will be targeted through these processes. While sampling remains a reasonable approach for FEMA to conduct monitoring across the large number of HSGP projects implemented annually, this approach is not likely to provide FEMA with sufficient visibility over fusion center projects because each state reports information independently and any actions taken by one state to recategorize projects are not generalizable to others. Given the past problems related to data reliability and FEMA not knowing why states may have initially miscategorized fusion center projects, additional actions beyond the monitoring efforts currently planned are important. According to Standards for Internal Control in the Federal Government, monitoring is important not only to assess the quality of performance over time but also to ensure that audit findings are promptly resolved. Development of a specific mechanism to ensure that states act in accordance with the forthcoming guidance could provide FEMA reasonable assurance that fusion center projects are properly classified and accurately account for total grant funding provided to centers. Such a mechanism could include, for example, having SPLO officials review those projects that states identify as supporting fusion centers to verify that states have accurately done so in accordance with the guidance. SPLO officials are in a position to conduct this review based on their knowledge of the results of the annual center assessments, input from DHS representatives at fusion centers, and other means. Developing a mechanism to ensure that states act in accordance with the proposed guidance could provide DHS, congressional, and other decision makers with more accurate information on the level of federal investment in centers to help decision makers determine future levels of investment. As focal points within states and urban areas for the receipt, analysis, gathering, and dissemination of law enforcement, homeland security, and terrorism information, fusion centers are uniquely situated to help enhance the national threat picture and help protect the country. As these centers continue to mature, it remains important for DHS to identify the results that centers are achieving and how federal agencies can help support and leverage these centers. The recent expansion of performance measures is a positive step in this process, as are plans to move forward with additional exercises to further evaluate fusion center capabilities. DHS grant funding also remains an important component of federal support to fusion centers, but to date, FEMA has not been able to accurately account for and report on the amount of funds it has provided to centers. FEMA’s proposed efforts to help ensure that grantees provide more accurate information on fusion center projects remain critical to improving reporting, but implementation of a specific mechanism to verify that states have acted in accordance with the forthcoming guidance would further help ensure that these efforts are achieving their intended purpose and fusion center grant reporting is reliable. To help provide reasonable assurance that data states report on the amount of federal grant funding used to support fusion centers is reliable, we recommend that the FEMA Administrator implement a mechanism to verify that states act in accordance with the proposed grant reporting guidance, when implemented. We provided a draft of this report to DHS and DOJ for review and comment. In its written comments, summarized below and reprinted in appendix II, DHS concurred with the recommendation and described actions planned to address it. In addition, DHS provided technical comments, which we incorporated in the report as appropriate. On October 27, 2014, DOJ’s Audit Liaison Group informed us via email that the department did not have any comments on our draft report. DHS concurred with our recommendation that FEMA develop a mechanism to verify that states act in accordance with proposed guidance to help ensure that data reporting on the amount of federal grant funding used to support fusion centers is reliable. Specifically, DHS said that beginning in January 2015, FEMA—in coordination with I&A as appropriate—will review all fusion center projects to determine whether state reported expenditures are actually in support of a designated fusion center. In the event that the review identifies discrepancies, DHS said that FEMA will work with grantees to obtain additional clarification. In addition, DHS noted that any grantees currently scheduled for monitoring in fiscal year 2015 will receive an in-depth review of all fusion center projects, to include an examination of project progress, impediments to timely completion, and verification of funding data provided by the state. If fully implemented, DHS’s planned efforts will address the intent of the recommendation. We are sending copies of this report to the Secretary of Homeland Security; the Attorney General, the Commissioner of Customs and Border Protection, the Director of Immigration and Customs Enforcement, and appropriate congressional committees. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6510 or larencee@gao.gov. 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 appendix provides a summary of performance measures that the Department of Homeland Security (DHS)—in consultation with other partners—has established for the National Network of Fusion Centers. DHS grouped the performance measures by six outcome and five output categories. Table 6 shows a description of measures, their implementation status, and aggregated performance results across the National Network, as reported in the 2013 National Network of Fusion Centers, Final Report. Eileen R. Larence, (202) 512-6510 or larencee@gao.gov. In addition to the contact named above, Eric Erdman (Assistant Director), Eric Hauswirth, Ryan Lambert, Thomas Lombardi, Linda Miller, Marvin McGill, and Jessica Orr made significant contributions to this report. | Fusion centers play a key role in sharing threat information among all levels of government and the private sector. Federal agencies support these centers by providing personnel, funding, and other assistance. GAO was asked to assess how federal agencies are accounting for ongoing support provided. This report addresses the extent to which (1) DHS has helped centers assess capabilities and address gaps, (2) the federal government has defined its expectations for centers and assessed their contributions to homeland security, (3) federal agencies have deployed personnel to centers, and (4) DHS grant reforms have improved accountability for federal funds that support centers. GAO analyzed the results of center assessments, documents on center expectations, guidance for deploying personnel, and grant requirements. GAO also interviewed DHS and FBI officials who work with centers, and directors, staff, and deployed personnel at 10 of 78 fusion centers. GAO selected centers based on geographic location and other factors. Interviews are not generalizable, but provided insights on center capabilities and federal support provided. The Department of Homeland Security (DHS) is helping state and major urban area fusion centers assess baseline capabilities—such as the ability to receive, analyze, and disseminate threat information—and address capability gaps through an annual assessment process, resources it provides to centers to mitigate gaps, and an exercise program to evaluate capabilities in practice. Results of the 2013 annual assessment show that centers achieved an average score of about 92 out of 100, which generally indicates that centers have policies and procedures in place to implement key information sharing activities. The scores do not reflect if these activities have resulted in specific homeland security impacts. All 10 fusion center directors GAO contacted said that the annual assessment is a useful tool to identify capabilities and monitor progress. Since 2004, the federal government has issued guidance and related documents that define its expectations and key roles for fusion centers and also has taken steps to assess their contributions to homeland security. For example, DHS has developed 45 performance measures to help assess fusion center contributions, which generally align with attributes of successful measures. The measures include outputs—such as the number of intelligence products—and outcomes, such as how products have influenced key partners' security decisions. In 2013, federal agencies deployed a total of 288 personnel to fusion centers. The two agencies that provide the most support—DHS's Office of Intelligence and Analysis (I&A) and the Federal Bureau of Investigation (FBI)—have developed nationwide guidance to help these agencies make fusion center support decisions and generally identified key roles and responsibilities for personnel deployed to centers. Other DHS components, including U.S. Customs and Border Protection and U.S. Immigration and Customs Enforcement, have not developed such guidance and generally defer to field-level management to make deployment decisions. However, in September 2014, DHS issued guidance that is designed to assist federal agencies in planning and tracking resource deployments to fusion centers. DHS reforms to the Homeland Security Grant Program are helping to ensure that grant funds intended for fusion centers are used to build or sustain baseline capabilities, but DHS cannot accurately account for federal funds provided to states to support these centers. Specifically, in fiscal year 2011, the Federal Emergency Management Administration (FEMA)—the lead DHS agency responsible for grant funding—began to require that grant requests for fusion centers identify specific capabilities that proposed projects are to address. FEMA also requires that state grantees biannually report the amount of federal funds spent on fusion center projects. However, after further review of data provided to GAO, FEMA determined that states inaccurately categorized about $60 million in projects as related to fusion centers in 2012. Thus, FEMA could not reliably report on the amount of federal grants used to support centers, which is needed to help inform future investment decisions. FEMA is developing guidance to help grantees better categorize fusion center projects and improve the reliability of grant reporting, but an additional mechanism to verify that states act in accordance with the guidance could help FEMA ensure that projects are properly classified and more accurately account for grant funding provided to centers. GAO recommends that FEMA develop a mechanism to verify that states act in accordance with proposed guidance, when implemented, to help ensure that data on fusion center projects are sufficiently accurate to provide a reliable accounting of the total amount of federal grant funding provided to centers. DHS concurred. |
Since the early 1990s, the explosion in computer interconnectivity, most notably growth in the use of the Internet, has revolutionized the way organizations conduct business, making communications faster and access to data easier. However, this widespread interconnectivity has increased the risks to computer systems and, more importantly, to the critical operations and infrastructures that these systems support, such as telecommunications, power distribution, national defense, and essential government services. Malicious attacks, in particular, are a growing concern. The National Security Agency has determined that foreign governments already have or are developing computer attack capabilities, and that potential adversaries are developing a body of knowledge about U.S. systems and methods to attack them. In addition, reported incidents have increased dramatically in recent years. Accordingly, there is a growing risk that terrorists or hostile foreign states could severely damage or disrupt national defense or vital public operations through computer-based attacks on the nation’s critical infrastructures. Since 1997, in reports to the Congress, we have designated information security a governmentwide high-risk area. Our most recent report in this regard, issued in January, noted that, while efforts to address the problem have gained momentum, federal assets and operations continue to be highly vulnerable to computer-based attacks. To develop a strategy to reduce such risks, in 1996, the President established a Commission on Critical Infrastructure Protection. In October 1997, the commission issued its report, stating that a comprehensive effort was needed, including “a system of surveillance, assessment, early warning, and response mechanisms to mitigate the potential for cyber threats.” The report said that the Federal Bureau of Investigation (FBI) had already begun to develop warning and threat analysis capabilities and urged it to continue in these efforts. In addition, the report noted that the FBI could serve as the preliminary national warning center for infrastructure attacks and provide law enforcement, intelligence, and other information needed to ensure the highest quality analysis possible. In May 1998, PDD 63 was issued in response to the commission’s report. The directive called for a range of actions intended to improve federal agency security programs, establish a partnership between the government and the private sector, and improve the nation’s ability to detect and respond to serious computer-based attacks. The directive established a National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism under the Assistant to the President for National Security Affairs. Further, the directive designated lead agencies to work with private-sector entities in each of eight industry sectors and five special functions. For example, the Department of the Treasury is responsible for working with the banking and finance sector, and the Department of Energy is responsible for working with the electric power industry. PDD 63 also authorized the FBI to expand its NIPC, which had been originally established in February 1998. The directive specifically assigned the NIPC, within the FBI, responsibility for providing comprehensive analyses on threats, vulnerabilities, and attacks; issuing timely warnings on threats and attacks; facilitating and coordinating the government’s response to cyber incidents; providing law enforcement investigation and response; monitoring reconstitution of minimum required capabilities after an infrastructure attack; and promoting outreach and information sharing. PDD 63 assigns the NIPC responsibility for developing analytical capabilities to provide comprehensive information on changes in threat conditions and newly identified system vulnerabilities as well as timely warnings of potential and actual attacks. This responsibility requires obtaining and analyzing intelligence, law enforcement, and other information to identify patterns that may signal that an attack is underway or imminent. Since its establishment in 1998, the NIPC has issued a variety of analytical products, most of which have been tactical analyses pertaining to individual incidents. These analyses have included (1) situation reports related to law enforcement investigations, including denial-of-service attacks that affected numerous Internet-based entities, such as eBay and Yahoo and (2) analytical support of a counterintelligence investigation. In addition, the NIPC has issued a variety of publications, most of which were compilations of information previously reported by others with some NIPC analysis. Strategic analysis to determine the potential broader implications of individual incidents has been limited. Such analysis looks beyond one specific incident to consider a broader set of incidents or implications that may indicate a potential threat of national importance. Identifying such threats assists in proactively managing risk, including evaluating the risks associated with possible future incidents and effectively mitigating the impact of such incidents. Three factors have hindered the NIPC’s ability to develop strategic analytical capabilities. First, there is no generally accepted methodology for analyzing strategic cyber-based threats. For example, there is no standard terminology, no standard set of factors to consider, and no established thresholds for determining the sophistication of attack techniques. According to officials in the intelligence and national security community, developing such a methodology would require an intense interagency effort and dedication of resources. Second, the NIPC has sustained prolonged leadership vacancies and does not have adequate staff expertise, in part because other federal agencies have not provided the originally anticipated number of detailees. For example, as of the close of our review in February, the position of Chief of the Analysis and Warning Section, which was to be filled by the Central Intelligence Agency, had been vacant for about half of the NIPC’s 3-year existence. In addition, the NIPC had been operating with only 13 of the 24 analysts that NIPC officials estimate are needed to develop analytical capabilities. Third, the NIPC did not have industry-specific data on factors such as critical system components, known vulnerabilities, and interdependencies. Under PDD 63, such information is to be developed for each of eight industry segments by industry representatives and the designated federal lead agencies. However, at the close of our work in February, only three industry assessments had been partially completed, and none had been provided to the NIPC. To provide a warning capability, the NIPC established a Watch and Warning Unit that monitors the Internet and other media 24 hours a day to identify reports of computer-based attacks. As of February, the unit had issued 81 warnings and related products since 1998, many of which were posted on the NIPC’s Internet web site. While some warnings were issued in time to avert damage, most of the warnings, especially those related to viruses, pertained to attacks underway. The NIPC’s ability to issue warnings promptly is impeded because of (1) a lack of a comprehensive governmentwide or nationwide framework for promptly obtaining and analyzing information on imminent attacks, (2) a shortage of skilled staff, (3) the need to ensure that the NIPC does not raise undue alarm for insignificant incidents, and (4) the need to ensure that sensitive information is protected, especially when such information pertains to law enforcement investigations underway. However, I want to emphasize a more fundamental impediment. Specifically, evaluating the NIPC’s progress in developing analysis and warning capabilities is difficult because the federal government’s strategy and related plans for protecting the nation’s critical infrastructures from computer-based attacks, including the NIPC’s role, are still evolving. The entities involved in the government’s critical infrastructure protection efforts have not shared a common interpretation of the NIPC’s roles and responsibilities. Further, the relationships between the NIPC, the FBI, and the National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism at the National Security Council have been unclear regarding who has direct authority for setting NIPC priorities and procedures and providing NIPC oversight. In addition, the NIPC’s own plans for further developing its analytical and warning capabilities were fragmented and incomplete. As a result, there were no specific priorities, milestones, or program performance measures to guide NIPC actions or provide a basis for evaluating its progress. The administration is currently reviewing the federal strategy for critical infrastructure protection that was originally outlined in PDD 63, including provisions related to developing analytical and warning capabilities that are currently assigned to the NIPC. On May 9, the White House issued a statement saying that it was working with federal agencies and private industry to prepare a new version of a “national plan for cyberspace security and critical infrastructure protection” and reviewing how the government is organized to deal with information security issues. In our report, we recommend that, as the administration proceeds, the Assistant to the President for National Security Affairs, in coordination with pertinent executive agencies, establish a capability for strategic analysis of computer-based threats, including developing related methodology, acquiring staff expertise, and obtaining infrastructure data; require development of a comprehensive data collection and analysis framework and ensure that national watch and warning operations for computer-based attacks are supported by sufficient staff and resources; and clearly define the role of the NIPC in relation to other government and private-sector entities. PDD 63 directed the NIPC to provide the principal means of facilitating and coordinating the federal government’s response to computer-based incidents. In response the NIPC undertook efforts in two major areas: providing coordination and technical support to FBI investigations and establishing crisis management capabilities. First, the NIPC provided valuable coordination and technical support to FBI field offices, which established special squads and teams and one regional task force in its field offices to address the growing number of computer crime cases. The NIPC supported these investigative efforts by (1) coordinating investigations among FBI field offices, thereby bringing a national perspective to individual cases, (2) providing technical support in the form of analyses, expert assistance for interviews, and tools for analyzing and mitigating computer-based attacks, and (3) providing administrative support to NIPC field agents. For example, the NIPC produced over 250 written technical reports during 1999 and 2000, developed analytical tools to assist in investigating and mitigating computer-based attacks, and managed the procurement and installation of hardware and software tools for the NIPC field squads and teams. While these efforts benefited investigative efforts, FBI and NIPC officials told us that increased computer capacity and data transmission capabilities would improve their ability to promptly analyze the extremely large amounts of data that are associated with some cases. In addition, FBI field offices were not yet providing the NIPC with the comprehensive information that NIPC officials say is needed to facilitate prompt identification and response to cyber incidents. According to field office officials, some information on unusual or suspicious computer-based activity had not been reported because it did not merit opening a case and was deemed to be insignificant. To address this problem, the NIPC established new performance measures related to reporting. Second, the NIPC developed crisis management capabilities to support a multiagency response to the most serious incidents from the FBI’s Washington, D.C., Strategic Information Operations Center. From 1998 through early 2001, seven crisis action teams had been activated to address potentially serious incidents and events, such as the Melissa virus in 1999 and the days surrounding the transition to the year 2000, and related procedures have been formalized. In addition, the NIPC coordinated development of an emergency law enforcement plan to guide the response of federal, state, and local entities. To help ensure an adequate response to the growing number of computer crimes, we recommend in our report that the Attorney General, the FBI Director, and the NIPC Director take steps to (1) ensure that the NIPC has access to needed computer and communications resources and (2) monitor implementation of new performance measures to ensure that field offices fully report information on potential computer crimes to the NIPC. Information sharing and coordination among private-sector and government organizations are essential for thoroughly understanding cyber threats and quickly identifying and mitigating attacks. However, as we testified in July 2000,establishing the trusted relationships and information-sharing protocols necessary to support such coordination can be difficult. NIPC success in this area has been mixed. For example, the InfraGard Program, which provides the FBI and the NIPC with a means of securely sharing information with individual companies, had grown to about 500 member organizations as of January 2001 and was viewed by the NIPC as an important element in building trust relationships with the private sector. NIPC officials recently told us that InfraGard membership has continued to increase. However, of the four information sharing and analysis centers that had been established as focal points for infrastructure sectors, a two-way, information-sharing partnership with the NIPC had developed with only one—the electric power industry. The NIPC’s dealings with two of the other three centers primarily consisted of providing information to the centers without receiving any in return, and no procedures had been developed for more interactive information sharing. The NIPC’s information-sharing relationship with the fourth center was not covered by our review because the center was not established until mid-January 2001, shortly before the close of our work. Similarly, the NIPC and the FBI have made only limited progress in developing a database of the most important components of the nation’s critical infrastructures—an effort referred to as the Key Asset Initiative. While FBI field offices had identified over 5,000 key assets, at the time of our review, the entities that own or control the assets generally had not been involved in identifying them. As a result, the key assets recorded may not be the ones that infrastructure owners consider to be the most important. Further, the Key Asset Initiative was not being coordinated with other similar federal efforts at the Departments of Defense and Commerce. In addition, the NIPC and other government entities had not developed fully productive information-sharing and cooperative relationships. For example, federal agencies have not routinely reported incident information to the NIPC, at least in part because guidance provided by the federal Chief Information Officers Council, which is chaired by the Office of Management and Budget, directs agencies to report such information to the General Services Administration’s Federal Computer Incident Response Capability. Further, NIPC and Defense officials agreed that their information-sharing procedures needed improvement, noting that protocols for reciprocal exchanges of information had not been established. In addition, the expertise of the U.S. Secret Service regarding computer crime had not been integrated into NIPC efforts. The NIPC has been more successful in providing training on investigating computer crime to government entities, which is an effort that it considers an important component of its outreach efforts. From 1998 through 2000, the NIPC trained about 300 individuals from federal, state, local, and international entities other than the FBI. In addition, the NIPC has advised several foreign governments that are establishing centers similar to the NIPC. To improve information sharing, we recommend in our report that the Assistant to the President for National Security Affairs direct federal agencies and encourage the private sector to better define the types of information necessary and appropriate to exchange in order to combat computer-based attacks and to develop procedures for performing such exchanges, initiate development of a strategy for identifying assets of national significance that includes coordinating efforts already underway, and resolve discrepancies in requirements regarding computer incident reporting by federal agencies. In our report, we also recommend that the Attorney General task the FBI Director to formalize information-sharing relationships between the NIPC and other federal entities and industry sectors and ensure that the Key Asset Initiative is integrated with other similar federal activities. | The National Infrastructure Protection Center (NIPC) is an important element of the U.S.' strategy to protect the nation's infrastructures from hostile attacks, especially computer-based attacks. This testimony discusses the key findings of a GAO report on NIPC's progress in developing national capabilities for analyzing cyber threats and vulnerability data and issuing warnings, enhancing its capabilities for responding to cyber attacks, and establishing information-sharing relationships with governments and private-sector entities. GAO found that progress in developing the analysis, warning, and information-sharing capabilities has been mixed. NIPC began various critical infrastructure protection efforts that have laid the foundation for future governmentwide efforts. NIPC has also provided valuable support and coordination related to investigating and otherwise responding to attacks on computers. However, the analytical and information-sharing capabilities that are needed to protect the nation's critical infrastructures have not yet been achieved, and NIPC has developed only limited warning capabilities. An underlying contributor to the slow progress is that the NIPC's roles and responsibilities have not been fully defined and are not consistently interpreted by other entities involved in the government's broader critical infrastructure protection strategy. This report summarized an April report (GAO-01-323). |
According to the National Academy of Public Administration, federal participation in economic development evolved during the 20th century. Economic development programs implemented during the 1930s characteristically involved direct federal action, bypassing state and local governments. During the 1940s and 1950s, these programs were intended to improve housing and commercial districts in central cities. In the 1960s, the federal government created programs to provide economic development assistance to economically distressed areas. These programs were expanded in the 1980s and 1990s to utilize new technologies to create new transit systems, clean up hazardous waste sites, and carry out other economic development activities in urban and rural areas. Most recently, economic development initiatives have included the revitalization of disaster areas, including lower Manhattan after the September 11, 2001, terrorist attacks and the Gulf Coast after the 2005 hurricane season. A variety of federal programs and federally funded regional commissions and authorities have helped advance economic development in communities throughout the United States, including many communities that are considered rural. Most of the nationwide programs do not have specific rural economic development objectives, but the regional commissions and authorities target economic rural areas specifically. For this reason, a narrow definition of economic development programs that only included those focusing exclusively on rural areas would include few programs and limited dollars. The nationwide programs also do not have a standard definition of economic development. Department of Commerce officials, for example, consider economic development programs as those that save or create jobs. U.S. Department of Agriculture (USDA) officials consider economic development broadly as activities that increase economic opportunities and improve residents’ quality of life. Officials at other federal agencies, including the Department of Defense (DOD), the Department of Transportation (DOT), and the Department of Housing and Urban Development (HUD), said that they did not have definitions of economic development. Like the concept of economic development, the notion of what constitutes rural and urban areas has evolved over several decades, partly in response to changes in residential and commuting patterns. As the cities and suburbs have expanded and more remote areas have become accessible, distinctions between rural and urban areas have blurred. Federal agencies use different criteria as to what constitutes a rural area. Depending on the agency and the program, the criterion most often used to define rural areas is population, especially at USDA, which uses varying thresholds ranging from 2,500 or less to 50,000. Some agencies and programs that fund economic development activities do not focus on serving rural or urban areas but instead provide competitive or formula-based grants to eligible applicants from any location. FAADS is a centralized reporting system that OMB established in April 1980 to gather and disseminate information on the domestic financial assistance provided by federal agencies. Authorized by the Consolidated Federal Funds Report Act of 1982, FAADS is a quarterly report of financial assistance awards made by each federal agency. OMB has designated Census as its executive agent to manage and operate the system, which the Congress and public officials use for policy and trend analyses, revenue forecasting, oversight, and legislative initiatives. Federal agencies and regional commissions and authorities that administer financial assistance programs are required to report quarterly to FAADS on the financial assistance awards they make. Because federal agencies do not have a standard definition of what constitutes economic development, we developed a list of activities that were generally accepted as being directly related to economic development. As agreed with your office, we based our framework on our prior work, a review of other research studies, and discussions with federal officials and rural development groups. We also held discussions with the administering federal agencies, regional commissions, and regional authorities to reach consensus on the activities and programs we selected. Our framework includes nine economic development activities: planning and developing strategies for job creation and retention; constructing and renovating commercial buildings; establishing business incubators (facilities to help small businesses get developing infrastructure by constructing and repairing roads, water and sewer systems, and airports; promoting the development of new markets for existing products; developing telecommunications and broadband infrastructure and enabling technology transfer; and developing and improving areas for tourism. The first five activities listed above, with the exception of developing airports, are from our 2000 report. That list was developed based on a general consensus of officials from (1) the Department of Commerce’s Economic Development Administration, whose mission is to help economically distressed areas, (2) other federal agencies involved with economic development, and (3) several national associations familiar with economic development. For this report, we confirmed the 2000 list with officials from the same federal agencies and organizations and also reached a general consensus on the four additional items. In general, we focused on activities that directly affected the overall development of an area, such as job creation, rather than on activities that improved individuals’ quality of life, such as housing and education. However, we did include job training that had a direct impact on economic development by, for example, preparing employees for work in a specific industry or business in a particular area. We identified 86 federal programs at 10 federal agencies and 3 regional commissions that included one or more of the activities in our economic development framework. Many of these programs were not labeled as economic development programs, but some of their activities suggested that they supported this goal. For example: The goal of USDA’s Empowerment Zone and Enterprise Community program for rural areas is to stimulate the creation of new jobs, particularly for the disadvantaged and long-term unemployed, and to revitalize economically distressed rural areas. The Department of the Interior’s (Interior) Bureau of Indian Affairs Facilities Operations and Maintenance program provides funding for basic services at noneducational facilities located on reservations. The Department of Commerce’s Trade Adjustment Assistance program provides assistance to firms and industries adversely affected by increased imports. The Appalachian Regional Commission, which oversees the Appalachian Development Highway System, aims to open up areas with development potential where commerce and communication have been inhibited by lack of adequate access. The number of programs each agency and commission administered that met one or more of the components of our economic development framework varied from one at the Denali Commission—established in 1998 to address the needs of rural Alaska—to 29 at USDA. We included only economic development programs that received funding during our review period (fiscal years 2002 to 2004). Thus, we did not include programs such as DOD’s base closing economic assistance programs because DOD reported no obligations for these programs during those years. Appendix II contains more detailed information on each of the 86 programs. Since our 1989 report, which used county-level data to classify rural and urban areas, a variety of more sophisticated classification systems have been developed that use census tracts to differentiate between rural areas and urban areas. These classification systems provide a more precise way of differentiating between rural and urban areas than county-based systems. Further, computer software programs can now geocode federal funding data below the county level. Due to data limitations that only allowed us to identify subcounty level recipients for about half of the funding, we chose to use a system developed in 2001 which relies on both population and commuting patterns of census tracts to classify each county as rural or urban based on the counties dominant commuting patterns. Although this approach does not fully resolve all the classification problems inherent in county-based systems that are based on political boundaries rather than demographic characteristics, it allowed us to geocode most of the data and was most comparable to census population data. We considered a number of county-based and subcounty systems for analyzing the data (table 1). We found shortcomings with most of these systems. For example: Many studies that have evaluated the rural share of federal programs, including our 1989 report, have used the rural-urban continuum codes devised by the Economic Research Service (ERS) of the USDA. These codes distinguish counties by their degree of urbanization and proximity to a metropolitan area or areas. While using rural-urban continuum codes allows geocoding at the county level, the results are often skewed, particularly in the western states, where counties often are very large. For example, using this approach, more than 50 percent of the nation’s rural population would live in counties that would be considered urban (based on the 2000 Census). Urban influence codes, which were developed by ERS in 1993 as a way to measure rurality by quantifying the influence of urban areas on rural areas, use only county-level data and are based solely on urban factors. As a result, the classifications are heavily skewed toward urban. Beginning in the 1990s, ERS and other organizations have developed subcounty classification systems that attempt to better capture differences between rural and urban areas. These subcounty classification systems include elements such as commuting zones and labor market areas that are more precise than the county level systems in order to capture the economic and social diversity of rural areas. Some use census tracts (about 62,000) or other geographic areas smaller than counties (about 3,000) that can better reflect rural-urban differences. Census’s urbanized areas and urban cluster system defines rural areas by exclusion—that is, it views as rural all areas that it has not already identified as urban. Census defines urbanized areas as continuously built up areas with a population of at least 50,000 and compromising one or more places and adjacent densely settled areas. Urban clusters are densely settled territories with at least 2,500 but fewer than 50,000 people. Collectively, urbanized areas and urban clusters are referred to as urban areas and essentially depict densely settled territory as it may appear from the air (see fig. 1). On the basis of these definitions, data from the 2000 Census suggest that 59 million Americans (20 percent of the population) reside in rural areas. As we reported in our 2004 report, using urbanized areas and urban clusters is an effective way to make consistent eligibility determinations for individual rural economic development programs when data is available at the census tract level. However, we found that our ability to track funds to the local level varied significantly across agencies. For example, while rural housing and most other USDA program data could be geocoded to the local level, most DOT spending could be tracked only to the counties. Thus, while geocoding data using urbanized areas and urban clusters would effectively show rural and urban differences, limitations with the data would only allow us to geocode about half of the data under this classification system. Ultimately, we chose the dominant RUCA system, developed by the Washington State Office of Community and Rural Health in 2001, because it uses both census tracts and county codes to determine which areas are rural. Using this system we were able to code 99 percent of the economic development funding. The dominant RUCA system is based on the 10- tiered subcounty RUCA system developed by ERS in conjunction with the Department of Health and Human Services (HHS) in the late 1990s. RUCA reflects both where people live and work by using both population and commuting relationships to classify census tracts. The dominant RUCA system classifies each county as rural or urban based on the dominant commuting patterns. Figure 2 shows a map of the rural and urban areas as defined by both the census tracts on which the RUCA codes are based and by the dominant RUCA system that we used due to the data limitations. Although the census tract RUCA code map better reflects where people live and work, using the dominant RUCA system we determined that 19 percent of the U.S. population resided in rural areas. This figure is comparable to the 20 percent figure cited in the 2000 Census. The rural-urban continuum classification system does not explicitly define rural. However, the rural-urban continuum codes can be combined to create rural and urban designations. (See fig. 3.) For example, in our 1989 report we defined as rural any county whose urban population was less than 20,000 people. Using this definition, slightly more than 10 percent of the U.S. population resides in rural areas, or only half the 20 percent rural figure cited in the 2000 Census. The 86 economic development programs we identified that met one or more of the criteria from our list of economic development activities provided about $200 billion in funding to the 50 states and Washington, D.C. for fiscal years 2002 through 2004. We were able to use geocoding to track about $150 billion of those dollars to the county level or below. We could not track beyond the state level another $50 billion that was passed through state capitals to county and local jurisdictions because we could not identify final recipients. If we had geocoded the funding for pass-through programs at the state capitals, the share of spending associated with urban areas—where state capitals are typically located—would have been overstated. For the approximately $150 billion that we could geocode to the county level or below, our analysis showed that during fiscal years 2002 through 2004, rural areas received more economic development program assistance dollars per capita than their urban counterparts. The overall shares of funding varied by the administering program and agency, and by the state and region receiving the money, with rural areas receiving a greater share of the funding in some cases and urban areas in others. When we analyzed economic development funding by program, we found wide variations in the percentage of funding that went to rural areas. The funding ranged from a high of 100 percent for the Interior’s Improvement and Repair of Indian Detention Facilities Program down to about 1 percent for DOT’s Transit Planning and Research Program and HUD’s Brownfields Economic Development Initiative. The programs with the highest percentage of rural funding tended to be from USDA, whose funding decisions are primarily based on specific definitions of rural, and from Interior and the commissions and authorities whose programs serve rural areas. In contrast, HUD, the Environmental Protection Agency (EPA), and DOL were among the agencies with the lowest percentage of funding reaching rural areas who also had significant pass-through dollar amounts. Most program funding by these agencies to eligible applicants is done using a formula or on a competitive basis without differentiating between rural and urban areas. USDA had the most programs providing economic development funding for rural areas, but DOT provided the largest amount of economic development funding overall (fig.4). DOT also accounted for the largest overall amount of pass-through dollars ($37.9 billion), but higher percentages of funds from EPA, DOL, and HUD were sent to state capitals. We were unable to track 88 percent of EPA’s funding, 79 percent of DOL’s, or 75 percent of HUD’s below the state level, and excluded those dollars from our analysis. Examples of programs that we could not track below the state level are DOL’s Employment Service program and EPA’s capitalization grants for clean water and drinking water. Figure 5 shows the approximately $150 billion in economic development funding that we could track below the state level by agency under both the dominant RUCA and rural-urban continuum models during fiscal years 2002–2004. Under both models, the amount of federal agency, regional commission, or authority funding to rural areas varied widely. For example, using the dominant RUCA model we found that the amounts provided to rural areas ranged from 7 percent or less for the portion of DOL and EPA funding we could track to about 58 percent for USDA and 77 percent for the Delta Regional Authority. The share of economic development funding that rural areas received also varied by state. Under the dominant RUCA model, the shares varied from 85 percent of the total funding in Wyoming to 3 percent in Massachusetts. Figure 6 shows the percentage of economic development funding in each state that went to rural areas. The amounts also varied by region of the country. As shown in figure 7, rural residents in the western states generally received more economic development funding per capita than residents in the mid-Atlantic and midwest states. For example, Alaska and North Dakota residents received more than $1,200 a year during fiscal years 2002 through 2004, while residents of all states east of the Mississippi River received $800 or less per year during the same time period. Detailed information on the share of federal economic development funding that rural areas received, listed by program, agency, state, and county under both the dominant RUCA and rural-urban continuum classification systems, can be viewed at www.gao.gov/cgi-bin/getrpt?GAO- 06-436sp. OMB requires that all federal agencies submit financial assistance award data to Census for their programs on a quarterly basis, but our review showed that the data submitted were often inaccurate and that some data were missing altogether. We worked with Census officials to find the reasons for the incorrect and missing data, and ultimately we received corrected information from seven agencies and three commissions. With these corrections, we determined that the data were sufficiently reliable for our analysis. The agencies involved took a number of significant actions in order to provide corrected data for the programs we reviewed, and these actions should improve FAADS reporting in the future. During our review, which covered fiscal years 2002 through 2004, we looked at the quarterly files of standardized records that FAADS maintains on financial assistance awards made by federal agencies. For those programs for which information had been submitted to FAADS, we checked the amounts against agency obligation data provided by the agency or the CFDA record. When we found significant discrepancies, we contacted the agencies to determine the reasons for these differences. If the FAADS data were deemed incorrect, in most cases we obtained corrected information from the agencies and replaced the FAADS information with that data for our analysis. In cases where the discrepancy could not be resolved, we used the agency obligations data provided to us by the agency. We found that for 44 of the 86 economic development programs included in our analysis, the administering agencies either did not report any funding data or reported incomplete or inaccurate data to FAADS during all or part of fiscal years 2002 through 2004. Total obligations that were reported to Census during those years for these programs were off by more than $11 billion, including obligations of about $4.5 billion for 19 programs (22 percent) that had not been reported at all, and a total of about $7 billion for 25 programs that was either over- or underreported. The programs we reviewed accounted for less than 10 percent of the federal programs that should be providing obligation information to FAADS. Since the FAADS reporting requirements are the same for all federal agencies and commissions that administer financial assistance programs—not just those involved in economic development—the amount of unreported and misreported funding is likely far greater than the $11 billion we identified during our review. Even though the FAADS reporting requirement has been in place since 1982, for the agencies we reviewed, several factors affected the extent of compliance with the FAADS requirements. These factors included: a lack of controls and resources at Census to determine whether agencies were actually submitting the data, a lack of knowledge among program officials about the FAADS poor oversight and coordination at the agencies responsible for ensuring both compliance with the reporting requirement and the accuracy of the data submitted. A Census official noted that, over the years, Census has worked with agencies to increase reporting compliance, but with limited success. Because we identified so many programs for which data had not been reported to FAADS, we worked with agency officials to identify the agencies’ reasons for not submitting the information. The agencies were either unaware of the requirements, did not have computer databases containing the necessary information, or were using expenditure instead of obligation data. Several program officials subsequently instituted corrective actions to improve FAADS reporting, and these improvements should eventually be reflected in the annual CFFR. Our review showed that Census could not ensure that federal agencies were complying with the FAADS reporting requirements. According to our Standards for Internal Control in the Federal Government and related documents, an agency’s system of internal control should include appropriate measures that will ensure the validity, accuracy, and completeness of the data in agency systems and capture erroneous data that can then be reported, investigated, and promptly corrected. However, according to a Census official, a lack of resources had kept the bureau from establishing an effective system to monitor whether agencies were submitting the required information. Further, Census does not have an adequate process for determining whether an agency has failed to report particular program data in a given year. Although Census prepares quarterly compliance reports showing whether agencies are meeting their reporting requirements, the reports we reviewed did not capture the extent of the misreporting we found. While Census officials told us that they had attempted to “persuade” agencies to submit data in the past, it became apparent from our findings that the effect of these efforts had been limited. During the course of our review, we talked with Census officials about the significant lack of compliance with FAADS reporting requirements, and officials from Census and OMB held several discussions about the problem. The culmination of these discussions was a meeting held in April 2005 between OMB, Census, and most of the agencies responsible for reporting information to FAADS. The purpose of the meeting was to allow OMB and Census to explain to the agencies the importance of submitting their obligation information on all programs on a quarterly basis as required. In addition, in June 2005, officials from the two agencies met with representatives of HUD to emphasize the need for compliance and accurate reporting, and in November 2005 Census and OMB held a second multiagency meeting. Even after this renewed emphasis on compliance and accurate reporting, Census officials told us that some agencies had continued to submit improper data that were not necessarily reliable, forcing Census to devote staff resources to cleaning up the information. For example, the officials said that even though they had frequently pointed out data problems to HUD, the same errors kept occurring with each submission. HUD officials told Census and OMB staff at a June 2005 meeting that they would try to improve their reporting accuracy. According to a HUD official, the agency was commended by OMB at the November 2005 multiagency meeting for reducing its error rate by half. However, Census officials told us that while HUD’s progress is commendable, HUD’s error rate remains higher than that of most agencies. A number of federal program officials who had not submitted FAADS information to Census were not aware that they were required to do so. In fact, a number of federal agency and regional commission officials told us that they had never heard of FAADS. As shown in table 2, CFDA program funding not reported to Census for fiscal years 2002, 2003, or 2004, accounted for about $4.5 billion. In the following examples of nonreporting that we found during our review, the agency officials involved were not familiar with FAADS: Staff at two of the three regional commissions and authorities we included in our analysis had never heard of FAADS or the CFFR and were not aware of the reporting requirements. We provided information to these officials about FAADS and the Census’s involvement in collecting the data. Between the two organizations, more than $340 million had not been reported to FAADS during our 3-year review period. As a result of our discussions about FAADS, officials at both commissions said that they would contact Census and begin reporting the information. Two different HUD program officials noted that they were not familiar with FAADS or the requirements to submit quarterly data. As a result, for fiscal year 2002 more than $50 million dollars in funding provided by the Brownfields Economic Development Initiative and the Rural Housing and Economic Development program was not reported to FAADS. A DOD program official was not familiar with FAADS and was only vaguely familiar with his program’s CFDA number. As a result, $53 million in program obligations was not reported in fiscal years 2002 through 2004. Initially, the FAADS data we received directly from DOD indicated that the program had received no funding for the 3 years we included in our review. However, subsequent discussions with the DOD official revealed that this particular program had about $53 million in obligations for fiscal years 2002 through 2004 that was not reported to FAADS and reflected in the CFFR. While other program managers were aware of the FAADS reporting requirements, the information they submitted to Census was either incomplete or inaccurate, resulting in the misreporting of another approximately about $7 billion dollars from various agencies during fiscal years 2002 through 2004. Several factors affected the quality of the reporting. First, in some cases data from several programs were combined. Second, program officials sometimes did not capture all the necessary information. And finally, agencies lacked the controls needed to ensure that all of the programs and the correct data were submitted, resulting in significant over- and underreporting of obligations. The following examples show some of the different scenarios that affected the completeness and accuracy of agencies’ submissions to FAADS: Although the Appalachian Regional Commission had four separate CFDA program numbers, for many years the agency had submitted all of its information under one program. As a result, three CFDA program accounts showed no funding, even though each represented a distinct program. We also determined that the amount of funding data submitted to FAADS appeared to be more than $30 million higher than the Appalachian Regional Commission’s annual appropriation in fiscal year 2002 and more than $4 million higher than the Commission’s fiscal year 2003 appropriation. The Appalachian Regional Commission subsequently determined that it had counted a portion of its FAADS submission twice and agreed to submit revised data that would reapportion its data correctly among the four CFDA program accounts and correct for the over-counting. These changes should lower its fiscal year 2002 total by more than $31 million, and its fiscal year 2003 total by $4.5 million. Also, the Appalachian Regional Commission told us that it has instituted internal controls to prevent duplicate submissions to FAADS and to prevent the reporting of all investments under one CFDA number. Interior had not updated its “cross-walk” of internal data codes that is intended to keep current with changes in the CFDA. As a result, Interior had underreported its FAADS data by nearly $56 million for fiscal years 2002 and 2003. The staff member in charge of reporting to FAADS told us that he had learned that some of his data codes were out of date only after we questioned some inaccuracies in the data. Interior has since rerun its data with the new codes and planned to resubmit corrected information to Census for fiscal year 2004. Also, Interior’s Outdoor Recreation, Acquisition, Development and Planning program reported to FAADS obligations amounting to about $64 million. Data we subsequently obtained from the agency showed obligations totaling more than $290 million. An agency official explained that until recently, there had been no monitoring of the information submitted to FAADS. HUD has consistently submitted to FAADS expenditure rather than obligation data. When questioned about this practice, a HUD official told us that the agency’s systems were set up to capture expenditure data. We found significant differences between expenditures and obligations in the funding information for two of the six HUD programs we evaluated. HUD met with Census and OMB in June 2005 about the issue and was considering ways to change its system to supply the required obligations data. Subsequently, another HUD official told us that a new system that would collect and report program obligation data rather than expenditure data to Census would be operational some time during 2006. We questioned a FAADS submission by HHS for the department’s Native American programs for fiscal year 2002 because the more than $82 million in obligations reported for that year totaled more than three times the $26.2 million budget for this program. For fiscal year 2003, the $37 million reported to FAADS was about $16 million more than the $20.8 million actual obligation amount provided to us by HHS. For fiscal year 2004, the $37 million reported to FAADS was about $13 million more than the $23.9 million reported to us by HHS. An HHS official said that she could not explain the discrepancies. For HHS’s Health Care and Other Facilities program, the FAADS submission for Fiscal Year 2002 totaled $620 million—more than $300 million more than what HHS’s internal system showed. An HHS official agreed that the appropriate figure for the year was about $314 million and said that HHS planned to review its data system to correct the discrepancy. We also questioned the figure of $1.3 billion that HHS reported for its Community Services Block Grant Discretionary Awards program for fiscal year 2002, because the department’s internal grant-tracking system showed a figure of about $55 million. After looking into the discrepancy, an HHS official indicated that the department had for several years mistakenly combined the Community Services Block Grant program and the Discretionary Awards program under the Discretionary Awards CFDA program number. However, the $1.3 billion total reported to FAADS also appeared to be incorrect, as the total obligations for the two programs combined in fiscal year 2002 was about $700 million—about $600 million less than what was reported to Census. HHS has agreed to correct the discrepancy, beginning with its fiscal year 2006 submission. The Small Business Administration (SBA) did not include in its FAADS submission the funding for a special loan program under its Small Business Loan program that was set up to assist the World Trade Center area after the September 11, 2001, terrorist attacks. As a result, the agency’s obligations were underreported by about $828 million for fiscal year 2003 and about $3.1 billion for fiscal year 2004. According to an SBA official, the agency will review the data that it provides to FAADS more closely in order to avoid such discrepancies in the future. According to the Census official who oversees the FAADS program, most of the agency staffs who submitted the data to Census had very little involvement with program operations, adding that the individual program managers who were most knowledgeable about the data’s accuracy and completeness generally did not get involved. OMB has required since fiscal year 1982 that agency officials review and sign off on a compliance form when submitting quarterly data. The form contains a series of statements, including one that reads, “All agency financial assistance award programs are covered in agency’s FAADS sources.” However, the official we spoke with who oversaw the program and had been involved with it since 1996 said that he had never seen a compliance form accompanying a quarterly report. It appeared that neither Census nor OMB was enforcing the requirement. Both Census and OMB staff told us that OMB had previously considered amending its guidance (Circular A-89) on reporting financial assistance data to specifically require that each agency appoint an official responsible for certifying that the FAADS data were accurately reported to Census. However, at the time of our review, the guidance had not been amended. Officials in a number of agencies commented about the lack of controls for submissions of data to FAADS and told us that requiring data certification would likely improve data quality. For example, one FAADS coordinator noted that the agency had no internal control checks in place to determine which programs should report cost information in any particular quarter or whether program personnel were submitting the required cost information. Other agency officials indicated that their agencies had no controls over FAADS data, including having individuals responsible for certifying that the data submitted was correct. Finally, one USDA official noted that USDA had been recording some FAADS information manually rather than through an electronic system but added that the agency is expected to automate the data collection system in 2006. The federal government funds a wide variety of programs that provide rural areas with economic development money. These programs provide assistance that directly supports communities’ economic well-being through such activities as creating and helping to retain jobs; constructing and repairing roads, airports, and water systems; establishing business incubators; and developing and improving tourist areas. Exactly how much assistance rural areas receive from the various economic development programs depends on how “rural” is defined, a definition which is constantly changing as advances in transportation, computer technology, and telecommunications—along with the spread of suburbia—continue to blur many of the distinctions between rural and urban life. We found that the amount of economic development funding provided to rural areas varied widely by program, agency, state, and region. However, both the Congress and the public are at a disadvantage in trying to assess the exact levels of funds rural areas receive because agencies have not provided accurate funding data for economic development programs. Our review showed that the data were often inaccurate or had not been reported at all. As a result, the information published by Census in reports issued to the Congress and the general public for the programs we examined was off by billions of dollars. We reviewed fewer than 10 percent of the programs that are required by OMB to provide obligation information to Census. Because the reporting requirements do not differ for the remaining 90 percent or more of the programs that are required to report to FAADS, the accuracy of the remaining program data are likely questionable. OMB has recently begun to meet with agency officials to improve agency reporting, and several agencies have agreed to implement changes that should ensure more accurate and complete compliance. Such efforts should improve the data submitted to FAADS. But the types of errors we identified will persist unless OMB emphasizes the importance of establishing improved controls at the agencies and at Census, including requirements that agencies certify their FAADS submissions and that Census notify agencies when significant errors occur. To better ensure that Census receives accurate funding information from federal agencies, OMB should consider improving its oversight of compliance with FAADS reporting requirements. We recommend that the Director of the Office of Management and Budget: regularly reach out to individual agencies on FAADS reporting requirements and on ways to improve the quality of the data provided to Census, and amend its guidance to require agency officials to certify the accuracy and completeness of their FAADS data reported to Census, and provide support to Census with its work in notifying agencies that do not report or significantly misreport their FAADS data. We provided Commerce and OMB with a draft of this report for review and comment. The Deputy Secretary of Commerce provided written comments that are provided in appendix III. OMB provided oral comments, stating that it agreed that improvements are needed in the FAADS reporting process. OMB officials said that they would continue to regularly reach out to individual agencies on FAADS reporting requirements, and when requested by Census, will provide support in notifying agencies that do not report or significantly misreport their FAADS data. They also said that they would discuss the need for having higher-level agency officials certify FAADS data submitted to Census at their next agencywide outreach meeting in April 2006. The Deputy Secretary of Commerce wrote that the Census generally agrees with the report’s conclusions and recommendations and that the difficulties GAO encountered with FAADS provide insights into the breadth and depth of the complexities involved for its staff in collecting, analyzing, and tabulating this large governmentwide data set. He wrote that the department will work with OMB and the individual reporting agencies to identify additional resources and streamlined methodologies to make future data more complete and accurate. The Census official who oversees FAADS provided us with oral comments that expanded on the Deputy Secretary’s comments, stating that he agreed with the need for OMB to regularly outreach to individual agencies and to require agency officials to certify the accuracy and completeness of data reported to FAADS. He also agreed that there is a need to identify and notify agencies that do not report or significantly misreport their FAADS obligation data, and noted that his office has been routinely reporting problems to agencies. However, he said that his office needs more support from OMB to succeed in this area. For example, he said that Census contacted 12 federal agencies in mid-September 2005 informing them about significant data problems with their fiscal year 2004 FAADS data submissions, including many of the items we reported as missing in this report. However, he said that 7 of the 12 agencies did not respond in any way as to how they planned to correct the types of discrepancies in the future. In light of this new information, we revised our recommendation to acknowledge that OMB should provide additional support to Census in notifying agencies that do not report or significantly misreport their FAADS obligation data. In addition to the comments we obtained from OMB and Commerce, we also obtained technical comments from most of the other agencies and commissions included in our review. We incorporated the comments in the report as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its issuance date. At that time we will send copies of the report to interested members of Congress and congressional committees. We will also send copies of this report to the Secretary of the Department of Commerce and the Director of the Office of Management and Budget and we will make copies available to others upon request. In addition, detailed information about the share of federal economic development funding by program, agency, state, and county will be available at no charge on the GAO website at www.gao.gov/cgi-bin/getrpt?GAO-06-436sp. If you or your staff have any questions concerning this report, please contact me at (202) 512-4325 or at shearw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in Appendix IV. To examine the share of federal economic development funds that support rural areas today, we (1) developed a framework for identifying federal economic development funding; (2) determined the most informative classification system for differentiating between rural and urban areas; (3) used the economic development framework and classification system to identify rural areas and report the amount and share of economic development funding these areas have received; and (4) examined federal agencies’ reporting of economic development funds. We interviewed officials from the U.S. Departments of Agriculture (USDA), Commerce (Commerce), Defense (DOD), Housing and Urban Development (HUD), Labor (DOL), Health and Human Services (HHS), Interior (Interior), and Transportation (DOT). We also interviewed officials from the Small Business Administration (SBA), Environmental Protection Agency (EPA), Appalachian Regional Commission, Denali Commission, and Delta Regional Authority. Because there is no commonly accepted definition of what constitutes federal economic development, we developed a framework for discussing economic development using our prior reports and research studies by the National Council for Urban Economic Development, the Progressive Policy Institute, the Cornell Community and Rural Development Institute, and the Northeast-Midwest Institute‘s Center for Regional Policy. We also used information provided by federal program officials and external rural development groups, including the Aspen Institute Community Strategies Group, the Sonoran Institute, the Southern Rural Development Initiative, and the Progressive Policy Institute. We then used the framework to define activities that were generally accepted as being related to economic development and reviewed program descriptions from the Catalog of Federal Domestic Assistance (CFDA) to assess which programs fostered or assisted with economic development. We originally identified about 135 programs and held discussions with the administering agencies, regional commissions, and authorities on our framework and the programs selected. Based on those discussions we modified our framework and eliminated programs that did not meet the modified framework. In some cases we obtained more detailed information on programs beyond that in the CFDA program descriptions. We settled on 86 programs to include in our analysis. In finalizing the framework, we focused on economic development activities that directly affect the overall development of an area— particularly saving or creating jobs—rather than on activities that improve individuals’ quality of life, such as housing or general education. For example, we did include job training that had a direct impact on economic development in an area by, for example, preparing employees for a specific industry or business located in a particular area. However, we did not include general educational programs, housing loan programs, research and development programs, or other programs that do not directly impact the economic development of an area. To examine federal agencies’ reporting of economic development funds, we reviewed the extent to which agencies reported information to the Federal Assistance Award Data System (FAADS) for the 86 programs we selected for review during fiscal years 2002 through 2004. FAADS produces a quarterly file of standardized records on financial assistance awards made by federal agencies. Each transaction record identifies, by CFDA program code number, the type and amount of financial assistance, the type and location of the recipient, and the geographic place of performance. We assessed the reliability of the FAADS data by (1) performing electronic testing of the required data elements for obvious errors in accuracy and completeness, (2) comparing program totals by fiscal year to similar data from the Consolidated Federal Funds Report (CFFR) database, (3) reviewing related documentation, and (4) interviewing the Census Bureau official knowledgeable about the data. For those programs for which information had been submitted to FAADS, we checked the amounts against agency obligation data provided by the agency or the CFDA record. When there were significant discrepancies, we contacted the agencies to determine the reasons for the discrepancies. If the FAADS data were deemed incorrect, in most cases we obtained the corrected information from the agencies and replaced the FAADS information for our analysis. In cases where the discrepancy could not be resolved, we used the agency obligations data provided to us by the agency. Because HUD had submitted expenditure data instead of obligation information as required by FAADS, we obtained obligation information from HUD on each of the programs included in our analysis. In addition to the more than 20 programs for which we identified discrepancies, we also identified another 20 programs for which the agencies had not submitted any information to FAADS for one or more of fiscal years 2002 through 2004. For each of these programs, we contacted agency staff to determine why no information had been submitted to FAADS and what the obligation information amounts were for each of the fiscal years. Also, because the FAADS data provides detailed information on program recipients, such as zip codes, we requested that each agency provide us with similar information on program recipients so that we could geocode the information. Once we created the final database of spending for the 86 programs, we used the information in the file to identify the locality that received the funds. However, for approximately 50 percent of the funding, we could not identify a recipient below the county level. Based on this finding and consultations with USDA’s Economic Research Service, we decided to analyze the dollars flowing to rural areas using the dominant Rural-Urban Commuting Area (RUCA) approach. RUCA data is based on census tracts, but the State of Washington’s Office of Community and Rural Health has developed a system to classify counties based on their dominant RUCA code if census tract data is not available. In order to produce county-level RUCA estimates, we applied this approach to the entire country by assigning dominant RUCA categories to every county. These analyses allowed us to classify every county as urban or rural. Using the county-level RUCA file, we were able to assign a dominant RUCA code to over 99 percent of the program dollars. We also classified every county as urban or rural using ERS’s rural-urban continuum system, including those counties considered completely rural or that contained urban populations of less than 20,000 as rural counties, and other counties as urban counties. Another data issue involved pass-through programs, or programs for which the data showed the recipient to be the state government. For most of these programs, state governments subsequently passed these funds through to counties or local governments. However, we could not identify the subsequent recipients. Using the CFDA program descriptions, we determined that 12 of 86 programs appeared to meet this criterion, along with the portion of the highway spending program that went to state governments. For example, both DOT’s Formula Grants Program for Other than Urbanized Areas and HUD’s Community Development Block Grant/ State’s program showed no funding going to rural areas. Both these programs pass through funding to rural areas, but the data only coded the funding to the state capitals. If we had geocoded funding for such pass- through programs, the share of spending associated with urban areas, where state capitals are typically located, would have been overstated. Excluding the pass-through funding reduced the total spending we analyzed from about $200 billion to about $150 billion. Significant noncompliance by a number of agencies that had failed to submit obligation information for one or more programs, restricted our ability to use the CFFR database to identify how all economic development program funds were dispersed. While the reliability of the databases used by Census to prepare the CFFR has been tested, we did not know the extent to which agency data we obtained and analyzed directly from the agencies were reliable. As a result, we contacted agency officials to determine the controls used to ensure that the data they provided to us were reliable and accurate. Specifically, we requested information concerning the accuracy and completeness of the data, the use of the data in developing financial statements about the programs, and any reviews or audits of the quality of the data. The respondents indicated that the data were correct and told us why they believed the information was accurate. In addition, we questioned whether agency staff was aware of the FAADS reporting requirements and in some cases requested data directly from agencies. While the data we received directly from agencies were generally not as comprehensive as the CFFR requires, we found that the information was sufficient for our purposes. We conducted our review from January 2005 through December 2005 in accordance with generally accepted government auditing standards. The following table lists each agency program by CFDA number and program objective, the source we used to obtain fiscal year 2002-2004 funding data, and whether or not missing or corrected data was obtained from the agency. To bring private non-industrial forest land under intensified management; to increase timber production; to assure adequate supplies of timber; and to enhance other forest resources through a combination of public and private investments on the most productive sites on eligible individual or consolidated ownership of efficient size and operation. To stimulate technological innovation in the private sector, strengthen the role of small businesses in meeting Federal research and development needs, increase private sector commercialization of innovations derived from USDA supported research and development efforts, and foster and encourage participation, by women-owned and socially disadvantaged small business firms in technological innovation. To improve the quality of life in rural America by supporting and maintaining a network of State Rural Development Councils that create and facilitate cross- program collaborations. To assist public or private nonprofit organizations interested in providing sites for housing; to acquire and develop land in rural areas to be subdivided as adequate building sites and sold on a cost-development basis to families eligible for low- and very-low-income loans, cooperatives, and broadly based nonprofit rural rental housing applicants. To develop the capacity and ability of private, nonprofit community-based housing and community development organizations, and low income rural communities to improve housing, community facilities, community and economic development projects in rural areas. A foreign market access program that provides funding for generic technical assistance activities which take place abroad. The program provides cost- share assistance to small- and medium- sized U.S. agriculture and agribusiness organizations that desire to promote, enhance or expand the exports of U.S. agricultural commodities and products into eligible low-and middle-income foreign countries. With respect to nonfederal forest and other rural lands, to assist in the advancement of forest resources management; the encouragement of the production of timber; the control of insects and diseases affecting trees and forests; the control of rural fires; the efficient utilization of wood and wood residues, including the recycling of wood fiber; the improvement and maintenance of fish and wildlife habitat; and the planning and conduct of urban and community forestry programs. To share receipts from the national forests with the states in which the national forests are located. To share receipts from national grasslands and land utilization projects with the counties in which the national grasslands and land utilization projects are located. Provide accelerated assistance to rural communities faced with acute economic problems associated with federal, state, or private sector resource management decisions and policies that are located in or near a national forest and are economically dependent upon forest resources. Aid is extended to these rural communities to help them develop strategic action plans to diversify their economic base and to improve the economic, social, and environmental well- being of rural areas. To help rural areas analyze and assess forest resource opportunities, maximize local economic potential through market development and expansion, and diversify communities’ economic base. To provide funds, on a cost-share basis, for the construction of demonstration modern timber bridges and modern timber bridge technology transfer projects. Primary focus is to assist in the development and commercialization of new technologies that incorporate underutilize timber and related resources to the extent that is economically feasible. To assist small forest products businesses, community leaders, entrepreneurs, non-profits, and others turn small diameter and underutilized wood species into marketable forest products, including biomass energy. Programs may include: (1) technical assistance for processing and manufacturing of small diameter or low value hardwoods and softwoods; (2) prototype development of potential new products; (3) demonstration projects that showcase innovative uses for small diameter and low-value hardwoods and softwoods; (4)economic feasibility assessments related to using small diameter and low-valued hardwoods and softwoods; and (5) market assessments for using small diameter and low-valued hardwoods and softwoods. To provide basic human amenities, alleviate health hazards, and promote the orderly growth of the rural areas of the nation by meeting the need for new and improved rural water and waste disposal facilities. Through the Emergency Community Water Assistance Grant program, the Rural Utility Service (RUS) is authorized to help rural residents who have experienced a significant decline in quantity or quality of water to obtain adequate quantities of water that meet the standards of the Safe Drinking Water Act. To construct, enlarge, extend, or otherwise improve community facilities providing essential services to rural residents. Intermediary Re-lending To finance business facilities and community development. To assist public, private, or cooperative organizations (profit or nonprofit), Indian tribes or individuals in rural areas to obtain quality loans for the purpose of improving, developing or financing business, industry, and employment and improving the economic and environmental climate in rural communities including pollution abatement and control. To facilitate the development of small and emerging private business, industry, and related employment for improving the economy in rural communities. To provide water and waste disposal facilities and services to low-income rural communities whose residents face significant health risks. To establish and operate centers for rural cooperative development to improve economic conditions in rural areas by promoting the development of new cooperatives and/or the improvement of existing cooperatives. To provide for the establishment of empowerment zones and enterprise communities in rural areas to stimulate the creation of new jobs, particularly for the disadvantaged and long-term unemployed, and to promote the revitalization of economically distressed areas. To promote sustainable economic development in rural communities with exceptional needs. To assure that people in eligible rural areas have access to electric services comparable in reliability and quality to the rest of the nation. To assure that people in eligible rural areas have access to telecommunications services comparable in reliability and quality to the rest of the nation. To provide supplemental financing to extend and improve telecommunications services in rural areas. To promote rural economic development and job creation projects, including funding for project feasibility studies, start- up costs, incubator projects, and other reasonable expenses for the purpose of fostering rural development. To encourage and improve the use of telemedicine, telecommunications, computer networks, and related advanced technologies to provide educational and medical benefits through distance learning and telemedicine projects to people living in rural areas and to improve rural opportunities. To provide assistance to rural communities with extremely high energy costs. To promote long-term economic development in areas experiencing substantial economic distress and investments to support the construction of rehabilitation of essential public infrastructure and develop facilities necessary to generate high-skill, higher- wage jobs and private investment. To help states, sub-state planning units, Indian Tribes, and/or local governments strengthen economic development planning capability and formulate and establish comprehensive economic development, process and strategies designed to reduce unemployment and increase incomes. To promote economic development and alleviate underemployment and unemployment in distressed areas by (1) enlisting the resources of designated university centers in promoting economic development, (2) supporting innovative economic development projects, (3) disseminating information and studies of economic development issues of national significance, and (4) financing feasibility studies and other projects leading to local economic development. To assist state and local interests design and implement strategies to adjust or bring about change to an economy. Program focuses on areas that have experienced or are under threat of serious structural damage to the underlying economic base. Such economic change may occur suddenly or over time, and generally results from industrial or corporate restructuring, new federal laws or requirements, reduction in defense expenditures, depletion of natural resources, or natural disaster. Aids the long-range economic development of areas with severe unemployment and low- family-income problems; aids in the development of public facilities and private enterprises to help create new, permanent jobs. To provide trade adjustment assistance for firms and industries adversely affected by increased imports. To establish, maintain, and support manufacturing extension centers and services that improve the competitiveness of firms by accelerating the usage of appropriate manufacturing technology by smaller U.S.-based manufacturing companies. To also partner with states to develop such technical assistance programs and services. To assist various organizations identified by Congress to achieve objectives specified by Congress. To increase assistance by the DOD for eligible entities by furnishing Procurement Technical Assistance to business entities, and to assist eligible entities in the payment of the costs of establishing and carrying out new programs and maintaining existing programs. To assist local governments or states, on behalf of local governments, to undertake community economic adjustment- planning activities to respond to military base closures and realignments. To develop viable urban communities by providing decent housing; a suitable living environment; and expanding economic opportunities, principally for persons of low and moderate income. To develop viable urban communities by providing decent housing; a suitable living environment and expanding economic opportunities, principally for persons of low and moderate income. To provide for the establishment of Empowerment Zones, Enterprise Communities and Renewal Communities in urban and rural areas, to stimulate the creation of new jobs empowering low- income persons and families receiving public assistance to become economically self-sufficient, particularly for the disadvantaged and long-term unemployed and to promote revitalization of economically distressed areas. To return brownfields to productive use by assisting public entities eligible under the Section 108 Loan Guarantees program to carry out qualified economic development projects. Grant assistance must enhance the security of loans guaranteed under the Section 108 program or improve the viability of projects financed with loans guaranteed under the Section 108 program. To provide communities with a source of financing for economic development, housing rehabilitation, public facilities, and large-scale physical development projects. To expand the supply of affordable housing and access to economic opportunities in rural areas. To assist Indian tribes and Alaska Native villages in the development of viable Indian communities. To provide limited routine maintenance on paved, gravel, earth, and unimproved roads, bridges, and airstrips. To assist and support the inventory and prudent development of energy and mineral resources on Indian lands. To promote conserving, developing, and using fish, wildlife, and recreational resources for the sustenance, cultural enrichment, economic support, and maximum benefit of Indians. To provide funds for basic operating and maintenance services of non-education facilities that are owned or operated by the Bureau of Indian Affairs and located on reservations. To provide safe, functional, code-and- standards compliant, economical, and energy-efficient adult and/or juvenile detention facilities. To assist federally recognized Indian tribal governments, Native American organizations, and individual American Indians in obtaining financing from private sources to promote business development initiatives on or near federally recognized Indian reservations. To manage recreational resource values on the public lands administered by the Bureau of Land Management and to increase public awareness and appreciation of those values. To implement the National Fire Plan and assist communities at risk from catastrophic wildland fires by providing assistance in the following areas: provide community programs that develop local capability including: assessment and planning, mitigation activities, and community and homeowner education and action; plan and implement hazardous fuels reduction activities on federal land or on adjacent nonfederal land that mitigate the threat of catastrophic fire to communities and natural resources in high risk area; enhance local and small business employment opportunities for rural communities; enhance the knowledge and fire protection capability of rural fire districts by providing assistance in education and training, protective clothing and equipment purchase, and mitigation methods on a cost -hare basis. To provide financial assistance to the states and their political subdivisions for the preparation of Statewide Comprehensive Outdoor Recreation Plans and acquisition and development of outdoor recreation areas and facilities for the general public, to meet current and future needs. To assist persons to secure employment and labor market information by providing a variety of job search assistance and labor market information services without charge to job seekers and to employers seeking qualified individuals to fill job openings. To assist sponsors, owners, or operators of public-use airports in developing a nationwide system of airports adequate to meet the needs of civil aeronautics. To assist state transportation agencies in planning and developing an integrated, interconnected transportation system by constructing and rehabilitating the National Highway System, including the Interstate System; and for transportation improvements to all public roads except those functionally classified as local; to provide aid for the repair of federal-aid roads following disasters; to foster safe highway design; to replace or rehabilitate deficient or obsolete bridges; and to provide for other special purposes. To provide funds to the States to develop and maintain recreational trails and trail- related facilities for both non-motorized and motorized recreational trail use. To improve, initiate, or continue public transportation service in non-urbanized areas and to provide technical assistance for rural transportation providers. To foster innovation in public transit systems, through local demonstrations of promising, but risky, new technologies and service or operational concepts; to address economic and social issues resulting from human impacts on the environment and develop risk assessment methodologies, integrated assessments, and other analytical tools for effective policy formulation; to develop practical know-how for solving fundamental industry-wide problems, such as how to accommodate the travel needs of persons with disabilities, how to finance transit infrastructure construction, and how to meet the requirements of the Clean Air Act; and to support developing information and technical assistance to convey the results of research, technology development, and innovative demonstrations for adaptation and local implementation. To provide competitive grants to local governments, nonprofit organizations, and designated recipients of Federal transit funding to develop transportation services to connect welfare recipients and low-income persons to employment and support services. Job Access grants will be for capital projects to finance operating costs of equipment, facilities and associated support costs related to providing access to jobs. The Reverse Commute grants will assist in funding the costs associated with adding reverse commute bus, train, carpool or service from urban areas, urbanized areas, and other than urbanized areas to suburban work places. To assure that air transportation is provided to eligible communities by subsidizing air carriers when necessary to provide service. To increase the participation of minority institutions in federally funded programs. Also, to use the resources of minority institutions to develop training and technical assistance programs to enhance small women-owned and disadvantaged business enterprises to successfully compete for Department of Transportation contracts and projects. The program is also geared to attracting young talent to transportation-related careers. To help smaller communities enhance air service and increase access to the national transportation system. To create opportunities for self-sustaining economic development and improved quality of life in the Appalachian region. To provide a highway system which, in conjunction with other federally-aided highways, will open up areas with development potential within Appalachia where access to commerce and communication have been inhibited. To provide planning and development resources in multi-county areas, to help develop the technical competence essential to sound development assistance, and to meet the objectives stated under the Appalachian Regional Development program. To assist the Appalachian Regional Commission in accomplishing its objectives by expanding the knowledge of the region through state-sponsored research. 7(j) Technical Assistance To provide business development assistance to socially and economically disadvantaged businesses by contracting with qualified service providers who have the capacity to provide business development assistance to these businesses or individuals. To establish privately owned and managed investment companies to provide equity capital and long term loans to small businesses, and to provide advisory services to small businesses. To provide guaranteed loans for small businesses that are unable to obtain financing in the private credit marketplace but can demonstrate an ability to repay loans. To assist small businesses by providing long-term, fixed-rate financing for fixed assets through the sale of debentures to private investors. To assist women, low-income, and minority entrepreneurs, business owners, and other individuals possessing the capability to operate successful business concerns and to assist small businesses in areas experiencing lack of credit due to economic downturns. To create state revolving funds that will provide a long-term source of financing for constructing wastewater treatment facilities and implementing other water quality management activities. To create state revolving funds that will provide a long-term source of financing for the costs of infrastructure needed to achieve or maintain compliance with requirements of the Safe Drinking Water Act and to protect public health. To support Brownfields training, research, and technical assistance related to the following categories: (1) community involvement, (2) health impacts of Brownfields sites, (3) science and technology relating to Brownfields assessment, remediation, and site preparation, (4) integrated approaches to Brownfields cleanup and redevelopment, (5) economics of Brownfields cleanup and redevelopment, (6) results analysis, and (7) state, local and tribal government Brownfields programs. To provide training to facilitate assessment, remediation, or preparation of Brownfield sites. To establish or enhance the capacity for state and tribal response programs and to capitalize revolving loan funds and support insurance mechanisms for Brownfields Cleanup. To provide funding: (1) to inventory, characterize, assess, and conduct planning and community involvement related to Brownfield sites; (2) to capitalize a revolving loan fund (RLF) and provide sub-grants to carry out cleanup activities at Brownfield sites; and, (3) to carry out cleanup activities at Brownfield sites that are owned by the grant recipient. To support program activities of national or regional significance to alleviate the causes of poverty in distressed communities. To create new permanent employment opportunities for low-income individuals using four project designs priority areas: (1) expansion of existing businesses through technical and financial assistance; (2) self- employment/microenterprise; (3) new business ventures; and (4) non-traditional employment initiatives that lead to economic self-sufficiency for eligible participants. To provide financial assistance to Native American community organizations to develop and implement social and economic development strategies that promote self-sufficiency, improve social and economic conditions, and increase the effectiveness of Tribes and Native American Organizations in meeting social and economic goals. To support State efforts to enhance employment options for people with disabilities by building Medicaid infrastructure. To construct, renovate, expand, equip, or modernize health care facilities and other health care related facilities. In addition to those named above, Andy Finkel, Assistant Director; Emily Chalmers; Mark Egger; John McGrail; Rich LaMore; John Mingus; Marc Molino; and Tom Taydus made key contributions to this report. | GAO was asked to update its 1989 report on the distribution of economic development funding using newer tools now available for measuring the distribution of federal funds to rural areas. GAO agreed to (1) identify federal economic development programs, (2) determine the best way to identify rural areas for this report, (3) determine the amount and share of economic development funding that rural areas receive, and (4) discuss the way federal agencies report data on economic development funding. Based on prior GAO reports, other research studies, and information provided by federal program officials and external rural development groups, GAO developed a list of activities as criteria to identify economic development programs. This list included job creation, infrastructure development, and other activities that are generally acknowledged to directly affect overall economic growth. Using this list, GAO identified 86 federal programs in 10 federal agencies and 3 regional commissions and authorities that provide economic development funding. Because federal agencies use different criteria as to what constitutes rural, determining how much funding has targeted rural areas required determining which method of defining rural was the best for tracking funding. Classification systems that can track funding data at the census tract level or below can better differentiate between rural and urban areas because they better reflect the economic and social diversity than do county-based systems that are based on political boundaries. Because limitations in the data did not allow tracking all the funding data to local levels, GAO used a system that used population and commuting relationships to classify census tracts and then classify each county as rural or urban based on the county's dominant commuting pattern. The 86 programs in 2002-2004 provided approximately $200 billion in total economic development funding, about $150 billion of which could be tracked to the county level or below. However, the amount of funding provided to rural areas varied widely by program, agency, state, and region. These calculations were complicated by significant problems with the data from the programs that federal agencies were reporting to Census. Although all federal agencies are required to submit obligations data for their programs quarterly, 44 of the programs GAO analyzed did not report any data or reported incomplete or inaccurate data for all or part of fiscal years 2002, 2003, or 2004. As a result, the reported obligations were off by more than $11 billon. Further, some 19 programs provided no information on obligations of about $4.5 billion, and another 25 programs reported amounts that varied significantly from actual obligations. The FAADS reporting requirement has been in place since 1982. But a lack of knowledge among program officials about the requirement and poor oversight has affected compliance with it. |
Located in FAA’s Office of Aviation Safety (Aviation Safety), the Aircraft Certification Service (Aircraft Certification) and Flight Standards Service (Flight Standards) issue certificates and approvals for new aviation products to be used in the national airspace system as well as for new operators in the system, such as air carriers, based on federal aviation regulations (see fig. 1 below). FAA inspectors and engineers interpret and implement these regulations governing certificates and approvals through FAA policies and guidance, including orders, notices, and advisory circulars. Additionally, FAA also has the authority to use private individuals and organizational entities, known as designees, to carry out many certification activities on behalf of the FAA Administrator in order to enable FAA to better concentrate its limited staff resources on safety- critical functions. In Aircraft Certification, approximately 880 engineers and inspectors issue certifications and approvals to the designers and manufacturers of new aircraft and aircraft engines, propellers, parts, and equipment, including the avionics and other equipment required for modernizing the air traffic control system under the Next Generation Air Transportation System (NextGen). Since 2005, Aircraft Certification has used a project sequencing system to nationally prioritize certification submissions on the basis of available resources. In fiscal year 2013, Aircraft Certification issued 3,496 design approvals, 57 production approvals, and 536 airworthiness certificates. In Flight Standards, approximately 4,000 inspectors issue certificates and approvals allowing individuals and entities to operate in the national airspace system. These include certificates to commercial air carriers, operators of smaller commercial aircraft, repair stations, and flight training schools and training centers. Flight Standards field office managers in over 100 field offices initiate certification projects within their offices on a first-come, first served basis. In fiscal year 2013, Flight Standards issued 259 air operator certificates and 159 air agency certificates. When FAA receives aviation industry submissions for certificates and approvals, it must determine whether or not resources are available to begin the project. According to FAA, the agency considers its highest priority to be overseeing the continued operational safety of the people and products already operating within the national airspace system. The same staff that provide this oversight are also tasked with other oversight activities, such as processing new certifications and approvals that FAA considers to be lower priority. FAA wait-lists new certification and approval projects when resources are not available to begin the work. Flight Standards, in particular, has historically had difficulty keeping up with its certification workload across its regions and offices, a problem that persists. FAA has considered ways to supplement its annual budget by expanding its sources of funding to deal with its increasing workload and staff shortages. However, FAA has limited options as it cannot levy fees on its customers for most of the services it provides to industry, including aviation product certifications and approvals. Attempts have been made to provide FAA with additional funding from industry stakeholders for processing certifications and approvals. In 2007, the administration submitted a reauthorization proposal to Congress that called for major changes to FAA’s funding and budget structure. These changes were intended to provide a more stable, reliable basis for funding in the long term, in part by allowing FAA to impose fees on manufacturers for the various activities and costs related to aircraft certification and approval. Congress has previously authorized other agencies to charge these types of “user fees” for services rendered for processing product certification and approval. For example, the Medical Device User Fee and Modernization Act of 2002 authorized the Food and Drug Administration (FDA) to charge and retain a fee for providing services related to reviewing medical device products. However, this broad authority has not been granted to FAA. In May 2012, the Certification Process Committee made six recommendations to Aircraft Certification to streamline and reengineer the product certification and approval processes, improve efficiency and effectiveness within Aircraft Certification, and redirect resources for support of certification. The Certification Process Committee further recommended that FAA develop measures of effectiveness for its activities and a means of tracking its progress. In August 2012, FAA reported its plan to Congress for addressing the Certification Process Committee’s recommendations, and, in July 2013, the agency issued an implementation plan with 14 initiatives. FAA updated this plan in January 2014 and plans to issue further updates on the status of the initiatives periodically. Since the January update, Aircraft Certification has continued its efforts to address the recommendations to improve its certification and approval processes and is implementing the 14 initiatives. These initiatives touch on various aspects of Aircraft Certification’s work and, according to FAA several predate the committee’s recommendations and were part of on- going continuous efforts to address long-standing certification issues and to improve the certification process. The initiatives range from developing a comprehensive road map for major change initiatives, to improving the project sequencing process, to reorganizing the small aircraft certification regulation. Figure 2, based on an interim May 2014 update that FAA provided to us, summarizes FAA’s determination of the status of the 14 initiatives. According to the May 2014 update that FAA provided to us, 1 of the 14 initiatives has been completed, and 10 initiatives are on track for completion within planned time frames. FAA deployed a tracking system to monitor the implementation of the initiatives in June 2013, but the agency indicated it is still finalizing the mechanisms for authorizing staff with the appropriate level of review and approval rights in the system. Also, ten of the initiatives were on track for meeting their planned completion milestones. For example, the initiatives to expand the authority for approving aircraft emissions data and noise compliance under the organization designation authorization (ODA) program are on track to be completed in 2015. In addition, the initiative to expedite rulemaking by, among other things, adopting a rulemaking prioritization tool to update airworthiness standards for special conditions is scheduled to be completed in September of this year. Further, three of the initiatives were in danger of getting off track between 2011 and 2013 and are now back on schedule. Although most initiatives are on track, according to FAA’s May 2014 interim update, 2 of the 14 initiatives will not meet planned milestones: Improve effectiveness of the ODA program: FAA and two aviation industry groups—the Aerospace Industries Association and General Aviation Manufacturers Association—developed a plan to improve the effectiveness of the ODA process, which is used to authorize organizations to act on behalf of FAA in conducting some safety certification work. In conjunction with the plan, FAA revised the order that outlines the new ODA procedures. However, this initiative was purposely delayed to provide industry with additional time to adapt to the changes in the ODA procedures. Representatives of three industry associations we interviewed for this testimony supported the use and expansion of ODA by FAA. In contrast, while the Professional Aviation Safety Specialists (PASS) agrees with the concept of ODA, it has concerns related to expanding the program because representatives contend that oversight of the program requires significant FAA resources. PASS also contends that due to current staffing shortages and increased workload, FAA does not have enough inspectors and engineers to provide the proper surveillance of the designees who would be granted this additional delegation authority. On May 14, 2014, the DOT OIG announced a review of FAA’s oversight of the ODA program. The OIG plans to assess FAA’s (1) process for determining staffing levels for ODA oversight and (2) oversight of delegated organizations’ program controls. Update 14 C.F.R. Part 21: FAA chartered another aviation rulemaking committee in October 2012 to evaluate improvements to the effectiveness and efficiency of certification procedures for aircraft products and parts, along with incorporating new safety management system (SMS) concepts into the design and manufacturing environment. The committee submitted its report to FAA in July 2014. FAA indicated that the government shutdown in October 2013 delayed some of the actions that the agency had planned to move this effort into the rulemaking process, including submission of the application for rulemaking. According to FAA, however, this delay will have no effect on completion of the final rule, which is planned for 2017. According to FAA’s May 2014 update, 1 of the 14 initiatives was at risk of not meeting planned milestones, which increases the risk that FAA will miss its established implementation time frames for the initiative for addressing its associated recommendation. Improve consistency of regulatory interpretations: The May 2014 interim update also indicated that the initiative for improving the consistency of regulatory interpretation is at risk of getting off track or off schedule. This initiative responds to the Regulatory Consistency Committee’s recommendations for improving the consistency of regulatory interpretation within both Aircraft Certification and Flight Standards. However, Aircraft Certification is relying on Flight Standards to complete the implementation plan for addressing the recommendations. Therefore, Aircraft Certification has placed this initiative on hold. (The next section of this statement discusses in more detail FAA’s response to the Regulatory Consistency Committee’s recommendations.) As of May 2014, FAA had not developed metrics for measuring the effectiveness of 9 of the 14 initiatives it has undertaken, nor has it determined metrics to measure the effectiveness of its actions as a whole. According to FAA officials, they plan to develop these metrics in three phases. For the first phase, to be included in the July 2014 update of its implementation plan, FAA will include metrics to measure the progress of the implementation of the initiatives. For the second phase, FAA plans to subsequently develop metrics for measuring the outcomes of each initiative. For the third phase, working with the Aerospace Industries Association, FAA plans to develop metrics for measuring the global return on investment in implementing all of the initiatives, to the extent that such measurement is possible. We believe that this plan for establishing performance measures is reasonable. Unlike FAA’s efforts to improve the certification process, although FAA has made some progress towards addressing the regulatory consistency recommendations, the details remain unclear about how FAA will structure its efforts. In November 2012, the Regulatory Consistency Committee made six recommendations to Aircraft Certification and Flight Standards to improve (1) the consistency in how regulations are applied and (2) communications between FAA and industry stakeholders. In July 2013, FAA reported to Congress on its plans for addressing the regulatory consistency recommendations, and included its preliminary plan for determining the feasibility of implementing these recommendations. The report also indicated that FAA would develop a detailed implementation plan that would include an implementation strategy, assign responsibilities to offices and staff, establish milestones, and measure effectiveness for tracking purposes. We found in February 2014 that FAA expected to publish such a detailed implementation plan by late June 2014, more than 6 months after its initial target date of December 2013. In June 2014, FAA officials told us that the implementation plan was under review within FAA and estimated that the agency would issue its detailed plan in August 2014. Until this detailed plan is released, the specific initiatives for addressing the recommendations are unknown; thus, we cannot analyze information on the status of any planned efforts similar to the information we provided above for the certification process initiatives. Further, FAA’s July 2013 preliminary plan does not specify how FAA plans to measure the effectiveness of the initiatives. FAA indicated that “although there may not be any baseline for each recommendation against which to compare improvements, FAA intends to consider: (1) identifying metrics, (2) gathering and developing baseline data, and (3) periodically measuring any changes, positive or negative, in rates of completion.” FAA officials provided the following information on how the agency is planning to respond to the six recommendations. The Regulatory Consistency Committee recommended that Aircraft Certification and Flight Standards (1) review all guidance documents and interpretations to identify and cancel outdated material and electronically link the remaining materials to its applicable rule, and (2) to consolidate Aircraft Certification’s and Flight Standards’ electronic guidance libraries into a master source guidance system, organized by rule, to allow FAA and industry users access to relevant rules and all active and superseded guidance material and related documents. This recommendation for creating the master source guidance system is the top priority of the Regulatory Consistency Committee. FAA officials indicated that establishing this system will require two main components: As a first step, for linking (mapping) all relevant guidance materials to the regulations, FAA plans to determine which "guidance" documents exist across regional and field offices—including orders, notices, and advisory circulars—outside FAA’s electronic guidance libraries, which are being used to answer questions, interpret or analyze regulations, and provide guidance on regulatory matters. In December 2013, Flight Standards sent out a memorandum requesting that staff discontinue using any guidance documents outside those found in the guidance libraries, to be effective January 15, 2014. The memorandum also asked for the staff to submit any unofficial guidance worth preserving to FAA for review. Flight Standards then conducted a review to determine which of the unofficial guidance documents submitted should be added to the guidance libraries. Several members of the Regulatory Consistency Committee responded in an e-mail to FAA to express serious concerns about this approach and stated that the committee did not envision the cancellation of any guidance before FAA developed a methodology to include or exclude such guidance. The committee members further noted that FAA’s memorandum provided no method to allow existing certificate holders to retain certifications that were based on any applied guidance that had been cancelled. Further, these members requested that FAA either withdraw the memorandum or address the issues they raised and extend the date for FAA staff to comply with the memorandum. However, two other Regulatory Consistency Committee members we interviewed considered FAA’s actions to get staff to discontinue the use of unofficial guidance in the field to be an appropriate first step. Second, FAA plans to develop a master source guidance system with the capability to consolidate information from Aircraft Certification’s and Flight Standards’ electronic guidance libraries as well as legal interpretations from the Office of Chief Counsel into a master guidance system to allow FAA and industry users access. Specifically, the Regulatory Consistency Committee recommended that this system be searchable so that FAA and industry users can easily access relevant rules and find the relevant guidance for the rule. FAA officials assessed the possibility of using the existing Aviation Safety Information Management System, but determined that it is not adequate because (1) users cannot search for guidance by word and (2) it is not compatible with other FAA data systems. According to FAA officials, with about $750,000 in approved funding for this project, FAA’s information technology division is in the process of developing a dynamic regulatory system that should provide the needed capabilities. Officials indicated that when users conduct a search for a particular topic in this system, the search results should bring up multiple entries for specific guidance. Initially, Flight Standards plans to use an Excel spreadsheet for storing the guidance and then transition to the new system once it is deployed. Flight Standards hopes to test out a first version of this system within calendar year 2014. However, the officials were unsure of the total cost of developing and deploying the system. Representatives from four of the committee stakeholders we interviewed for this testimony acknowledged that creating this system is a major effort for FAA because of the volume of FAA guidance that potentially exists across regional and field offices, some of which may not be in Aircraft Certification’s and Flight Standards’ electronic guidance libraries. Representatives of five industry stakeholders we interviewed provided insights on how FAA might devise a plan for creating and populating this system. Three of these noted that FAA will need to ensure that the various types of guidance—such as orders, notices, and advisory circulars—include links to the original federal aviation regulations. One of these stakeholders recommended that FAA develop the system to allow a user looking at FAA guidance to also see all relevant background information on related decisions, and the past actions related to the guidance in question and their relation to the original regulation. Because of the large volume of FAA guidance, some stakeholders also suggested that FAA begin by first choosing a starting date for which any new rules or other new guidance it issues would include links to the relevant original regulations. However, one stakeholder we interviewed noted that FAA should consider prioritizing its effort by first mapping the guidance materials for specific key regulations and then the guidance for less significant regulations. The Regulatory Consistency Committee noted multiple instances where FAA guidance appeared to have created inconsistent interpretation and application, and confusion; the Consistency Committee recommended that FAA develop a standardized decision-making methodology for the development of all policy and guidance material to ensure such documents are consistent with adopted regulations. In interviews for this testimony, FAA officials also provided some updates on how the agency will respond to the recommendation to develop instructional tools for its policy staff. FAA officials told us they had not initiated any efforts yet to address this recommendation, but would begin by focusing on developing instructions for policy staff to use for populating the master source guidance system. In August 2014, FAA plans to form an internal work group to establish a document management framework and work processes that can be used by Aircraft Certification’s and Flight Standards’ policy division staffs as they map existing guidance documents to applicable source regulations in the master source guidance system. The officials expected the work group would issue an internal directive for FAA personnel on work processes to be used in populating the guidance system by June of 2015. The Regulatory Consistency Committee recommended that FAA, in consultation with industry stakeholders, review and revise its regulatory training for applicable agency personnel and make the curriculum available to industry. FAA officials told us that FAA has begun to develop improved training for its field staff—the third recommendation of the Regulatory Consistency Committee—so that field inspector staffs are better equipped to answer routine compliance-related questions confidently and in a consistent manner. In addition, the officials told us starting in 2015, FAA plans to conduct a gap analysis of existing training for all FAA staff who are responsible for interpreting and applying certification and approval regulations. For this analysis, FAA plans to assess whether existing training can be modified to sufficiently address any gaps. FAA also plans to coordinate with industry to share the results of this review and analysis by the end of 2015. The Regulatory Consistency Committee made two similar recommendations for FAA to consider: (1) establish a Regulatory Consistency Communications Board comprising various FAA representatives that would provide clarification on questions from FAA and industry stakeholders related to the application of regulations and (2) determine the feasibility of establishing a full-time Regulatory Operations Communication Center as a centralized support center to provide real- time guidance to FAA personnel and industry certificate/approval holders and applicants. FAA officials also discussed the agency’s conceptual approach and plans for establishing a board—likely by the end of calendar year 2014—to address these two recommendations. The purpose of the board would be to provide a neutral and centralized mechanism with a standardized process for addressing and resolving regulatory compliance issues between FAA and industry. According to the committee, this board would be comprised of representatives from the relevant headquarters policy divisions in FAA to help answer complex regulatory interpretation issues that arise between FAA inspectors and engineers, and industry during the certification and approval processes. FAA officials told us the board’s process, once established, would use a modified version of the agency’s current Consistency and Standardization Initiative (CSI), a process established as a means for industry to appeal FAA decisions and actions. As we found in 2010, resolution through the CSI can be a lengthy process, with the total length of the process depending on how many levels of appeal the industry stakeholder chooses. However, as we also found, industry stakeholders have generally been reluctant to use CSI for initiating appeals and raising concerns with the local field office for fear of retribution. FAA officials told us in interviews that the modified process would help address the retribution issue, because it would rely instead on multiple sources to raise issues—not just solely on industry—and would be the final arbiter for FAA and industry in disagreements on certification and approval decisions. According to FAA officials, the board could also serve the function of the proposed operations center recommended by the committee to be a resource for assisting FAA personnel and industry stakeholders with interpretation queries and establishing consistency in regulatory application. FAA officials indicated that the agency had decided not to establish the communications center because (1) the board could serve a similar function and (2) FAA has limited resources available to staff a communications center. Several industry stakeholders we spoke with told us they support FAA’s preliminary plans to establish the board and modify the CSI process as part of this effort. For example, several stakeholders told us that they support FAA’s plans to modify the current CSI process. One of these stakeholders noted that a modified process would be more effective if it allowed for industry stakeholders to raise issues anonymously. Also, another stakeholder noted the board would not be beneficial until after FAA has established the master source guidance system because the board should be able to refer to that guidance in demonstrating how it makes decisions. The Regulatory Consistency Committee recommended that FAA improve the clarity of its final rules by ensuring that each final rule contains a comprehensive explanation of the rule’s purpose and how it will increase safety. FAA officials told us that this recommendation has been addressed through the work of the Aviation Rulemaking Advisory The officials told Committee’s Rulemaking Prioritization Working Group.us that, as a result of this effort, all final rules, are now well-vetted across FAA. The industry representatives we interviewed had mixed opinions about whether FAA had addressed this recommendation as intended. For example, two stakeholders were in agreement with FAA that the agency had addressed it while two other stakeholders noted that FAA’s new rules are still not as clear as they should be. Two stakeholders also said that it is often not the final rules but the guidance that accompanies or follows the final rules that is unclear and contributes to inconsistent interpretation and application among FAA staff. In our previous work on organizational transformations, we noted that implementing large-scale change management initiatives—like those the committees tasked FAA with—are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and accomplish new organizational goals. People are at the center of any serious change management initiative because people define the organization’s culture, drive its performance, and embody its knowledge base. The best approach for these types of initiatives depends upon a variety of factors specific to each context, but there has been some general agreement on a number of key practices that have consistently been found at the center of successful change management initiatives. These include, among other things, securing organizational support at all levels, developing clear principles and priorities to help change the culture, communicating frequently with partners, and setting performance measures to evaluate progress. In this final section of this testimony, we discuss challenges for FAA in implementing the committees’ certification and approval and regulatory consistency recommendations that relate to these key practices. FAA officials and industry representatives we spoke to noted that shifting priorities as well as declining resources may prohibit FAA from devoting the time and resources needed for completing the initiatives in the planned time frames. They agreed that a primary challenge for FAA will be having the dedicated resources that will be needed to successfully implement the committees’ recommendations. We have previously found that successful organizational transformations and cultural changes require several years of focused attention from the agency’s senior leadership. This lesson is consistent with our previous work on organizational transformation, which indicates that support from top leadership is indispensable for fundamental change. Top leadership’s clear and personal involvement in the transformation represents stability for both the organization’s employees and its external partners. Top leadership must set the direction, pace, and tone for the transformation. Additionally, buy-in and acceptance among the workforce will be critical to successful implementation of the initiatives to address the two committees’ recommendations. Additionally, as we described in our 2010 report, FAA prioritizes ensuring the continued operational safety of the people and products already operating in the national airspace system over processing new certifications and approvals. We reported in the 2010 report that Flight Standards staff had little or no incentive to perform certification work under the system in which their pay grades are established and Other than inspectors involved with overseeing air carriers, maintained.Flight Standards inspectors are typically responsible for a variety of types of certificate holders. Each certificate is allocated a point value based on the complexity of the certificate or operation, and the combined point value for each inspector’s oversight responsibilities must meet or exceed the points allocated for the inspector’s grade. However, not all of the inspectors’ duties—including certification work—receive points in this system, and inspectors are subject to a downgrade if entities in their portfolio relocate or go out of business. FAA and industry representatives also cited FAA’s organizational culture as a primary challenge for FAA in successfully implementing these initiatives. They noted that many of the certification process and regulatory consistency initiatives FAA is attempting to implement represent cultural shifts for FAA staff in how regulations, policy, and guidance are applied, and ultimately how certification and approval decisions are made. As we have previously found, the implementation of recommendations that require a cultural shift for employees can be delayed if the workforce is reluctant in accepting such change. Further, industry representatives have identified the lack of communication with and involvement of stakeholders as a primary challenge for FAA in implementing the committees’ recommendations, particularly the regulatory consistency recommendations. Successful agencies we have studied based their strategic planning, to a large extent, on the interests and expectations of their stakeholders, and stakeholder involvement is important to ensure agencies’ efforts and resources are targeted at the highest priorities. However, representatives of two industry organizations we interviewed told us that FAA did not provide the opportunity for early input and that outreach is low regarding the certification process recommendations, and representatives of four industry organizations indicated that FAA has not sought their input in responding to the regulatory consistency recommendations. They reported that FAA had neither kept in contact with or advised them of its plans nor engaged the Regulatory Consistency Committee participants in the drafting of the detailed implementation plan that is expected to be published in August. As an example, as previously discussed, when Flight Standards published a memo in December 2013 calling for the cancellation of non-official guidance, several members of the Regulatory Consistency Committee were unaware of the change and expressed surprise and dissatisfaction with the action and offered their assistance. Representatives of one industry group noted that FAA sought their input on addressing the Certification Process Committee’s recommendations for subsequent revisions of its implementation plan. FAA has not fully developed performance metrics to ensure that any initiatives it implements are achieving their intended outcomes. We have previously found that agencies that have been successful in assessing performance use measures that demonstrate results and provide useful information for decision making.that FAA had not completed developing performance measures for either the certification improvement or the regulatory consistency initiatives: Earlier in this testimony, we reported FAA had developed performance measures for 5 of the 14 certification process initiatives as of May 2014 and plans to further develop measures in three phases. In addition, most of the initiatives are scheduled to be implemented by 2017. Although we have assessed FAA’s plan for developing these metrics as reasonable, the agency may miss an opportunity to gather early data for evaluating the effectiveness of its actions and making any needed corrections. There is no detailed plan for implementing initiatives addressing the consistency of regulatory interpretation recommendations and measuring their outcomes. In recent meetings, FAA officials told us they have had difficulty in determining how to measure the outcomes of its regulatory consistency initiatives and have not been able to determine what specific performance metrics could be used. Going forward, it is critically important that FAA develop outcome-based performance measures to determine what is actually being achieved through the current and future initiatives, thereby making it easier to determine the overall outcomes of each of the initiatives and to hold FAA’s field and headquarters offices and employees accountable for the results. We are not making any new recommendations because the recommendation we made in 2010 for FAA to develop outcome-based performance measures and a continuous evaluative process continue to have merit related to this issue. To its credit, FAA has initiated some efforts and sound planning for addressing the committees’ recommendations. However, it will be critical for FAA to follow through with its initiatives and plans for developing performance metrics to achieve the intended efficiencies and consistencies. As we noted in our October 2013 statement, however, some improvements to the certification and approval processes, will likely take years to implement and, therefore, will require a sustained commitment as well as congressional oversight. Chairman LoBiondo, Ranking Member Larsen, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or dillinghamg@gao.gov. In addition, 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 statement include Vashun Cole, Assistant Director; Andrew Von Ah, Assistant Director; Jessica Bryant-Bertail; Jim Geibel; Josh Ormond; Amy Rosewarne; and Pamela Vines. The following individuals made key contributions to the prior GAO work: Teresa Spisak, Assistant Director; Melissa Bodeau, Sharon Dyer, Bess Eisenstadt, Amy Frazier, Brandon Haller, Dave Hooper, Sara Ann Moessbauer, and Michael Silver. 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. | Among its responsibilities for aviation safety, FAA issues certificates for new aircraft and parts, and grants approvals for changes to air operations and aircraft, based on federal aviation regulations. Various studies, GAO's prior work, and industry stakeholders have raised questions about the efficiency of FAA's certification and approval processes, as well as the consistency of its staff in interpreting aviation regulations. Over time, FAA has implemented efforts to address these issues, but they persist as FAA faces greater industry demand and its overall workload has increased. The 2012 FAA Modernization and Reform Act required FAA to work with industry to resolve these issues. In response, FAA chartered two committees—one to address certification and approval processes and another to address regulatory consistency—which recommended improvements in 2012. In 2013, FAA published an implementation plan for addressing the certification and approval process recommendations and promised to publish an implementation plan for addressing the regulatory consistency recommendations at a later date. This testimony provides information on FAA's progress in implementing the (1) certification and approval process recommendations and (2) regulatory consistency recommendations. It also discusses future challenges industry stakeholders believe FAA will face in implementing these recommendations. This testimony is based on GAO products issued from 2010 to 2014, updated in July 2014 through reviews of recent FAA and industry documents and interviews of FAA officials and industry representatives. The Federal Aviation Administration's (FAA) Aircraft Certification Service (Aircraft Certification) is responsible for addressing the certification and approval process recommendations, and has made progress. Aircraft Certification is implementing and has set milestones for completing 14 initiatives, several of which were originally begun as part of earlier certification process improvement efforts. The initiatives range from developing a comprehensive road map for major change initiatives, to improving Aircraft Certification's process for prioritizing requests for certifications and approvals (project sequencing), to reorganizing the small aircraft certification regulation. According to an update prepared by FAA in May 2014, one initiative has been completed and most are on track to be completed within 3 years. However, according to this update, two initiatives will not meet planned milestones, including the one for improving FAA's program for delegating authority to organizations to carry out some certification activities. Also, a third initiative for improving consistency of regulatory interpretation was at risk of not meeting planned milestones. Two additional initiatives, while on track for meeting planned milestones in May 2014, faced challenges because of opposition by FAA's labor unions, including one for improving Aircraft Certification's project sequencing process. GAO found in October 2013 that Aircraft Certification continued to lack performance measures for many of these initiatives, a condition that persists. In 2010, GAO had previously recommended that FAA develop a continuous evaluative process with performance goals and measures. FAA agreed but has not yet fully addressed the recommendation. Aircraft Certification officials discussed plans to develop metrics in three phases, beginning in July 2014 and in the future, for measuring (1) the progress of implementing the initiatives throughout FAA, (2) the outcomes of each initiative, and (3) the return on investment for FAA and the industry resulting from implementing the initiatives as a whole. FAA's Flight Standards Service (Flight Standards) is responsible for addressing the regulatory consistency recommendations, is finalizing plans to do so. FAA has not published a detailed plan with milestones and performance metrics, and officials told GAO that they intend to publish a plan by August 2014. Flight Standards officials said they were making progress in addressing the committee's top priority recommendation—mapping all FAA policy and guidance to relevant federal aviation regulations and developing an electronic system that maintains this information and that is accessible by FAA and industry users. As part of this effort, officials told GAO that Flight Standards has begun eliminating obsolete guidance and linking existing policy and guidance to the regulations. Going forward, Aircraft Certification's and Flight Standards' efforts may face challenges that could affect successful implementation of the committees' recommendations. Many of these recommendations represent a significant shift in how FAA normally conducts business, and if the workforce is reluctant to implement such changes, FAA's planned initiatives for addressing the recommendations could be delayed. Also, the fact that FAA has not yet implemented performance measures for most of the initiatives is a concern for both GAO and the industry. As GAO concluded in October 2013, without performance measures, FAA will be unable to gather the appropriate data to evaluate the success of current and future initiatives. |
Large banking organizations typically establish ongoing relationships with their corporate customers and evaluate the overall profitability of these relationships. They use company-specific information gained from providing certain products and services—such as credit or cash management—to identify additional products and services that customers might purchase. This practice, known as “relationship banking,” has been common in the financial services industry for well over a century. In recent years, as the legal and regulatory obstacles that limited banking organizations’ abilities to compete in securities and insurance activities have been eased, some large banking organizations have sought to expand the range of products and services they offer customers. In particular, some commercial banks have sought to decrease their reliance on the income earned from credit products, such as corporate loans, and to increase their reliance on fee-based income by providing a range of priced services to their customers. Federal Banking Regulators The Federal Reserve and OCC are the federal banking regulators charged with supervising and regulating large commercial banks. The Federal Reserve has primary supervisory and regulatory responsibilities for bank holding companies and their nonbank and foreign subsidiaries and for state-chartered banks that are members of the Federal Reserve System and their foreign branches and subsidiaries. The Federal Reserve also has regulatory responsibilities for transactions between member banks and their affiliates. OCC has primary supervisory and regulatory responsibilities for the domestic and foreign activities of national banks and their subsidiaries. OCC also has responsibility for administering and enforcing standards governing transactions between national banks and their affiliates. Among other activities, the Federal Reserve and OCC conduct off-site reviews and on-site examinations of large banks to provide periodic analysis of financial and other information, provide ongoing supervision of their operations, and determine compliance with banking laws and regulations. Federal Reserve and OCC examinations are intended to assess the safety and soundness of large banks and identify conditions that might require corrective action. Congress added section 106 to the Bank Holding Company Act in 1970 to address concerns that an expansion in the range of activities permissible for bank holding companies might give them an unfair competitive advantage because of the unique role their bank subsidiaries served as credit providers.Section 106 makes it unlawful, with certain exceptions, for a bank to extend credit or furnish any product or service, or vary the price of any product or service (the “tying product”) on the “condition or requirement” that the customer obtains some additional product or service from the bank or its affiliate (the “tied product”). Under section 106, it would be unlawful for a bank to provide credit (or to vary the terms for credit) on the condition or requirement that the customer obtain some other product from the bank or an affiliate, unless that other product was a traditional bank product.Thus, it would be unlawful for a bank to condition the availability or pricing of new or renewal credit on the condition that the borrower purchase a nontraditional bank product from the bank or an affiliate. In contrast, section 106 does not require a bank to extend credit or provide any other product to a customer, as long as the bank’s decision was not based on the customer’s failure to satisfy a condition or requirement prohibited by section 106. For example, it would be lawful for a bank to deny credit to a customer on the basis of the customer’s financial condition, financial resources, or credit history, but it would be unlawful for a bank to deny credit because the customer failed to purchase underwriting services from the bank’s affiliate. Section 106 does not prohibit a bank from cross-marketing products that are not covered by the “traditional banking product” exemption or from granting credit or providing any other product or service to a customer based solely on the hope that the customer obtain additional products from the bank or its affiliates in the future, provided that the bank does not require the customer to purchase an additional product. Also, section 106 generally does not prohibit a bank from conditioning its relationship with a customer on the total profitability of its relationship with the customer. Section 106 authorizes the Federal Reserve to make exceptions that are not contrary to the purposes of the tying prohibitions. The Federal Reserve has used this authority to allow banks to offer broader categories of packaging arrangements, where it has determined that these arrangements benefit customers and do not impair competition. In 1971, the Federal Reserve adopted a regulation that extended antitying rules to bank holding companies and their nonbank affiliates and approved a number of nonbanking activities that these entities could engage in under the Bank Holding Company Act. Citing the competitive vitality of the markets in which nonbanking companies generally operate, in February 1997, the Federal Reserve rescinded this regulatory extension. At the same time, the Federal Reserve expanded the traditional bank products exception to include traditional bank products offered by nonbank affiliates. In the mid-1990s, the Board also added two regulatory safe harbors. First, the Board granted a regulatory safe harbor for combined-balance discount packages, which allowed a bank to vary the consideration for a product or package of products—based on a customer’s maintaining a combined minimum balance in certain products—as long as the bank offers deposits, the deposits are counted toward the combined-balance, and the deposits count at least as much as nondeposit products toward the minimum balance. Furthermore, according to the Board, under the combined- balance safe harbor, the products included in the combined balance program may be offered by either the bank or an affiliate, provided that the bank specifies the products and the package is structured in a way that does not, as a practical matter, obligate a customer to purchase nontraditional bank products to obtain the discount. Second, the Board granted a regulatory safe harbor for foreign transactions. This safe harbor provides that the antitying prohibitions of section 106 do not apply to transactions between a bank and a customer if the customer is a company that is incorporated, chartered, or otherwise organized outside of the United States, and has its principal place of business outside of the United States, or if the customer is an individual who is a citizen of a country other than the United States and is not resident in the United States. On August 29, 2003, the Board published for public comment its proposed interpretation and supervisory guidance concerning section 106. In this proposed interpretation, the Federal Reserve noted that determining whether a violation of section 106 occurred requires a detailed understanding of the facts underlying the transaction in question. In this proposed interpretation, the Federal Reserve also noted what it considers to be the two key elements of a violation of section 106: (1) The arrangement must involve two or more separate products: the customer’s desired product(s) and one or more separate tied products; and (2) The bank must force the customer to obtain (or provide) the tied product(s) from (or to) the bank or an affiliate in order to obtain the customer‘s desired product(s) from the bank. A transaction does not violate section 106 unless it involves two separate products or services. For example, a bank does not violate section 106 by requiring a prospective borrower to provide the bank specified collateral to obtain a loan or by requiring an existing borrower to post additional collateral as a condition for renewing a loan. Assuming two products or services are involved, the legality of the arrangement depends on, among other things, which products and services are involved and in what combinations. It would be unlawful for a bank to condition the availability of corporate credit on a borrower’s purchase of debt underwriting services from its affiliate, because a bank cannot condition the availability of a bank product on a customer’s purchase of a nontraditional product or service. According to the Board’s proposed interpretation, a bank can legally condition the availability of a bank product, such as credit, on the customer’s selection from a mix of traditional and nontraditional products or services—a mixed-product arrangement—only if the bank offered the customer a “meaningful choice” of products that includes one or more traditional bank products and did not require the customer to purchase any specific product or service. For example, according to the Federal Reserve, a bank could legally condition the availability of credit on a customer’s purchase of products from a list of products and services that includes debt underwriting and cash management services, provided that this mixed- product arrangement contained a meaningful option to satisfy the bank’s condition solely through the purchase of the traditional bank products included in the arrangement. However, it would be a violation of section 106 for a bank to condition the availability of credit on a mixed-product arrangement that did not contain a meaningful option for the customer to satisfy the bank’s condition solely through the purchase of a traditional bank product. When a bank offers a customer a low price on credit, it might or might not be a violation of law. If a bank reduced the cost of credit on the condition that the customer purchase nontraditional bank products or services offered by its investment affiliate, this arrangement would violate section 106. However, if a bank offered a low price on credit to attract additional business but did not condition the availability of the price on the purchase of a prohibited product, it would not violate section 106. Additionally, if a reduced interest rate were to constitute underpricing of a loan, such a transaction, depending on the circumstances, could violate section 23B of the Federal Reserve Act of 1913, which we discuss later in this section. Whether the arrangement constitutes an unlawful tie under section 106 also depends upon whether a condition or requirement actually exists and which party imposes the condition or requirement. Determining the existence of either element can be difficult. The question of whether a condition or requirement exists is particularly difficult because of uncertainties about how to interpret that aspect of the prohibition. According to the Board’s proposal, section 106 applies if two requirements are met: “(1) a condition or requirement exists that ties the customer’s desired product to another product; and (2) this condition or requirement was imposed or forced on the customer by the bank.” Thus, according to the Board’s proposal, if a condition or requirement exists, further inquiry may be necessary to determine whether the condition or requirement was imposed or forced on the customer by the bank: “If the condition or requirement resulted from coercion by the bank, then the condition or requirement violates section 106, unless an exemption is available for the transaction.” This interpretation is not universally accepted, however. As the Board’s proposal has noted, some courts have held that a tying arrangement violates section 106 without a showing that the arrangement resulted from any type of coercion by the bank. Uncertainties about the proper interpretation of the “condition or require” provision of section 106 have lead to disagreement over the circumstances that violate section 106. It has been suggested that changes in financial markets that have occurred since the enactment of section 106, particularly a decreased corporate reliance on commercial bank loans, also are relevant in considering whether banks currently can base credit decisions on a “condition or requirement” that corporate customers buy other services. At the end of 1970, according to the Federal Reserve’s Flow of Funds data, bank loans accounted for about 24 percent of the total liabilities of U.S. nonfarm, nonfinancial corporations. At the end of 2002, bank loans accounted for about 14 percent of these liabilities. Because section 106 applies only to commercial and savings banks, investment banks and insurance companies, which compete in credit markets with banks, are not subject to these tying restrictions. Thus, under section 106, a bank’s nonbank affiliate legally could condition the availability of credit from that nonbank affiliate on a customer’s purchase of debt underwriting services. Where a transaction involves a bank as well as one or more affiliates, uncertainties could exist over whether the affiliate or the bank imposed a condition or requirement. It should be noted, however, that all of these financial institutions are subject to the more broadly applicable antitrust laws, such as the Sherman Act, that prohibit anticompetitive practices, including tying arrangements. In addition, under section 106 it is lawful for bank customers to initiate ties. For example, a customer could use its business leverage to obtain favorable credit terms or require a bank to extend a corporate loan as a condition for purchasing debt underwriting services. Section 23B requires that transactions involving a bank and its affiliates, including those providing investment-banking services, be on market terms. Although section 106 generally prohibits changing the price for credit on the condition that the customer obtain some other services from the bank or its affiliates, section 23B prohibits setting the price for credit at a below-market rate that would reduce the bank’s income for the benefit of its affiliate. Banking regulators have noted that pricing credit at below- market rates could also be an unsafe and unsound banking practice independent of whether the practice violates section 23B specifically. Some corporate borrowers alleged that commercial banks unlawfully tie the availability of credit to the borrower’s purchase of other financial services, including debt underwriting services from their banks’ investment affiliates. Because banks, in certain circumstances, may legally condition the availability of credit on the borrower’s purchase of other products, some of these allegations of unlawful tying could be invalid. Substantiating charges of unlawful tying, if it occurs, can be difficult because, in most cases, credit negotiations are conducted orally and thus generate no documentary evidence to support borrowers’ allegations. Thus, banking regulators may have to obtain other forms of indirect evidence to assess whether banks unlawfully tie products and services. Although customer information could have an important role in helping regulators enforce section 106, regulators do not have a specific mechanism to solicit information from corporate bank customers on an ongoing basis. The results of a 2003 survey of financial executives, interviews that we conducted with corporate borrowers, and several newspaper articles, suggest that commercial banks frequently tie access to credit to the purchase of other financial services, including bond underwriting, equity underwriting, and cash management. The Association for Financial Professionals reported that some respondents to their survey of financial executives at large companies (those with revenues greater than $1 billion) claimed to have experienced the denial of credit or a change in terms after they did not award a commercial bank their bond underwriting business. In our interviews with corporate borrowers, one borrower said that a commercial bank reduced the borrower’s amount of credit by $70 million when the borrower declined to purchase debt underwriting services from the bank’s investment affiliate. In addition, several newspapers and other publications have also reported instances where corporate borrowers have felt pressured by commercial banks to purchase products prohibited under section 106 for the customers to maintain their access to credit. In these reports, corporate borrowers have described negotiations where, in their views, bankers strongly implied that future lending might be jeopardized unless they agreed to purchase additional services, such as underwriting, from the banks’ investment affiliates. However, none of these situations resulted in the corporate borrower complaining to one of the banking regulators. In its Special Notice to its members, NASD also noted the Association for Financial Professional survey. The notice cautioned that NASD regulations require members to conduct business in accordance with just and equitable principles of trade and that it could be a violation of these rules for any member to aid and abet a violation of section 106 by an affiliated commercial bank. NASD is conducting its own investigation into these matters. At the time of our review, NASD had not publicly announced any results of its ongoing investigation. Corporate borrowers might be unaware of the subtle distinctions that make some tying arrangements lawful and others unlawful. Borrowers, officials at commercial banks, and banking regulators said that some financial executives might not be familiar with the details of section 106. For example, some borrowers we interviewed thought that banks violated the tying law when they tied the provision of loan commitments to borrowers’ purchases of cash management services. However, such arrangements are not unlawful, because, as noted earlier, section 106 permits banks to tie credit to these and other traditional bank services. The legality of tying arrangements might also hinge on the combinations of products that the borrowers are offered. For example, recently proposed Federal Reserve guidance suggested that a bank could legally condition the availability of credit on the purchase of other products services, including debt underwriting, if the customer has the meaningful choice of satisfying the condition solely through the purchase of one or more additional traditional bank products. Corporate borrowers said that because the credit arrangements are made orally, they lack the documentary evidence to demonstrate unlawful tying arrangements in those situations where they believe it has occurred. Without such documentation, borrowers might find it difficult to substantiate such claims to banking regulators or seek legal remedies. Moreover, with few exceptions, complaints have not been brought to the attention of the banking regulators. Some borrowers noted that they are reluctant to report their banks’ alleged unlawful tying practices because they lack documentary evidence of such arrangements and uncertainty about which arrangements are lawful or unlawful under section 106. Borrowers also noted that a fear of adverse consequences on their companies’ future access to credit or on their individual careers contributed to some borrowers’ reluctance to file formal complaints. Because documentary evidence demonstrating unlawful tying might not be available in bank records, regulators might have to look for other forms of indirect evidence, such as testimonial evidence, to assess whether banks unlawfully tie products and services. The guidance that the federal banking regulators have established for their regular examinations of banks calls for examiners to be alert to possible violations of law, including section 106. These examinations generally focus on specific topics based on the agencies’ assessments of the banks’ risk profiles, and tying is one of many possible topics. In response to recent allegations of unlawful tying at large commercial banks, the Federal Reserve and OCC conducted a special targeted review of antitying policies and procedures at several large commercial banks and their holding companies. The banking regulators focused on antitying policies and procedures; interviewed bank managers responsible for compliance, training, credit pricing, and internal audits; and reviewed credit pricing policies, relationship banking policies, and the treatment of customer complaints regarding tying. The review did not include broadly based testing of transactions that included interviews with corporate borrowers. The regulators said that they met with officials and members of a trade group representing corporate financial executives. The banking regulators found that banks covered in the review generally had adequate controls in place. With limited exceptions, they did not detect any unlawful combinations or questionable transactions. The examiners did, however, identify variation among the banks in interpreting section 106, some of which was not addressed in the regulatory guidance then available. As a result of the findings of the special targeted review, on August 29, 2003, the Federal Reserve released for public comment proposed guidance to clarify the interpretation of section 106 for examiners, bankers, and corporate borrowers. Federal Reserve officials said that they hope that the guidance encourages customers to come forward if they have complaints. As part of their routine examination procedures, the Federal Reserve and OCC provide instructions for determining compliance with section 106.During the course of these examinations, examiners review banks’ policies, procedures, controls, and internal audits. Exam teams assigned to the largest commercial banks continually review banks throughout the year, and in several cases, the teams are physically located at the bank throughout the year. The Federal Reserve and OCC expect examiners to be alert to possible violations of section 106 of the Bank Holding Company Act Amendments of 1970 and section 23B of the Federal Reserve Act and to report any evidence of possible unlawful tying for further review. Regular bank examinations in recent years have not identified any instances of unlawful tying that led to enforcement actions. Federal Reserve officials told us, however, that if an examiner had tying-related concerns about a transaction that the bank’s internal or external legal counsel had reviewed, examiners deferred to the bank’s legal analysis and verified that the bank took any appropriate corrective actions. Federal Reserve officials also said that legal staffs at the Board and the District Reserve Banks regularly receive and answer questions from examiners regarding the permissibility of transactions. In a 1995 bulletin, OCC reminded national banks of their obligations under section 106 and advised them to implement appropriate systems and controls that would promote compliance with section 106. Along with examples of lawful tying arrangements, the guidance also incorporated suggested measures for banks’ systems and controls, and audit and compliance programs. Among the suggested measures were training bank employees about the tying provisions, providing relevant examples of prohibited practices, and reviewing customer files to determine whether any extension of credit was conditioned unlawfully on obtaining another nontraditional product or service from the bank or its affiliates. In addition to reviewing banks’ policies, procedures, and internal controls, examiners also review aggregate data on a bank’s pricing of credit products. OCC officials noted that instances of unlawfully priced loans or credit extended to borrowers who were not creditworthy could alert examiners to potential unlawful tying arrangements. However, Federal Reserve officials pointed out that examiners typically do not focus on a banks’ pricing of individual transactions because factors that are unique to the bank and its relationship with the customer affect individual pricing decisions. They said that examiners only conduct additional analyses if there was an indication of a potential problem within the aggregated data. In recent years, banking regulators’ examination strategies have moved toward a risk-based assessment of a bank’s policies, procedures, and internal controls, and away from the former process of transaction testing. The activities judged by the regulatory agencies to pose the greatest risk to a bank are to receive the most scrutiny by examiners under the risk-based approach, and transaction testing is generally intended to validate the use and effectiveness of risk-management systems. The effectiveness of this examination approach, however, depends on the regulators’ awareness of risk. In the case of tying, the regulators are confronted with the disparity between frequent allegations about tying practices and few, if any, formal complaints. Further, the examiners generally would not contact customers as part of the examinations and thus would have only limited access to information about transactions or the practices that banks employ in managing their relationships with customers. In response to the controversy about allegations of unlawful tying, in 2002 the Federal Reserve and OCC conducted joint reviews targeted to assessing antitying policies and procedures at large commercial banks that, collectively, are the dominant syndicators of large corporate credits. The Federal Reserve and OCC exam teams found limited evidence of potentially unlawful tying in the course of the special targeted review. For example, one bank’s legal department uncovered one instance where an account officer proposed an unlawful conditional discount. The officer brought this to the attention of the legal department after the officer attended antitying training. The customer did not accept the offer, and no transaction occurred. In addition, the teams noted that the commercial bank’s interpretation of section 106 permitted some activities that the teams questioned; one of the banks reversed a transaction in response to examiner questions. Attorneys on the exam teams reviewed documents regarding lawsuits alleging unlawful tying, but they found that none of the suits contained allegations that warranted any follow-up. For example, they found that some of the suits involved customers who were asserting violations of section 106 as a defense to the bank’s efforts to collect on loans and that some of the ties alleged in the suits involved ties to traditional bank products, which are exempted from section 106. Federal Reserve and OCC officials noted that it would be unusual to find a provision in a loan contract or other loan documentation containing an unlawful tie. Some corporate borrowers said that there is no documentary evidence because banks only communicate such conditions on loans orally. According to members of the review team, they did not sample transactions during the review because past reviews suggested that this would probably not produce any instances of unlawful tying practices. The targeted review did include contacting some bank customers to obtain information on specific transactions. The Federal Reserve noted that without examiners being present during credit negotiations, there is no way for examiners to know what the customer was told. Given the complex nature of these transactions, the facts and circumstances could vary considerably among individual transactions. Federal Reserve officials, however, noted that customer information could play an important role in enforcing the law, because so much depends on whether the customer voluntarily agreed with the transaction or was compelled to agree with the conditions imposed by the bank. As the officials noted, this determination cannot be made based solely on the loan documentation. During the targeted review, Federal Reserve and OCC officials found that all of the banks they reviewed generally had adequate procedures in place to comply with section 106. All banks had specific antitying policies, procedures, and training programs in place. The policies we reviewed from two banks encouraged employees to consult legal staff for assistance with arrangements that could raise a tying-related issue. According to the Federal Reserve and OCC, at other banks, lawyers reviewed all transactions for tying-related issues before they were completed. The training materials we reviewed from two banks included examples that distinguished lawful from unlawful tying arrangements. Banking regulators noted that some banking organizations had newly enhanced policies, procedures, and training programs as a result of recent media and regulatory attention. However, examiners also found that the oversight by internal audit functions at several banks needed improvement. In one case, they found that bank internal auditors were trained to look for the obvious indications of tying, but that banks’ audit procedures would not necessarily provide a basis to detect all cases of tying. For example, recent antitying training programs at two banks helped employees identify possible tying violations. Officials at one large banking organization also said that banks’ compliance efforts generally are constrained by the inability to anticipate every situation that could raise tying concerns. They also noted that banks could not monitor every conversation that bank employees had with customers, and thus guarantee that mistakes would never occur. In addition, examiners were concerned that certain arrangements might cause customer confusion when dealing with employees who work for both the bank and its investment affiliate. In those cases, it could be difficult to determine whether the “dual” employee was representing the bank or its affiliate for specific parts of a transaction. However, the examiners noted that in the legal analysis of one banking organization, the use of such dual employees was not necessarily problematic, given that the tie was created by the investment affiliate, rather than the bank, and that section 106 addresses the legal entity involved in a transaction and not the employment status of the individuals involved. Proposed Federal Reserve guidance did not add clarification to this matter beyond emphasizing the importance of training programs for bank employees as an important internal control. “the determination of whether a violation of section 106 has occurred often requires a careful review of the specific facts and circumstances associated with the relevant transaction (or proposed transaction) between the bank and the customer.” Customers could provide information on the facts and circumstances associated with specific transactions and provide a basis for testing whether the bank actions were in compliance with its policies and procedures. If the banks’ actions are not consistent with their policies and procedures, there could be violations of section 106. A review of the transactions would provide direct evidence of compliance or noncompliance with section 106. Further, information from analysis of transactions and information obtained from customers could provide the bank regulatory agencies with more information on the circumstances where there could be a greater risk of tying, contributing to their risk-based examination strategies. The examiners and attorneys participating in the targeted review found variations in banks’ interpretation of section 106 in areas where authoritative guidance was absent or incomplete at the time of the review. One interpretative issue was the extent to which a bank could consider the profitability of the overall customer relationship in making credit decisions, particularly whether a bank could consider a customer’s use of nontraditional banking services in deciding to terminate the customer relationship without violating section 106. This issue also encompassed the appropriateness of the language that a bank might use when entering into or discontinuing credit relationships—including whether a bank could appropriately use language implying the acceptance of a tied product in a letter formalizing a commitment for a loan and communication protocols that a bank might use to disengage clients who did not meet internal profitability targets. Examiners found that all banks in the joint targeted review had undergone a “balance sheet reduction,” disengaging from lending relationships with their least desirable customers. An official at one commercial bank acknowledged that, when banks discontinue relationships, their decision might appear to be unlawful tying from the perspective of the customer. However, it would not be unlawful for a bank to decline to provide credit to a customer as long as the bank’s decision was not based on the customer’s failure to satisfy a condition or requirement prohibited by section 106. Examiners questioned whether it would be appropriate for a banking organization to provide both a bridge loan and securities underwriting to vary the amount of fees it charged for services that would normally be done independently for each service. For example, a bank conducting a credit analysis for both commercial and investment banking services and reducing the overall fees to only include one credit analysis might raise tying considerations. Banks and their outside counsels believed that this price reduction would be appropriate. However, the Federal Reserve staff said that whether or not a price reduction would be appropriate would depend on the facts and condition of the transaction, including whether or not the bank offered the customer the opportunity to obtain the discount from the bank separately from the tied product. Examiners were also concerned that some bank transactions might appear to circumvent section 106. For example, the examiners found one instance in which a nonbank affiliate had tied bridge loans to the purchase of securities underwriting and syndicated some or all of the loans to its commercial bank. The examiners noted that although this issue had not been addressed in the guidance available at the time, this arrangement created the appearance of an attempt to circumvent the application of section 106. The bank thereupon discontinued the practice. As mentioned previously, because section 106 applies only to banks, it is not a violation of the section for most nonbank affiliates of commercial banks to tie together any two products or services. The proposed interpretation of section 106 recently issued by the Federal Reserve addresses this issue. Finally, the examiners found that one bank might be overstating the relief gained from the foreign transactions safe harbor. The Federal Reserve adopted a safe harbor from the antitying rules for transactions with corporate customers that are incorporated or otherwise organized and that have their principal place of business outside the United States. This safe harbor also applies to individuals who are citizens of a foreign country and are not resident in the United States. The new guidance developed by the banking regulators does not address the examiners’ specific concerns. Federal Reserve officials said that a general rule on these issues would not be feasible and that any determinations would depend on the facts and circumstances of the specific transactions. Based on the interpretive issues examiners found during the special targeted review and its analysis, and after significant consultation with OCC, the Federal Reserve recently released for public comment a proposed interpretation of section 106. The proposed interpretation noted that the application of section 106 is complicated and heavily dependent on the particular circumstances and facts of specific transactions. The proposed guidance outlines, among other things, some of the information that would be considered in determining whether a transaction or proposed transaction would be lawful or unlawful under section 106. Federal Reserve officials also have noted that another desired effect of additional guidance could be providing bank customers a better understanding of section 106 and what bank actions are lawful. The officials said that they hoped that the new guidance would encourage customers to come forward with any complaints. The deadline for public comments on the proposed guidance was September 30, 2003. At the time of our review, the Federal Reserve was reviewing comments that had been received. Although officials at one investment bank contended that large commercial banks deliberately “underpriced”—or priced credit at below market rates— corporate credit to attract underwriting business to their investment affiliates, the evidence of “underpricing” is ambiguous and subject to different interpretations. They claimed that these commercial banks underprice credit in an effort to promote business at the banks’ investment affiliates, which would increase the bank holding companies’ fee-based income. Such behavior, they contended, could indicate violations of section 106, with credit terms depending on the customer buying the tied product. The banking regulators also noted that pricing credit below market interest rates, if it did occur, could violate section 23B, with the bank’s income being reduced for the benefit of its investment affiliate. Commercial bankers counter that the syndication of these loans and loan commitments—the sharing of them among several lenders—makes it impossible to underprice credit, since the other members of the syndicate would not participate at below market prices. Federal Reserve staff is considering further research into the issue of loan pricing, which could clarify the issue. Investment bankers and commercial bankers also disagreed whether differences between the prices for loans and loan commitments and those for other credit products indicated that nonmarket forces were involved in setting credit prices. Both investment bankers and commercial bankers cited specific transactions to support their contentions; in some cases, they pointed to the prices for the same loan products at different times. Commercial bankers also noted that their business strategies called for them to ensure the profitability of their relationship with customers; if market-driven credit prices alone did not provide adequate profitability, the strategies commonly called for marketing an array of other products to make the entire relationship a profitable one. The banking regulators noted that such strategies would be within the bounds of the law as long as the bank customers had a “meaningful choice” that includes traditional bank products. In recent years, the market share of the fees earned from debt and equity underwriting has declined at investment banks and grown at investment affiliates of commercial banks. In 2002, the three largest investment banks had a combined market share of 31.9 percent, a decline from a 38.1 percent market share that these investment banks held in 1995. In comparison, the market share of the three largest investment affiliates of commercial banks was 30.4 percent in 2002, compared with their 17.8 percent market share that these investment banks held in 1995. Some of this growth might be the result of the ability of commercial banks and their investment affiliates to offer a wide array of financial services. However, banking regulators noted that industry consolidation and the acquisition of investment banking firms by bank holding companies also has been a significant factor contributing to this growth. For example, regulators noted that Citigroup Inc. is the result of the 1998 merger of Citicorp and Travelers Group Inc., which combined Citicorp’s investment business with that of Salomon Smith Barney, Inc., a Travelers subsidiary that was already a prominent investment bank. J.P. Morgan & Co. Incorporated and The Chase Manhattan Corporation also combined in 2000 to form J.P. Morgan Chase & Co. Some investment bankers contended that commercial banks offer loans and loan commitments to corporate borrowers at below-market rates if borrowers agree to engage the services of their investment affiliates. Large loans and loan commitments to corporations—including the lines of credit that borrowers use in conjunction with issuing commercial paper—are frequently syndicated. A syndicated loan is financing provided by a group of commercial banks and investment banks whereby each bank agrees to advance a portion of the funding. Commercial bankers contended that these prices of the loans and loan commitments reflected a competitive market, where individual lenders have no control over prices. Officials from one investment bank who contended that banking organizations have underpriced credits to win investment banking business drew comparisons between the original pricing terms of specific syndicated loans and the pricing of the same loans in the secondary market. Specifically, they pointed to several transactions, including one in which they questioned the pricing but participated because the borrower insisted that underwriters provide loan commitments. The investment bank officials said that when they subsequently attempted to sell part of their share of the credits, the pricing was unattractive to the market and that they could not get full value. In one case, they noted that the credit facility was sold in the secondary market at about 93 cents on the dollar shortly after origination. They said that, in their opinion, this immediate decline in value was evidence that the credit facility had been underpriced at origination. Commercial bankers said that competition in the corporate loan market determines loan pricing. One banker said that if a loan officer overpriced a loan by even a basis point or two the customer would turn to another bank.Bankers also noted that if loans were underpriced, the syndicators would not be able to syndicate the loan to investors who are not engaged in debt underwriting and insist on earning a competitive return. An official from one commercial bank provided data on its syndicated loans, showing that a number of the participants in the loans and loan commitments did not participate in the associated securities underwriting for the borrower and—in spite of having no investment banking business to win—found the terms of the loans and loan commitments attractive. However, we do not know the extent, if any, to which these other participants might have had other revenue-generating business with the borrowers. Officials from a commercial bank and loan market experts also said that the secondary market for loans was illiquid, compared with that for most securities. The bank officials said that therefore prices could swing in response to a single large sale as a result of this illiquidity. Officials from one commercial bank said that the price of the loan to which investment bank officials referred, which had sold for about 93 cents on the dollar shortly after origination, had risen to about 98 cents on the dollar in secondary trades a few months later. These officials said that, in their opinion, this return in pricing toward the loan’s origination value is proof that the syndicated loan was never underpriced and that the movement in price was the result of a large portion of the facility being sold soon after the origination. Independent loan market experts also observed that trading in loan commitments is illiquid, and thus subsequent price fluctuations might not reflect fair value. Commercial bankers and investment bankers disagreed on whether a comparison of the prices of loans and other credit products demonstrated underpricing. In particular, one key disagreement involved the use of credit default swaps. Banks and other financial institutions can use credit default swaps, among other instruments, to reduce or diversify credit risk exposures. With a credit default swap, the lender keeps the loan or loan commitment on its books and essentially purchases insurance against borrower default. Officials at one investment bank compared the prices of syndicated loans with the prices of credit default swaps used to hedge the credit risk of the loan. In their view, the differences in the two prices demonstrated that commercial banks underpriced corporate credit. They provided us with several examples of syndicated loans, wherein the difference between the interest rate on the loan or loan commitment and the corresponding credit default swap was so great that the investment bankers believed that the bank would have earned more from insuring the credit than extending it. On the other hand, Federal Reserve officials, commercial bankers, and loan market experts disputed the extent to which the pricing of corporate credit could be compared with their corresponding credit default swaps, because of important differences between the two products and between the institutions that dealt in them. Officials from the Federal Reserve noted that the triggering mechanisms for the two products differed. Although the trigger for the exercise of a credit default swap is a clearly defined indication of the borrower’s credit impairment, the exercise of a commercial paper back-up line is triggered by the issuer’s inability to access the commercial paper market—an event that could occur without there necessarily being any credit impairment of the issuer. For example, in 1998, Russia’s declaration of a debt moratorium and the near-failure of a large hedge fund created financial market turmoil; since this severely disrupted corporations’ issuance of bonds and commercial paper, they drew on their loan commitments from banks. In addition, loan market experts and officials from a commercial bank also said that the loan market and the credit default swap market involve different participants with different motivations. Loan market experts noted that lead originators of loans and loan commitments have an advantage gained from knowledge of the borrower through direct business relationships. On the other hand, those who provide credit protection by selling credit swap might be entities with no direct knowledge of the customer’s creditworthiness, but use these instruments for diversifying risks. To present their differing positions on whether or not credit is underpriced, investment bankers, loan market experts, and commercial bankers discussed the pricing of selected syndicated loan commitments. In syndicated loan commitments, participants receive commitment fees on the undrawn amount and a specified interest rate if the loan is drawn. In addition, participants in syndicated loan commitments are protected from certain risks by various conditions. Also, the lead participant might receive an up-front fee from the borrower. Each of these factors can influence the price of the loan commitment. Officials at one investment bank noted that the pricing for undrawn loan commitments provided as back-up lines for commercial paper issuers have been low for several years and had been relatively stable, even when other credit market prices fluctuated. Available data showed that this was the case for the fees for undrawn commitments provided for investment-grade borrowers, with undrawn fees averaging under 0.10 percent per year of the undrawn amount. The investment bankers further noted that the loan commitment would be drawn in the event of adverse conditions for the borrower in the commercial paper market. Thus, commercial paper back- up lines exposed the provider to the risk that they might have to book loans to borrowers when they were no longer creditworthy. In the opinion of these investment bankers, the low undrawn loan fees do not reflect this risk. In contrast, officials from commercial banks and loan market experts said that the level of undrawn fees for loan commitments did not represent all the ways that commercial banks might adjust credit terms to address rising credit risk. These officials said that in response to perceived weakening in credit quality, lenders had shortened the maturity of credit lines. Lenders also tightened contract covenants to protect themselves against a borrowers’ potential future weakening. In addition, commercial bank officials told us that other factors were involved in the pricing of loan commitments. For example, they said that a comprehensive analysis should include the upfront fees to measure the total return on undrawn loan commitments. However, loan market experts said that published loan pricing data do not include the up-front fees that many banks collect when they extend credit. Thus, publicly available information was insufficient to indicate the total return commercial banks received on such lending. Officials at one investment bank claimed that because the fees that commercial banks receive for corporate credits barely exceed their cost of funds, commercial banks are not covering all of their costs and are in essence subsidizing corporate credits. Conversely, several bankers said that the rates they can charge on corporate credits do exceed their cost of funds but are not always high enough to allow them to meet their institution’s profitability targets. Officials at one commercial bank noted that their internal controls included separation of powers, where any extensions of credit over $10 million would have to be approved by a credit committee rather than those responsible for managing the bank’s customer relationships. However, these same officials said that they often base lending decisions on the profitability of customer relationships, not individual products. Thus, a loan that might not reach profitability targets on a stand-alone basis could still be attractive as part of an overall customer relationship. During our review, members of the Federal Reserve’s staff said that they were considering conducting research into pricing issues in the corporate loan market. Such research could shed some additional light on the charges of the investment bankers and the responses of the commercial bankers.It also could provide useful supervisory information. If the study finds indications that pricing of credit to customers who also use underwriting services is lower than other comparable credit, this could lend support to the investment banker’s allegations of violations of section 23B. However, if the charges are not valid and credit pricing does reflect market conditions, this information would serve as useful confirmation of the findings of the Federal Reserve-OCC targeted review, which found that the policies and procedures of the largest commercial banks served as effective deterrents against unlawful tying. Based on our analysis, the different accounting methods, capital requirements, and levels of access to the federal safety net did not appear to give commercial banks a consistent competitive advantage over investment banks. Officials at some investment banks asserted that these differences gave commercial banks an unfair advantage that they could use in lending to customers who also purchase debt-underwriting services from their investment affiliates. Under current accounting rules, commercial banks and investment banks are required to use different accounting methods to record the value of loan commitments and loans. Although these different methods could cause temporary differences in the financial statements for commercial banks and investment banks. While these different methods could cause temporary differences in financial statements, these differences would be reconciled at the end of the credit contract periods. Further, if the loan commitment were exercised and both firms either held the loan until maturity or made the loan available for sale, the accounting would be similar and would not provide an advantage to either firm. Additionally, while commercial and investment banks were subject to different regulatory capital requirements, practices of both commercial and investment banks led to avoidance of regulatory charges on loan commitments with a maturity of 1 year or less. Moreover, while the banks had different levels of access to the federal safety net, some industry observers argued that greater access could be offset by corresponding greater regulatory costs. According to FASB, which sets the private sector accounting and reporting standards, commercial banks and investment banks follow different accounting models for similar transactions involving loans and loan commitments. Most commercial banks follow a mixed model, where some financial assets and liabilities are measured at historical cost, some at the lower of cost or market value and some at fair value. In contrast, some investment banks follow a fair-value accounting model, in which they report changes in the fair value of inventory, which may include loans or loan commitments, in the periods in which the changes occur. Where FASB guidance is nonexistent, as is currently the case for fair-value accounting for loan commitments, firms are required to follow guidance from the AICPA, which provides industry specific accounting and auditing guidance that is cleared by FASB prior to publication. FASB officials said that it is currently appropriate for commercial banks and investment banks to follow different accounting models because of their different business models. When commercial banks make loan commitments, they must follow FASB’s Statement of Financial Accounting Standards (FAS) No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, which directs them to book the historic carrying value of the fees received for loan commitments as deferred revenue.In the historic carrying value model, commercial banks are not allowed to reflect changes in the fair value of loan commitments in their earnings. However, commercial banks are required to disclose the fair value of all loan commitments in the footnotes to their financial statements, along with the method used to determine fair value. Some investment banks follow the AICPA Audit and Accounting Guide, Brokers and Dealers in Securities, which directs them to record the fair value of loan commitments.The AICPA guidance is directed at broker- dealers within a commercial bank or investment bank holding company structure. However, some investment banks whose broker-dealer subsidiaries comprised a majority of the firms’ financial activity would also be required to follow the fair-value accounting model outlined in the AICPA guidance for instruments held in all subsidiaries.When using the fair- value model, investment banks must recognize in income gains or losses resulting from changes in the fair value of a financial instrument, such as a loan commitment. Investment banks said that they determine the current fair value of loan commitments based on the quoted market price for an identical or similar transaction or by modeling with market data if market prices are not available. According to FASB, although measurement of financial instruments at fair value has conceptual advantages, not all issues have been resolved, and FASB has not yet decided when, if ever, it will require essentially all financial instruments held in its inventory to be reported at fair value. A loan market expert said that, although the discipline of using market-based measures works well for some companies, fair-value accounting might not be the appropriate model for the entire wholesale loan industry. FASB said that one reason is that in the absence of a liquid market for loan commitments, there is potential for management manipulation of fair value because of the management discretion involved in choosing the data used to estimate fair value. Officials from some investment banks contended that adherence to different accounting models gave commercial banks a competitive advantage relative to investment banks in lending to customers who also purchased investment banking services. They alleged that commercial banks extended underpriced 364-day loan commitments to attract customers’ other, more profitable business—such as underwriting—but they were not required to report on their financial statements the difference in value, if any, between the original price of the loan commitment and the current market price. The investment bank officials contended that the current accounting standards facilitate this alleged underpricing of credit because commercial banks record loan commitments at their historic value rather than their current value, which might be higher or lower, and do not have to report the losses incurred in extending an allegedly underpriced loan commitment. Officials from some investment banks also claimed that the historic carrying value model allowed commercial banks to hide the risk of these allegedly underpriced loan commitments from stockholders and market analysts, because the model did not require them to report changes in the value of loan commitments. Officials said that differences in accounting for identical transactions might put investment banks at a disadvantage, compared with commercial banks when analysts reviewed their quarterly filings. As discussed in an earlier section, it is not clear that commercial banks underprice loan commitments. Although commercial and investment banks might have different values on their financial statements for similar loan commitments, both are subject to the same fair-value footnote disclosure requirements in which they report the fair value of all loan commitments in their financial statement footnotes, along with the method used to determine fair value. As a result, financial analysts and investors are presented with the same information about the commercial and investment banks’ loan commitments in the financial statement footnotes. According to FAS 107: Disclosures about Fair Value of Financial Instruments, in the absence of a quoted market price, firms estimate fair value based on (1) the market prices of similar traded financial instruments with similar credit ratings, interest rates, and maturity dates; (2) current prices (interest rates) offered for similar financial instruments in the entity’s own lending activities; or (3) valuations obtained from loan pricing services offered by various specialist firms or from other sources. FASB said that they have found no conclusive evidence that an active market for loan commitments exists; thus, the fair value recorded might frequently be estimated through modeling with market data. When a quoted market price for an identical transaction is not available, management judgment and the assumptions used in the model valuations could significantly affect the estimated fair value of a particular financial instrument. SEC and the banking regulators said the footnote disclosures included with financial statements, which are the same for both commercial banks and investment banks, were an integral part of communicating risk. They considered the statement of position and statement of operations alone to be incomplete instruments through which to convey the risk of loan commitments. They emphasized that to fully ascertain a firm’s financial standing, financial footnotes must be read along with the financial statements. Although different accounting models would likely introduce differences in the amount of revenue or loss recognized in any period, all differences in accounting for loan commitments that were not exercised would be resolved by the end of the commitment period. Any interim accounting differences between a commercial bank and investment bank would be relatively short-lived because most of these loan commitment periods are less than 1 year. Further, if a loan commitment were underpriced, an investment bank using the fair-value accounting model would recognize the difference between the fair value and the contractual price as a loss, while a commercial bank using the historical cost model would not be permitted to do so. This difference in the recognition of gains or losses would be evident in commercial and investment banks’ quarterly filings over the length of the commitment period. However, there is no clear advantage to one method over the other in accounting for loan commitments when the commitments are priced consistently between the two firms at origination. According to investment bankers we spoke with and staff from the AICPA, loan commitments generally decline in value after they are made. Under fair-value accounting, these declines in fair value are actually recognized by the investment bank as revenue because the reduction is recognized in a liability account known as deferred revenue. Therefore, if an investment bank participated with commercial banks in a loan commitment that was deemed underpriced, any initial loss recognized by the investment bank would be offset by each subsequent decline in the loan commitment’s fair value. Further, as discussed in an earlier section, it is not clear that commercial banks underprice loan commitments. Whether a commercial bank using the historic carrying value model or an investment bank using the fair-value model would recognize more revenue or loss on a given loan commitment earlier or later would depend on changes in the borrower’s credit pricing, which reflects overall market trends and customer-specific events, as well as on the accounting model that the firm follows. In addition, when similar loan commitments held by a commercial bank and an investment bank are exercised and become loans, both firms would be subject to the same accounting standards if they had the intent and ability to hold the loan for the foreseeable future or to maturity. In this situation, both commercial banks and investment banks would be required to establish an allowance for probable or possible losses, based on the estimated degree of impairment of the loan commitment or historic experience with similar borrowers. If both an investment bank and a commercial bank decided to sell a loan that it previously had the intent and ability to hold for the foreseeable future or until maturity, the firms would follow different guidance that would produce similar results. A commercial bank would follow the AICPA’s Statement of Position 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others that was issued in December, 2001. According to this guidance, once bank management decides to sell a loan that had not been previously classified as held-for-sale, the loan’s value should be adjusted to the lower of historical cost or fair value, and any amount by which historical cost exceeds fair value should be accounted for as a valuation allowance. Further, as long as the loan’s fair value remained less than historical cost, any subsequent changes in the loan’s fair value would be recognized in income. The investment bank would follow the guidance in the AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities, and account for inventory, the loan in this instance, at fair value and recognize changes in the fair value in earnings. Regulatory capital is the minimum long-term funding level that financial institutions are required to maintain to cushion themselves against unexpected losses, and differing requirements for commercial banks and broker-dealers reflect distinct regulatory purposes. The primary purposes of commercial bank regulatory capital requirements are to maintain the safety and soundness of the banking and payment systems and to protect the deposit insurance funds. Under the bank risk-based capital guidelines, off-balance sheet transactions, such as loan commitments, are converted into one of four categories of asset equivalents. Unfunded loan commitments of one year or less are assigned to the zero percent conversion category, which means that banks are not required to hold regulatory capital for these commitments. In contrast, the primary purposes of broker-dealers’ capital requirements are to protect customers and other market participants from losses caused by broker-dealer failures and to protect the integrity of the financial markets. The SEC net capital rule requires broker-dealer affiliates of investment banks to hold 100- percent capital against loan commitments of any length. However, nonbroker-dealer affiliates of investment banks are not subject to any regulatory capital requirements, and are therefore not required to hold regulatory capital against loan commitments of any length. It is costly for banks or other institutions to hold capital; thus, to the extent that the level of regulatory capital requirements determines the amount of capital actually held, lower capital requirements can translate into lower costs. Officials from an investment bank contended that bank capital requirements gave commercial banks with investment affiliates a cost advantage they could use when lending to customers who also purchased underwriting business. They said that because banks’ regulatory capital requirements for unfunded credits of 1 year or less were zero, commercial banks had the opportunity to adjust the length of credit commitments to avoid capital charges. Furthermore, officials said that the ability to avoid capital charges allowed commercial banks to underprice these loan commitments, because they could extend the commitments without the cost of assigning additional regulatory capital. They pointed to the high percentage of credit commercial banks structured in 364-day facilities as evidence that banks structure underpriced credit in short-term arrangements to avoid capital charges. We found no evidence that bank regulatory capital requirements provided commercial banks with a competitive advantage. Although investment banks could face a 100-percent regulatory capital charge if they carried loan commitments in their broker-dealer affiliates, investment bank officials and officials from the SEC said that, in practice, investment banks carried loan commitments outside of their broker-dealer affiliates, and thus avoided all regulatory capital charges. Furthermore, banking regulators did not think that the current regulatory capital requirements adversely affected the overall amount of capital banks held, because commercial banks generally carried internal risk-based capital on instruments— including loan commitments—that were in excess of the amount of regulatory capital required. In addition, the banking regulators said that bank regulatory capital requirements had not affected banks’ use of loan commitments of 1 year or less. Although loan market data indicated that the percentage of investment-grade loans structured on 364-day terms has increased, commercial bank officials and banking regulators said that this shift was, in part, the banks’ response to the increased amount of risk in lending. Commercial banks have access to a range of services sometimes described as the federal safety net, which includes access to the Federal Reserve discount window and deposit insurance. The Federal Reserve discount window allows banks and other organizations to borrow funds from the Federal Reserve.Commercial banks’ ability to hold deposits backed by federal deposit insurance provides them with a low-cost source of funds available for lending. Industry observers and banking regulators agreed that commercial banks receive a subsidy from the federal safety net; however, they differed on the extent to which the subsidy was offset by regulatory costs. Although officials at the Federal Reserve and at an investment bank contended that access to the federal safety net gave commercial banks a net subsidy, officials from OCC and an industry observer said that the costs associated with access to the safety net might offset these advantages. We could not measure the extent to which regulatory costs offset the subsidy provided by the access to the federal safety net because reliable measures of the regulatory costs borne by banks were not available. Although the Gramm-Leach-Bliley Act of 1999, among other things, expanded the ability of financial services providers, including commercial banks and their affiliates, to offer their customers a wide range of products and services, it did not repeal the tying prohibitions of section 106, which remains a complex provision to enforce. Regulatory guidance has noted that some tying arrangements involving corporate credit are clearly lawful, particularly those involving ties between credit and traditional bank products. The targeted review conducted by the Federal Reserve and OCC, however, identified other arrangements that raise interpretive issues that were not addressed in prevailing guidance. The Federal Reserve recently issued for public comment a proposed interpretation of section 106 that is intended to provide banks and their customers a guide to the section. As the proposed interpretation notes, however, the complexity of section 106 requires a careful review of the facts and circumstances of each specific transaction. The challenge for the Federal Reserve and OCC remains that of enforcing a law where determining whether a violation exists or not depends on considering the precise circumstances of specific transactions; however, information on such circumstances is inherently limited. Customers have a key role in providing information that is needed to enforce section 106. However, the Federal Reserve and OCC have little information on customers’ understanding of lawful and unlawful tying under section 106 or on customers’ knowledge of the circumstances of specific transactions. The available evidence did not clearly support contentions that banks violated section 106 and unlawfully tied credit availability or underpriced credit to gain investment banking revenues. Corporate borrowers generally have not filed complaints with the banking regulators and attribute the lack of complaints, in part, to a lack of documentary evidence and uncertainty about which tying arrangements section 106 prohibits. The Federal Reserve and OCC report that they found only limited evidence of even potentially unlawful tying practices involving corporate credit during a targeted review that began in 2002, and they found that the banks surveyed generally had adequate policies and procedures in place to deter violations of section 106. However, while the teams conducting this review analyzed some specific transactions, they did not test a broad range of transactions, or outreach widely to bank customers. Information from customers could be an important step in assessing both implementation of and compliance with a bank’s policies and procedures. While regulators could take further steps to encourage customers to provide information, in addition to the recent Federal Reserve proposal, bank customers themselves are crucial to enforcement of section 106. Distinguishing lawful and unlawful tying depends on the specific facts and circumstances of individual transactions. Because the facts, if any, that would suggest a tying violation generally would not be found in the loan documentation that banks maintain and because bank customers have been unwilling to file formal complaints, effective enforcement of section 106 requires an assessment of other indirect forms of evidence. We therefore recommend that the Federal Reserve and the OCC consider taking additional steps to ensure effective enforcement of section 106 and section 23B, by enhancing the information that they receive from corporate borrowers. For example, the agencies could develop a communication strategy targeted at a broad audience of corporate bank customers to help ensure that they understand which activities are permitted under section 106 as well as those that are prohibited. This strategy could include publication of specific contact points within the agencies to answer questions from banks and bank customers about the guidance in general and its application to specific transactions, as well as to accept complaints from bank customers who believe that they have been subjected to unlawful tying. Because low priced credit could indicate a potential violation of section 23B, we also recommend that the Federal Reserve assess available evidence regarding loan pricing behavior, and if appropriate, conduct additional research to better enable examiners to determine whether transactions are conducted on market terms and that the Federal Reserve publish the results of this assessment. We requested comments on a draft of this report from the Federal Reserve and OCC. We received written comments from the Federal Reserve and OCC that are summarized below and reprinted in appendixes II and III respectively. The Comptroller of the Currency and the General Counsel of the Board of Governors of the Federal Reserve System replied that they generally agreed with the findings of the report and concurred in our recommendations. Federal Reserve and OCC staff also provided technical suggestions and corrections that we have incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issuance date. At that time, we will send copies the Chairman and Ranking Minority Member, Senate Committee on Banking, Housing, and Urban Affairs; the Chairman, House Committee on Energy and Commerce; the Chairman of the Board of Governors of the Federal Reserve System; and the Comptroller of the Currency. 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 James McDermott or me at (202) 512-8678. Key contacts and major contributors to this report are listed in appendix IV. Because commercial and investment banks follow different accounting models, there are differences in the financial statement presentation of some similar transactions. This appendix summarizes the differences, under generally accepted accounting principles in how commercial banks and investment banks account for loan commitments—specifically commercial paper back-up credit facilities—using hypothetical scenarios to illustrate how these differences could affect the financial statements of a commercial and investment bank. We use three hypothetical scenarios to illustrate the accounting differences that would occur between the commercial and investment banks for similar transactions if (1) a loan commitment were made, (2) the loan commitment was exercised by the borrower and the loan was actually made, and (3) the loan was subsequently sold. This appendix does not assess the differences in accounting that would occur if a loan was made by both a commercial bank and an investment bank when one entity decided to hold the loan to maturity and the other opted to hold the loan as available for sale, because the basis for these actions and the resulting accounting treatment are not similar. The examples in this appendix demonstrate that, as of a given financial statement reporting date, differences would likely exist between commercial and investment banks in the reported value of a loan commitment and a loan resulting from an exercised commitment, as well as the recognition of the related deferred revenue. In addition, the volatility of the fair value of loan commitments and the related loan, if the commitment were exercised, would be reflected more transparently in an investment bank’s financial statements, because an investment bank must recognize these changes in value in earnings as they occur in net income.In contrast, commercial banks are not allowed to recognize changes in the fair value of the loan commitment, its related deferred revenue, or the related loan (if drawn). The differences in accounting between commercial banks and investment banks are temporary; and, as the examples in the following sections show, whether a commercial bank or an investment bank recognizes more fee revenue first would depend on various market conditions, including interest rates and spreads. Similarly, any differences between the fair value of a loan or loan commitment on an investment bank’s book and the net book value of a similar loan or loan commitment on a commercial bank’s books would be eliminated by the end of the loan term or commitment period.Given that loan commitment terms are usually for less than 1 year, any accounting differences between the commercial and investment banks would be for a relatively short period of time. Further, both commercial and investment banks are required to make similar footnote disclosures about the fair value of their financial instruments. Thus, neither accounting model provides a clear advantage over the life of the loan commitment or the loan if the commitment were exercised. Since 1973, the Financial Accounting Standards Board (FASB) has been establishing private-sector financial accounting and reporting standards. In addition, the American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee also provides industry- specific authoritative guidance that is cleared with FASB prior to publication. Where FASB guidance is nonexistent, as is currently the case in fair-value accounting for loan commitments, firms are required to follow AICPA guidance. Most commercial banks generally follow a mixed-attribute accounting model, where some financial assets and liabilities are measured at historical cost, some at the lower of cost or market value and some at fair value. In accounting for loan commitments, banks follow the guidance in Statement of Financial Accounting Standards (FAS) Number 91 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.Broker-dealer affiliates and investment banks whose primary business is to act as a broker-dealer follow the AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities, where the inventory (that may include loan commitments) are recorded at the current fair value and the change in value from the prior period is recognized in net income. Further, FASB currently has a project on revenue recognition that includes the accounting for loan commitment fees by investment banks and others. The purpose of that project includes addressing the inconsistent recognition of commitment fee income and may eliminate some of the accounting differences that exist between commercial banks and investment banks described in this appendix. FASB has stated that it is committed to work diligently toward resolving, in a timely manner, the conceptual and practical issues related to determining the fair values of financial instruments and portfolios of financial instruments. Further, FASB has stated that while measurement at fair value has conceptual advantages, all implementation issues have not yet been resolved; and the Board has not yet decided when, if ever, it will be feasible to require essentially all financial instruments to be reported at fair value in the basic financial statements. Although FASB has not yet issued comprehensive guidance on fair-value accounting, recent literature has stated that the fair-value accounting model provides more relevant information about financial assets and liabilities and can keep up with today’s complex financial instruments better than the historical cost accounting model. The effect of the fair-value accounting model is to recognize in net income during the current accounting period amounts that, under the historical cost model, would have been referred to as unrealized gains or losses because the bank did not sell or otherwise dispose of the financial instrument. Further, proponents of the fair-value accounting model contend that unrealized gains and losses on financial instruments are actually lost opportunities as of a specific date to realize a gain or loss by selling or settling a financial instrument at a current price. However, a disadvantage of fair-value accounting exists when there is not an active market for the financial instrument being valued. In this case, the fair value is more subjective and is often determined by various modeling techniques or based on the discounted value of expected future cash flows. On the first day of an accounting period, Commercial Bank A and Investment Bank B each made a $100 million loan commitment to a highly rated company to back up a commercial paper issuance. This loan commitment was irrevocable and would expire at the end of three quarterly accounting periods. Because the loan commitment was issued to a highly rated company, both banks determined that the chance of the company drawing on the facility was remote. Both banks received $10,000 in fees for these loan commitments. Commercial Bank A followed the guidance in FAS No. 91 and recorded this transaction on a historical cost basis while Investment Bank B, subject to specialized accounting principles that require fair-value accounting, reported changes in fair value included the effect of these changes in earnings. Revenue Recognition for the Upon receipt of the loan commitment fee, Commercial Bank A would Commercial Bank record the $10,000 as a liability, called deferred revenue, because the bank would be obligated to perform services in the future in order to “earn” this revenue. In practice, because of the relatively small or immaterial amounts of deferred revenue compared with other liabilities on a bank’s statement of position (balance sheet), this amount would not be reported separately and would likely be included in a line item called “other liabilities.”Commercial Bank A would follow the accounting requirements of FAS No. 91 and recognize the revenue as service-fee income in equal portions over the commitment period, regardless of market conditions—a practice often referred to as revenue recognition on a straight-line basis. Thus, at the end of the first accounting period, Commercial Bank A would reduce the $10,000 deferred revenue on its statement of position (balance sheet) by one-third or $3,333 and record the same amount of service-fee revenue on the statement of operations (income statement). The same accounting would occur at the end of the second and third accounting periods, so that an equal portion of service revenue would have been recognized during each period that the bank was obligated to loan the highly rated company $100 million. Regarding disclosure of the $100 million commitment, Commercial Bank A would not report the value of the loan commitment on its balance sheet. However, the bank would disclose in the footnotes to its financial statements the fair value of this commercial paper back-up facility as well as the method used to estimate the fair value. Although AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities does not provide explicit guidance for how Investment Bank B would account for this specific transaction, the guide provides relevant guidance on accounting for loan commitments in general. This guide states that Investment Bank B would account for inventory, including financial instruments such as a commercial paper back-up facility, at fair value and report changes in the fair value of the loan commitment in earnings. When changes occurred in the fair value of the loan commitment, Investment Bank B would need to recognize these differences by adjusting the balance of the deferred revenue account to equal the new fair value of the loan commitment. Generally, quoted market prices of identical or similar instruments, if available, are the best evidence of the fair value of financial instruments. If quoted market prices are not available, as is often the case with loan commitments, management’s best estimate of fair value may be based on the quoted market price of an instrument with similar characteristics; or it may be developed by using certain valuation techniques such as estimated future cash flows using a discount rate commensurate with the risk involved, option pricing models, or matrix pricing models. A corresponding entry of identical value would be made to revenue during the period in which the change in fair value occurred. Once the commitment period ended, as described in the previous paragraph, the deferred revenue account would be eliminated and the remaining balance recorded as income. If market conditions changed shortly after Investment Bank B issued this credit facility and its fair value declined by 20 percent to $8,000, Investment Bank B would reduce the deferred revenue account on its statement of position (balance sheet) to $8,000, the new fair value. Investment Bank B would recognize $2,000 of service-fee income, the amount of the change in value from the last reporting period, in its statement of operations (income statement). Investment Bank B would also disclose in its footnotes the fair value of this credit facility, as well as the method used to estimate the fair value. If during the second accounting period there was another change in market conditions and the value of this credit facility declined another 5 percent of the original amount to $7,500, Investment Bank B would decrease the balance in the deferred revenue account to $7,500 and recognize $500 in service-fee revenue. Further, Investment Bank B would disclose in its footnotes the fair value of this credit facility. During the accounting period in which the commitment to lend $100 million was due to expire, accounting period 3 in this example, the balance of the deferred revenue account would be recognized because the commitment period had expired and the fair value would be zero. Thus, $7,500 would be recognized in revenue and the balance of deferred revenue account eliminated. In this accounting period, there would be no disclosure about the fair value of the credit facility. The following table summarizes the amount of revenue Commercial Bank A and Investment Bank B would recognize and the balance of the deferred revenue account for each of the three accounting periods when there were changes in the value of the loan commitments. Commercial Bank A would recognize more service-fee income in accounting periods 1 and 2 than Investment Bank B. However, this situation would be reversed in period 3, when Investment Bank B would recognize more revenue. Thus, differences in the value of the loan commitment and the amount of revenue recognized would likely exist between specific accounting periods, reflecting the volatility of the financial markets more transparently in Investment B’s financial statements. The magnitude of the difference is determined by the market conditions at the time and could be significant or minor. However, these differences would be resolved by the end of the commitment period, when both entities would have recognized the same amount of total revenue for the loan commitment. Commercial Bank A and Investment Bank B issued the same loan commitment described previously. However, at the end of the second accounting period, the highly rated company exercised its right to borrow the $100 million from each provider because its financial condition had deteriorated and it could no longer access the commercial paper market. The accounting treatment for this loan would depend upon whether bank management had the intent and ability to hold the loan for the foreseeable future or until maturity. AICPA Task Force members and some investment bankers told us that in practice, this loan could be either held or sold, and as a result, the accounting for both is summarized in the following sections. At the time the loan was made, Commercial Bank A would record the $100 million dollar loan as an asset on its statement of position (balance sheet). Investment Bank B would initially record this loan at its historical cost basis, less the loan commitment’s fair value at the time the loan was drawn ($100 million - $7,500). Further, based on an analysis by the banks’ loan review teams, a determination of “impairment” would be made. According to FAS 114, Accounting by Creditors for Impairment of a Loan, “a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” If the loan were determined to be impaired, FAS 114 states that, the bank would measure the amount of impairment as either the (1) present value of expected future cash flows discounted at the loan’s effective interest rate, (2) loan’s observable market price, or (3) fair value of the collateral if the loan were collateral dependent. FAS 114 directs both banks to establish an allowance for losses when the measure of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premium or discount) by creating a valuation allowance that reduces the recorded value of the loan with a corresponding charge to bad- debt expense. When there are significant changes in the amount or timing of the expected future cash flows from this loan, the banks would need to adjust, up or down, the loan-loss allowance as appropriate so that the net balance of the loan reflects management’s best estimate of the loan’s cash flows. However, the net value of the loan cannot exceed the recorded investment in the loan. If the loan were not impaired, both banks would still record an allowance for credit losses in accordance with FAS 5, Accounting for Contingencies, when it was probable that a future event would likely occur that would cause a loss and the amount of the loss was estimable. Thus, both banks would establish an allowance for loss in line with historical performance for borrowers of this type. Because the loan was performing, both banks would receive identical monthly payments of principal and interest. Generally, these cash receipts would be applied in accordance with the loan terms, and a portion would be recorded as interest income; and the balance applied would reduce the banks’ investment in the loan. At the end of the loan term, the balance and the related allowance for this loan would be eliminated. FAS 91 also directs both banks to recognize the remaining unamortized commitment fee over the life of the loan as an adjustment to interest income. Because the borrower’s financial condition had deteriorated, both banks would likely have charged a higher interest rate than the rate stated in the loan commitment. As a result, at the time it becomes evident that the loan is to be drawn, Investment Bank B would record a liability on its balance sheet to recognize the difference between the actual interest rate of the loan and the interest rate at which a loan to a borrower with this level of risk would have been made—in essence the fair value interest rate. This liability would also be amortized by Investment Bank B over the life of the loan as an adjustment to interest income. If Commercial Bank A and Investment Bank B’s policies both permitted the firms to only hold loans for the foreseeable future or until maturity when the borrowers were highly rated, it is unlikely that the banks would keep the loan in the previous hypothetical scenario and would sell the loan soon after it was made. Although the banks would follow different guidance there would be similar results. Commercial Bank A would follow the guidance in the AICPA Statement of Position 01-6. According to this guidance, once bank management decides to sell a loan that had not been previously classified as held-for-sale, the loan’s value should be adjusted to the lower of historical cost or fair value, and any amount by which historical cost exceeds fair value should be accounted for as a valuation allowance. Further, as long a the loan’s fair value remained less than historical cost, any subsequent changes in the loan’s fair value would be recognized in other comprehensive income. Investment Bank B would follow the guidance in the AICPA’s Audit and Accounting Guide, Brokers and Dealers in Securities, as it did with loan commitments, and account for inventory at fair value and report changes in the fair value of the loan in net income. For example, if bank management decided to sell the loan soon after it was drawn when some payments had been made to reduce the principal balance and the net book value of this loan was $88,200,000 (unpaid principal balance of $90,000,000 less the related allowance of $1,800,000) and the fair value was 97 percent of the unpaid principal balance or $87,300,000, both banks would recognize the decline in value of $900,000 in earnings. While the loan remained available-for-sale, any changes in its fair value would be recorded in net income. For example, if the loan’s fair value declined further to $85,500,000, both banks would recognize the additional decline in value of $1,800,000 in earnings. Table 2 below summarizes the accounting similarities between Commercial Bank A and Investment Bank B for the loan sale. Although the two banks followed different guidance, the effect of the loan sale is the same for both banks. In addition to those individuals named above, Daniel Blair, Tonita W. Gillich, Gretchen Pattison, Robert Pollard, Paul Thompson, and John Treanor made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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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. | Investment affiliates of large commercial banks have made competitive inroads in the annual $1.3 trillion debt-underwriting market. Some corporate borrowers and officials from an unaffiliated investment bank have alleged that commercial banks helped their investment affiliates gain market share by illegally tying and underpricing corporate credit. This report discusses these allegations, the available evidence related to the allegations, and federal bank regulatory agencies' efforts to enforce the antitying provisions. Section 106 of the Bank Holding Company Act Amendments of 1970 prohibits commercial banks from "tying," a practice which includes conditioning the availability or terms of loans or other credit products on the purchase of certain other products and services. The law permits banks to tie credit and traditional banking products, such as cash management, and does not prohibit banks from considering the profitability of their full relationship with customers in managing those relationships. Some corporate customers and officials from an investment bank not affiliated with a commercial bank have alleged that commercial banks illegally tie the availability or terms, including price, of credit to customers' purchase of other services. However, with few exceptions, formal complaints have not been brought to the attention of the regulatory agencies and little documentary evidence surrounding these allegations exists, in part, because credit negotiations are conducted orally. Further, our review found that some corporate customers' claims involved lawful ties between traditional banking products rather than unlawful ties. These findings illustrate a key challenge for banking regulators in enforcing this law: while regulators need to carefully consider the circumstances of specific transactions to determine whether the customers' acceptance of an unlawfully tied product (that is, one that is not a traditional banking product) was made a condition of obtaining credit, documentary evidence on those circumstances might not be available. Therefore, regulators may have to look for indirect evidence to assess whether banks unlawfully tie products and services. Although customer information could have an important role in helping regulators enforce section 106, regulators generally have not solicited information from corporate bank customers. The Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) recently reviewed antitying policies and procedures of several large commercial banks. The Federal Reserve and OCC, however, did not analyze a broadly-based selection of transactions or generally solicit additional information from corporate borrowers about their knowledge of transactions. The agencies generally found no unlawful tying arrangements and concluded that these banks generally had adequate policies and procedures intended to prevent and detect tying practices. The agencies found variation among the banks in interpretation of the tying law and its exceptions. As a result, in August 2003, the Board of Governors of the Federal Reserve, working with OCC, released for public comment new draft guidance, with a goal of better informing banks and their customers about the requirements of the antitying provision. |
The federal government’s vast real property portfolio is used for all aspects of operations and includes buildings such as warehouses, office space, dormitories, and hospitals. Agencies’ physical security programs address how agencies approach aspects of physical security for these buildings, such as conducting risk assessments to identify threats and vulnerabilities, determining which countermeasures to implement, and coordinating security efforts within the agency and with other agencies. We have previously reported that because of the considerable differences in types of federal facilities and the variety of risks associated with each of them, there is no single, ideal approach to physical security. For example, in some instances, an agency’s component offices—which are subordinate entities such as bureaus, administrations, or other operating divisions—have their own physical security programs for the facilities they use. In other instances, an agency’s regions or districts play a role in physical security. ISC was created by Executive Order 12977 in 1995, after the bombing of the Alfred P. Murrah federal building in Oklahoma City, to address physical security across federal facilities occupied by federal employees for nonmilitary activities. ISC’s mandate is to enhance the quality and effectiveness of security in and protection of federal facilities. To accomplish this, Executive Order 12977 directs the ISC to, among other things, develop and evaluate security standards for federal facilities, develop a strategy for ensuring compliance with such standards, and oversee the implementation of appropriate security measures in federal facilities. Executive Order 12977 also directs each executive agency and department to cooperate and comply with ISC policies and recommendations issued pursuant to the order. The order, as amended, gives the Secretary of Homeland Security the responsibility to monitor federal agency compliance with ISC policies and recommendations. Prior to the creation of ISC, there was no federal body responsible for developing government-wide physical security standards. Consequently, ISC became the government’s central forum for exchanging information and disseminating standards and guidance on physical security at federal facilities. ISC’s standards are intended to help agencies integrate security into the operations, planning, design, and construction of federal facilities and are intended to be customized to address facility-specific conditions. ISC has developed the following security standards and guidance, among others:9, 10 Physical Security Criteria for Federal Facilities establishes a process for determining the baseline set of physical security measures to be applied at a federal facility and provides a framework for the customization of security measures to address unique risks at a facility. Design-Basis Threat establishes a profile of the type, composition, and capabilities of adversaries. It is designed to correlate with the countermeasures contained in the Physical Security Criteria for Federal Facilities. Facility Security Level Determinations defines the criteria and process to be used in determining the facility security level of a federal facility, a categorization that then serves as the basis for implementing ISC standards. Use of Physical Security Performance Measures directs all federal agencies to assess and document the effectiveness of their physical security programs through performance measurement and testing. For a complete listing of ISC standards and guidance, see www.dhs.gov/interagency- security-committee-standards-and-best-practices. Accessed January 22, 2013. ISC officials said that they are in the process of consolidating and streamlining several of their physical security standards into a single document, which they believe will help facilitate agencies’ use of the standards. This standard provides guidance on how to establish and implement a comprehensive measurement and testing program. Security Specialist Competencies provides the range of core competencies federal security specialists should possess to perform their basic duties and responsibilities. ISC’s 51 member agencies meet quarterly to promote information sharing on physical security. Members serve on working groups and subcommittees to develop and update physical security standards and guidance, including those listed above. ISC also engages with industry and other government stakeholders to advance best practices and provides training on its standards to federal facility security professionals and other stakeholders. Leadership for the ISC is provided by DHS’s Assistant Secretary for Infrastructure Protection, who is the chair of the ISC; an Executive Director; and eight standing subcommittees that identify long- and short-term priorities and oversee strategic initiatives. Agencies draw upon a variety of information sources in developing and continually refining aspects of their physical security programs, such as how and when to conduct risk assessments, what skills security staff should have, and how to determine which countermeasures to implement at their facilities. Sources can include an agency’s institutional knowledge or subject matter expertise in physical security, federal statutes and regulations, physical security standards issued by ISC, and state or local regulations, among others, as shown in figure 1. Characteristics such as agencies’ missions and the type, use, and location of their facilities can affect which of these sources agencies use. For example, a facility may adhere to local building codes that affect aspects of physical security such as perimeter fencing, or a facility that is used to house radioactive waste may be subject to federal requirements on the storage of nuclear materials. Institutional knowledge in physical security and ISC’s physical security standards were the two sources that our survey results and case- study interviews showed to be the most influential in guiding agencies’ physical security programs. All 32 of the agencies we surveyed reported that institutional knowledge or subject matter expertise informs their physical security programs. This was the most widely used source cited in our survey, as shown in figure 1. For example, officials from three of the agencies we surveyed said that the knowledge, experience, and expertise that their security specialists have in physical security—which they consider institutional knowledge— is reflected in their physical security programs and policies. One of these officials said his agency contracts with a security company that has extensive knowledge and experience in providing security and law enforcement to high profile institutions across the federal government, and that this knowledge is used in managing the agency’s security program. Another agency official said that the knowledge gained from employees’ previous education, training, or work experiences, or historical knowledge of the agency has assisted in the development of several security policies and procedures within the agency. Agencies also rely heavily on institutional knowledge or subject matter expertise to inform specific aspects of their security programs, more so than any other source we asked about in our survey. As shown in figure 2, 26 agencies reported that institutional knowledge informs how they conduct risk assessments and determine appropriate countermeasures. For example, officials from two of our case-study agencies—DOE and USPS—said that they use institutional knowledge to inform how they conduct these activities. DOE headquarters officials told us that when developing and updating agency-wide physical security policies, which address topics such as risk assessments, they obtain input from DOE staff in their component offices, who have knowledge of the particular needs and constraints of their facilities based on their experience implementing security programs. In addition, USPS officials said that their security staff’s knowledge of the agency’s long-standing security program and their professional education in physical security helps them make decisions about security measures needed at their facilities, such as on the location of perimeter fencing and the appropriate brightness for security lights. Twenty-nine of 32 agencies surveyed reported that ISC standards inform their physical security programs, making it the second most-used source behind institutional knowledge, as shown in figure 1. Officials we interviewed from our case-study agencies said that they use ISC standards as one of many sources that inform what they include in their physical security programs. ISC has developed a number of government- wide physical security standards that address topics intended to help guide agencies’ physical security programs, including determining a facility’s risk level and identifying threats posed by potential adversaries, among other things. Agencies’ use of ISC standards can help ensure that physical security programs are effective government-wide. The standards are developed based on the collective knowledge and physical security expertise of ISC member agencies and, therefore, reflect leading practices in physical security. Every ISC member agency that we surveyed, as well as four agencies that are not ISC members, reported that they use ISC standards at least to some degree. The three agencies we surveyed that reported that they do not use ISC standards at all are not ISC members. According to our survey, ISC standards are most often used for conducting design-basis threat analysis of agency facilities, identifying aspects of facilities that need security measures, and determining appropriate countermeasures, as shown in figure 2. Although the majority of agencies we surveyed use ISC standards, the extent of their reliance varies—with some agencies using the standards extensively to inform their physical security programs and some using them in a more limited way. For example, 11 agencies reported that all of the physical security aspects shown in figure 2 are largely informed by ISC standards, whereas six agencies reported that none of these aspects are largely informed by ISC standards. Instead, these six agencies generally reported that these aspects are somewhat, minimally, or not informed by ISC standards. Among the six agencies that said none of these aspects are largely informed by ISC standards, three are primary ISC members, two are associate members, and one is not an ISC member. We found that agencies’ reasons for making limited use of ISC standards reflect a lack of understanding by some agencies regarding how the standards are intended to be used. For example, officials from the case- study agencies that we interviewed said that certain conditions at their agencies contribute to their limited use of the standards. Specifically, these agencies cited the suitability of the ISC standards to the agencies’ facilities and their own physical security requirements as contributing to their limited use of the standards. Suitability of standards. Officials we interviewed at our case-study agencies told us that they are selective in their use of ISC standards because the standards are not suitable for the types of facilities in their portfolio. For example, USPS officials said that, consistent with ISC standards, they establish a baseline level of protection at their facilities that address facility-specific functions and threats, but they do not follow some practices included in the ISC standards— particularly those related to access control—because the practices are not suitable for the high degree of public access needed at post offices. Likewise, VA officials told us that they do not use ISC standards for all of their facilities because some practices included in the standards do not cover security topics that are specific to their facilities, such as hospitals and health clinics. In response to these comments, ISC officials told us that ISC’s standards are designed to be suitable for all facilities and to accommodate a broad range of security needs, conditions, and types of facilities. For example, ISC’s Physical Security Criteria for Federal Facilities—one of ISC’s key standards—establishes a decision-making process to help agencies consistently determine the baseline level of protection needed for each facility. The Criteria provide agencies the flexibility to build upon or customize the baseline level of protection to address facility- specific conditions. According to the Criteria, consistency in the process used to determine a baseline level of protection for each facility is important because it helps ensure that the risks that all facilities face—regardless of the type facility—are mitigated to an acceptable level. Furthermore, according to ISC officials, the Criteria do not prescribe specific countermeasures and, as a result, can be used by all agencies regardless of the type of facilities in their portfolio. Use of other physical security standards. Officials we interviewed at our case-study agencies also told us that they do not make greater use of ISC standards because they have their own standards for physical security. For example, officials at DOE told us that the Atomic Energy Act was the foundation for their security program long before the ISC was created and ISC standards developed. Additionally, DOE officials told us that the act and DOE’s security policy derived from it establishes physical security requirements for their facilities with classified or nuclear material and that these requirements are usually more stringent than ISC requirements. Similarly, VA officials told us that they have developed their own physical security standards that are specific to the needs of their hospital and clinic facilities, and that these standards go above and beyond ISC standards. ISC officials told us that, because ISC standards are intended to ensure a minimum or baseline level of protection, it is appropriate for agencies to have their own requirements and standards that exceed those of ISC. According to ISC officials, an agency should apply the decision- making process established by the ISC standards to determine if their facilities’ physical security requirements meet the baseline, and then add additional requirements based on their agency’s needs. As previously discussed, ISC was established to enhance the quality and effectiveness of security in and protection of non-military, federal facilities. Although most agencies we surveyed use ISC standards to some degree, some agencies’ use of the standards is limited because they believe that the ISC standards are not suitable for their circumstances. Clarifying how agencies can use the standards regardless of the types of facilities in their portfolio and in concert with their existing physical security programs may result in the greater use of the standards. Use of ISC standards may be beneficial because they provide agencies with tools and approaches for consistently and cost-effectively establishing a baseline level of protection at all facilities commensurate with identified risks at those facilities. By using the standards to determine the level of protection needed to address the unique risks faced at each facility, agencies may be able to avoid expending resources on countermeasures that are not needed. ISC currently does not formally monitor agencies’ compliance with ISC standards. ISC officials said that with only five full time employees and a budget that is not a dedicated line item within DHS’s budget, it lacks the staff and resources to conduct monitoring. Currently, in place of a formal monitoring program, ISC officials hold quarterly meetings and participate in ISC working groups along with their member agencies. ISC officials said that the information sharing that occurs through these channels helps them achieve a basic understanding of whether and how member agencies use the standards. This approach, however, does not provide a thorough or systematic assessment of ISC member agencies’ use of the standards, and provides no information on non-member agencies’ physical security practices. Further, because ISC conducts limited outreach to non-member agencies, property-holding agencies that are not ISC members may not be fully aware of the benefits that the use of the ISC standards might have for them. ISC stated in its 2012 to 2017 action plan that it plans to establish protocols and processes for monitoring and testing compliance with its standards by fiscal year 2014. According to ISC’s executive director, monitoring agencies’ compliance with the standards could include agency self-assessments or ISC officials’ assessing agencies’ compliance. Monitoring and testing as well as other methods of measuring the performance of the standards can help gauge the adequacy of facility protection, improve security, and ensure accountability for achieving the goals of the standards. In commenting on a draft of this report, DOE and USPS stated that they use ISC standards as a baseline for at least some of their facilities. DOE officials said that ISC standards must be considered the baseline for security for facilities that do not have classified or nuclear material but have federal personnel. USPS officials said that ISC’s Criteria standard provides flexibility to customize baseline levels of protection to address facility-specific conditions and that it is within this framework that USPS employs appropriate countermeasures at its facilities when it is not able to adopt ISC’s recommended standards. As discussed, ISC is planning to monitor and test agencies’ compliance with ISC standards. This monitoring and testing will help shed more light on whether these and other agencies’ approaches align with ISC’s standards. Based on responses to our survey and our interviews with agency officials, we found that agencies use a range of management practices that can contribute to effective oversight of physical security programs, including: having a manager responsible for physical security, having agency-wide physical-security policies, using risk management practices that compare physical security measuring the performance of physical security programs. We and others have reported that these practices can help agencies address risks, achieve effective results in their programs, determine program effectiveness, and identify whether changes are needed to better meet the program objectives. A physical security manager can be beneficial for an agency because the manager can establish a cohesive strategy for the agency to mitigate or reduce risk across the agency’s facilities, coordinate and oversee physical security efforts across departments, and minimize potential redundancies that could be occurring across departments if accountability for physical security is dispersed among several managers, according to guidance issued by ASIS International. Many of the agencies we surveyed reported that they have a manager at the agency-wide level responsible for their risk assessment approaches and monitoring and oversight (25 and 22 agencies, respectively), as shown in figure 3. However, we determined that physical security managers at our case-study agencies have varying levels of responsibility. For example, DOE’s director of security has agency-wide responsibility and works with component offices throughout the agency to ensure that the component offices’ security programs align with DOE policies, which helps achieve a consistent approach to security across the agency. Alternatively, FCC’s chief security officer is responsible for physical security at only a select group of the 14 facilities held by FCC. Two of FCC’s component offices are responsible for physical security at the remaining facilities. Each of these component offices approach physical security in a way that meets its particular needs. The FCC official we interviewed acknowledged, however, that if physical security were centrally managed—through a physical security manager with agency- wide responsibilities, for example—the agency could benefit from a consistent approach to physical security for facility types that are similar. Although it is important to tailor physical security to facilities so that the unique risks at those facilities are addressed, a consistent approach to certain aspects of physical security is beneficial because it helps ensure that all facilities are covered by a baseline level of physical security commensurate with identified risks at those facilities. For example, we previously reported that the Department of the Interior (Interior) established a central law enforcement and security office in 2002 that enabled it to develop a uniform risk assessment and ranking methodology to quantify risk, identify needed security enhancements, and measure risk-reduction benefits at some of its properties. In addition to fostering consistency, a central approach to physical security can also help coordinate physical security across component offices and provide a single point of contact for the agency for physical security. For example, Interior’s central office responsible for security provided the agency with a single point of contact that the Secretary and senior managers could depend upon for security information and advice. We have previously reported that agencies’ physical security programs can benefit from documented agency-wide guidelines. According to GAO’s Standards for Internal Control in the Federal Government, policies and procedures that enforce management’s directives at an agency-wide level are an important part of an agency’s ability to achieve effective results in its programs, in physical security as well as other types of programs. Furthermore, according to the Standards for Internal Control, assessing compliance to policies and procedures can also assist agencies in monitoring and measuring the performance of programs, including physical security programs. A majority of the agencies (24) we surveyed reported that they have documented agency-wide guidelines for monitoring and overseeing security programs at individual facilities, as shown in figure 4. Our more in-depth analysis of the case-study agencies found that they have documented agency-wide policies for a range of physical security activities. For example, DOE has documented policies for facility-level security plans, performance assurance, facility clearance activities, and other security-related activities that apply to individual facilities, and according to OPM officials their agency has a documented general security policy and access control policy. Having documented policies can help agencies ensure that their security programs achieve results. For example, USPS’s security policy states that its security policies and adherence to these policies can help the agency ensure that the most appropriate level of security and protection available are provided to its facilities. DOE’s security policy states that adherence to the policies can help prevent adverse impacts on the safety of DOE and contractor employees and the public. Most agencies (26 of 32) we surveyed reported that offices at the agency- wide or component level, or both, monitor facilities’ compliance with policies and procedures. In addition, six agencies reported that their region or district offices or facilities are responsible for performing this activity, rather than agency-wide or component offices. Agency-wide offices at our case-study agencies monitor facilities’ compliance with agency-wide policies. For example, USPS staff working in field offices annually assess whether postal facilities are complying with agency-wide policies, and the headquarters security office reviews the results of the assessments. At DOE, component offices assess facilities’ compliance with security policies and the agency-wide security office reviews high risk facilities to determine if DOE policies have been adequately implemented. We have previously identified risk management as a key practice in facility protection. A risk management approach that compares physical security across facilities can provide agencies assurance that the most critical risks at facilities across their agencies are being prioritized and mitigated, and that systemic risks are identified and addressed. Agencies we surveyed reported that they conduct risk management practices—such as comparing risk assessments across facilities and monitoring the implementation of countermeasures across facilities—and that such practices are most often the responsibility of agency-wide offices, component level offices, or both. Specifically, of the 32 agencies we surveyed, 24 agencies reported that agency-wide or component offices, or both, had primary responsibility for comparing risk assessments across facilities and 26 agencies reported that either or both of these offices had primary responsibility for monitoring countermeasure implementation across facilities. A few agencies reported that regional or district offices or facilities had primary responsibility for these activities instead of agency-wide or component offices. However, not all agencies we surveyed perform these activities: six agencies reported that they do not compare risk assessments across facilities, and two agencies reported that they do not monitor the implementation of countermeasures across facilities. Officials from OPM and DOE, two of our case-study agencies, said that they do not compare risk assessments across facilities. Specifically, OPM officials told us that they do not compare the results of the risk assessments across facilities because they have a small facility portfolio and have not seen the need to do such a comparison. Rather, the agency uses risk assessments to determine what countermeasures need to be implemented to address risks at individual facilities. Similarly, DOE officials told us that each of their component offices conducts risk assessments in different ways and that the Office of Health, Safety, and Security, which has agency-wide responsibility for physical security policy and oversight, does not compare risks across components or facilities. In contrast, officials from another case-study agency, USPS, said that they do perform such comparisons. USPS officials who have agency-wide responsibilities for physical security said that they review the results of risk assessment performed across facilities to identify trends or anomalies that may indicate a systemic problem, and use this information to determine which countermeasures need to be implemented on a national basis. Monitoring the implementation of countermeasures across facilities can provide agencies with an agency-wide understanding of their vulnerabilities and whether identified risks have been mitigated. Another key practice in facility protection we have identified is the use of performance measures. In the area of physical security, performance measures could include the number of security incidents or the effectiveness of countermeasures, among other things. We have previously reported that benefits of performance measures for physical security include helping agencies reach their strategic objectives for physical security, evaluating the effectiveness of their physical security programs, and identifying changes needed to better meet the program’s objectives. Twenty-two of 32 agencies we surveyed reported that at least some of their performance measures are documented in agency-wide or component-level planning, budget, or performance reports. The remaining 10 agencies reported that they did not have or did not know if they have performance measures documented in such reports. One of our case-study agencies, OPM, uses agency-wide performance measures to measure the performance of its security program. In contrast, officials from another case-study agency, DOE, said that such measures are difficult to implement at their agency. OPM, for example, has specific goals for its physical security program that are reflected in the evaluation used for its director of security. These performance goals, which are linked to the agency’s strategic plan and operational goals, include measures such as completing a certain number of facility risk assessments, revising physical security policies, and fully implementing physical security technologies by specific dates. In contrast, DOE officials told us that although measuring performance on an agency-wide basis is a beneficial practice, they do not have agency-wide performance measures because each DOE facility varies, making it difficult to compare performance trends across facilities. Among the physical security activities we asked about, agencies we surveyed identified allocating physical security resources across an agency’s portfolio as the greatest challenge. A majority of agencies (17 or more) we surveyed identified the following resource allocation activities as extremely or very challenging: balancing the need for improved security with other operational needs and competing interests, obtaining funding for security technologies and personnel, and balancing the funding process with changing security needs. Additional activities related to resource allocation were also among those that surveyed agencies found most challenging, as shown in figure 5. Surveyed agencies generally reported other aspects of physical security that we asked about to be less challenging than those related to resource allocation. Officials we interviewed at various levels in our case-study agencies— including at agency-wide offices and facilities—also cited challenges related to the timeliness of funding decisions or prioritizing resource allocation decisions. For example, DOE officials in the agency-wide office responsible for physical security said that once they decide which countermeasures they need to implement to address threats or vulnerabilities, it takes time to obtain funding because the budget cycle spans multiple years. Similarly, officials at a USPS facility we visited said that USPS’s funding process—which involves headquarters prioritizing security funds and reassessing the priorities during the year to take into consideration newly identified security deficiencies—makes it a challenge for the facility to obtain funding as quickly as it would like. A USPS headquarters official said that this might occur because there are other facilities that have higher priority security needs, and that facilities would be able to implement an interim solution while awaiting funding for a long- term solution. Officials must also prioritize funding for physical security along with other agency needs, as described by an official from a VA hospital we visited, who said that the medical center director has to balance funding for physical security needs, such as training for security personnel, with other hospital needs, such as medical equipment and overtime pay. Agency officials we interviewed at our case-study agencies said that the following circumstances contribute to the challenges they experience in allocating physical security resources: Evolving threats. DOE officials at the agency-wide level and a component office discussed the budgetary implications of the need to address constantly changing threats and increased risks, which results in the need for new or increased countermeasures at their facilities. For example, the agency-wide officials said that after the terrorist attacks of September 11, 2001, there was a large focus on security and that as a result, DOE incorporated many new countermeasures at its facilities. The officials stated that the threats have changed over time, and different countermeasures are required to address the new threats. Limited familiarity with aspects of physical security. A USPS headquarters official said that his agency recently took steps to help individuals who make funding decisions in physical security make more informed funding decisions. This official said that USPS improved the existing level of coordination between the individuals responsible for making funding decisions and those with expertise in physical security. According to USPS, this enabled the agency to more effectively prioritize and decide which physical security projects should get funded. Likewise, a police officer at a VA facility we visited described the challenge of identifying appropriate and cost-effective technologies to purchase because his training and expertise are in law enforcement, not in technological aspects of physical security. Limited budgets available for physical security. Agencies throughout the federal government have experienced or are experiencing budget constraints that have limited the funding available for their programs, including physical security programs. Agency officials we interviewed told us that they have limited funds to implement some physical security measures that address identified risks. A USPS official we interviewed said that while baseline physical security measures are in place at each USPS facility, financial constraints, caused by declining revenues at the agency, have affected the agency’s ability to deploy security enhancements at its facilities. For instance, because of limited funding, implementing security enhancements, such as an upgraded closed-circuit television (CCTV) system, may be delayed at a facility until the needed funding becomes available. In addition, an official at FCC stated that funding was not available to implement several recommendations identified in its fiscal year 2012 physical security risk assessments. This official said that while there has not been an immediate impact of not funding these recommendations, the lack of funding results in continued risks not being addressed. However, in instances when a risk assessment identified an immediate or imminent threat, this official said that funding was made available to mitigate or reduce the threat. As discussed, agencies are already using management practices to support oversight of their physical security programs, but according to our survey, agencies make limited use of some of these management practices for the purposes of allocating resources. For example, as shown in figure 3, of the 30 agencies responding to the survey question on whether they have a manager responsible for physical security aspects we asked about, only 13 reported that they have a manager for allocating resources based on risk assessments. In contrast, a majority of agencies reported having managers for other aspects of physical security, including those related to oversight. In addition, as discussed, 6 agencies do not compare risk assessments across facilities and 10 agencies do not have or do not know if they have documented agency- or component- wide performance measures. In addition to supporting oversight, we identified a number of examples of how agencies’ use of management practices can contribute to more efficient allocation of physical security resources across an agency’s portfolio of facilities. Below are examples of how management practices—such as having a physical security manager, comparing risk assessments across facilities, and using performance measures—can aid in more efficient resource allocation. The use of management practices for the purposes of resource allocation is particularly relevant given the challenges cited in this area. DOE’s Office of Inspector General recently reported that the agency could realize efficiencies by consolidating security guard contracts from multiple offices throughout the agency to a single unified office. A physical security manager who is responsible for allocating resources across an agency or across components within an agency can help bring about greater efficiencies in procurement of equipment or personnel at the agency. We have previously reported that comparing physical security across facilities, such as comparing the results of risk assessments across facilities and monitoring the implementation of countermeasures across facilities, is another risk management practice that can help agency officials prioritize resource allocation decisions. In this context, USPS headquarters officials said that they are in the process of improving their capability to compare the results of risk assessments across facilities. They plan to use these comparisons to help them prioritize which facilities in their portfolio have the greatest physical security needs and then direct funding to meet the priority needs. We have also previously reported that using physical security-related performance measures can help agencies justify investment decisions to maximize available resources. Such performance measures have helped security officials in one government agency in Australia allocate resources more effectively across facilities. One performance measure this agency used allowed security officials to monitor the impact of additional security expenditures on a facility’s risk rating while controlling for existing security enhancements that mitigate the risk, such as the number of guard patrols and the adequacy of access control systems. Security officials then used the results to justify spending decisions and prioritize security investments. Although this example is from an agency outside of the United States, the use of such performance measures could be a useful practice to more effectively allocate resources at agencies within the United States as well. As the government’s central forum for exchanging information and disseminating guidance on physical security at federal facilities, ISC is well positioned to develop and disseminate guidance on management practices that can help agencies make funding decisions across a portfolio of facilities. ISC’s key physical security standards can help agencies make resource allocation decisions at individual facilities, but the standards do not currently address management practices for allocating resources across an agency’s entire portfolio of facilities. ISC’s key standards—Facility Security Level Determinations, Physical Security Criteria, and Design-Basis Threat—are intended to be used to determine the types of countermeasures needed at a given facility to provide a baseline level of protection. In this regard, the standards can help agencies make spending decisions at individual facilities, but do not provide direction to guide funding decisions across a portfolio of facilities. ISC officials we interviewed said that compiling information on management practices that support the allocation of resources across a portfolio of facilities would be useful for agencies. Agencies’ physical security programs are mainly informed by their own institutional knowledge and subject matter expertise and, to a lesser degree, ISC standards. A few agencies rely extensively on ISC standards to inform key aspects of their security programs, but others use the standards in a more limited way. Agencies whose officials we interviewed and those we surveyed told us that they do not use ISC standards to a greater degree because the standards are not suitable to their facilities or because their agencies base their security programs on their own physical security standards that they believe obviate the need to use ISC standards. These reasons indicate some agencies lack an understanding of how the standards are intended to be used. As ISC officials stated, the standards are meant to accommodate almost any type of facility and are to be used in concert with other physical security requirements to which agencies may be subject. ISC has an opportunity to clarify to agencies how the standards are intended to be used when it disseminates new or updated standards, provides training to agencies on the standards, or engages in other outreach regarding the standards. Furthermore, ISC can use its quarterly meetings with its member agencies as a forum to share best practices on how the standards are to be used. Such outreach to clarify how the standards can be used may result in the greater use of the standards by ISC member agencies. Likewise, outreach by ISC to executive branch agencies that are not ISC members to clarify how the ISC standards are to be used may also lead to wider adoption of ISC standards. Potential benefits of more widespread use of ISC standards include helping to achieve the purpose of Executive Order 12977 to enhance the quality and effectiveness of security of federal facilities. Moreover, consistent use may help ensure that federal agencies are following a decision-making process that helps ensure that all facilities are covered by a cost-effective baseline level of protection commensurate with identified risks at those facilities. In addition to these benefits, clarifying to executive branch agencies how ISC standards are to be used will also help the agencies understand what the standards require, which is an important first step for ISC as it prepares to monitor and test agencies’ compliance with its standards. Government agencies are faced with increasing security requirements and limited budgets. Effective program management, including the use of management practices such as risk management strategies and a centralized management structure, can help make the most effective use of limited resources. While agencies are already using management practices to support oversight of their physical security programs, agencies make limited use of some of these management practices for the purposes of allocating resources. For example, most agencies do not have a central manager or agency-wide guidelines for allocating resources across facilities based on risk assessments, and some agencies do not compare risk assessments across facilities. Agencies also reported that the greatest challenge they face—among the physical security activities we asked about—is allocating physical security resources. ISC’s key standards do not currently provide guidance on management practices that agencies can use to allocate resources across their entire portfolio of facilities. Agencies’ use of management practices could help agencies make resource allocation decisions strategically for their entire portfolios of facilities and maximize effective resource allocation agency-wide. As the government’s central forum for exchanging information and disseminating guidance on physical security at federal facilities, ISC is well positioned to develop and disseminate guidance that could increase agencies’ use of these practices. We recommend that the Secretary of Homeland Security direct ISC to take the following two actions: To help achieve the purpose of Executive Order 12977 to enhance the quality and effectiveness of security of federal facilities, conduct outreach to all executive branch agencies to clarify how the standards can be used in concert with agencies’ existing physical security programs. To help agencies make the most effective use of resources available for physical security across their portfolios of facilities, develop and disseminate guidance on management practices for resource allocation as a supplement to ISC’s existing physical security standards. This effort could include identifying practices most beneficial for physical security programs and determining the extent to which federal agencies currently use these practices. We provided a draft of this report and the e-supplement that provides summary results of our survey to DHS, DOE, VA, USPS, FCC, and OPM for comment. In written comments, reproduced in appendix III, DHS concurred with the report’s recommendations. DHS said that ISC would conduct outreach with agencies to clarify how its standards can be used and that it would develop guidance to help agencies make the most effective use of resources available for physical security across their portfolios of facilities. DHS also provided technical clarifications, which we incorporated as appropriate. Further, DHS said that it concurred with the e-supplement. DOE and USPS did not provide formal written comments on the draft report or e-supplement, but provided technical clarifications, which we incorporated as appropriate. VA, FCC, and OPM did not have any comments on the draft report or e-supplement. 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 Secretaries of Homeland Security, Energy, and Veterans Affairs; the Postmaster General; the Chairman of the Federal Communications Commission; and the Director of the Office of Personnel Management. 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) 512-2834 or GoldsteinM@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of our review were to examine (1) the sources that inform how federal agencies conduct their physical security programs and (2) the management practices that agencies use to oversee physical security activities and allocate physical security resources. Our review focused on executive branch agencies that have facilities that are not protected by the Federal Protective Service (FPS) and that have facilities located in the United States and its territories. Facilities in the judicial or legislative branches, military facilities, and facilities located abroad were not included in the scope of our review. To help inform our research, we reviewed and synthesized reports and documentation on physical security, and interviewed officials familiar with this issue area. For example, we reviewed prior reports from GAO, the Congressional Research Service, and the Congressional Budget Office on the security of federal government facilities and effective program management, as well as documentation from the Department of Homeland Security’s Interagency Security Committee (ISC), including physical security standards developed by the ISC. We also interviewed physical security officials at the General Services Administration (GSA); ISC; the Department of Defense (DOD); the Department of State; and ASIS International, an organization for security professionals in the public and private sector that has developed physical security standards for the federal government and non-government entities. We conducted a web-based survey of 36 cabinet level and independent agencies in the federal government. The surveyed agencies included all non-military agencies that are required under Executive Order 13327 to report to GSA’s Federal Real Property Profile (FRPP) as well as those that are not required to report to the FRPP but optionally did so in fiscal year 2010. In addition, although not included in the FRPP, we surveyed the U.S. Postal Service (USPS) because of its large number of federal real property holdings. See appendix II for a list of agencies we surveyed. We obtained responses from all 36 surveyed agencies. To determine whether the surveyed agencies were within the scope of our review, we asked questions in the survey to determine if all of their facilities were protected by FPS. Four agencies reported that all of their facilities were protected by FPS, and we therefore did not include them in our review. The remaining 32 agencies are included in our review, and in this report we identify these agencies as the agencies we surveyed. Of the 32 agencies that were within the scope of our review, 16 are primary ISC members, 9 are associate ISC members, and 7 are not members of ISC. We asked chief security officers or equivalents at the surveyed agencies a series of questions with both closed- and open-ended responses regarding physical security within their agency. The survey included questions on (1) the organization and administration of their agencies, (2) sources used to inform physical security programs, (3) security program policy elements and implementation, (4) challenges and best practices in physical security, and (5) the agencies’ building portfolios. We developed the survey questions based on previous GAO work and interviews with agency officials. This report presents survey results in aggregate and does not discuss individual agency responses in a way that would identify them. Summary results for each survey question, except those requiring narrative responses, are available in a supplement to this report, GAO-13-223SP. 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 in person with six different agencies. The agencies were GAO, USPS, the Department of Energy (DOE), ISC, GSA, and the Federal Communications Commission (FCC). We conducted pretests to help ensure that the questions were clear and unbiased, that the data and information were readily obtainable, 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 questionnaire based on the pretests and independent review. The web-based survey was administered from May 15, 2012, to June 27, 2012. Respondents were sent an email invitation to complete the survey on a GAO web server using a unique username and password. To increase the response rate, we followed up with emails and personal phone calls to respondents to encourage participation in our survey. We then analyzed results of the survey, and as part of this survey analysis, we recoded certain responses that were inconsistent. We followed up with individual agencies as needed to ensure we properly understood what needed to be recoded. All data analysis programs were independently verified for accuracy. In addition to the survey, we also conducted case studies with five agencies for more in-depth analysis. These case-study agencies were selected to achieve diversity in total building square footage and levels of public access allowed at facilities. The five agencies we selected for our case studies were DOE, the Department of Veterans Affairs (VA), USPS, FCC, and the U.S. Office of Personnel Management (OPM). Based on our review of agency square footage as presented in the Federal Real Property Council’s FY2010 Federal Real Property Report, we classified DOE, VA, and USPS as large property holders, and FCC and OPM as small property holders. To ensure that we had diversity in levels of public access at agencies’ facilities, we reviewed previous GAO reports and agency websites. For example, from initial interviews, we found that USPS provides a high level of public access to customers where as DOE provides limited public access except for employees and contractors. For each of these five agencies, we interviewed officials in their headquarters offices who are familiar with physical security policy and reviewed documentation on physical security. This report discusses the results of interviews on an individual agency basis, in which case the agency referred to is identified by name, as well as in the aggregate. Since these agencies were selected as part of a non-probability sample, the findings from our case studies cannot be generalized to all federal agencies. To supplement these interviews, we conducted site visits to individual DOE, VA, and USPS facilities. For each of these agencies we visited facilities in New Jersey, West Virginia, and Illinois. We selected these locations and facilities to achieve diversity in geographic area, urban and rural environments, and facility risk level as determined by the agencies. We determined which facilities to visit at each location based on FRPP data for DOE and VA, USPS’s internal real property database, recommendations from agency officials, and research on the agencies’ facilities from their agency websites. The facilities we visited in each state are listed below. Argonne National Laboratory, DOE, Argonne Jesse Brown VA Medical Center, Chicago Cardiss Collins Processing and Distribution Center, USPS, Chicago Princeton Plasma Physics Laboratory, DOE, Princeton Lyons VA Medical Center, Lyons Trenton Main Post Office, USPS, Trenton National Energy Technology Laboratory, DOE, Morgantown Louis A. Johnson VA Medical Center, Clarksburg Clarksburg Processing and Distribution Facility, USPS, Clarksburg At each of these facilities we interviewed facility officials in charge of physical security and reviewed documentation related to physical security. If needed, we also interviewed officials from component offices—which are subordinate entities within an agency, such as bureaus, administrations, and other operating divisions within an agency—who oversee facilities with regard to physical security. This report discusses the results of site visit interviews on an individual basis, in which case the agency referred to is identified by name, as well as in the aggregate. Since these facilities and component offices were selected as part of a non-probability sample, the findings from our facility visits cannot be generalized to all federal agencies. We conducted this performance audit from November 2011 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. We conducted a web-based survey of 36 cabinet level and independent agencies. These 36 agencies are those non-military agencies that are required under Executive Order 13327 to report to the Federal Real Property Profile (FRPP); those that voluntarily reported to the FRPP in 2010; and the U.S. Postal Service which, although not included in the FRPP, is one of the federal government’s largest real property holders. The agencies we surveyed are listed below. Four agencies reported that all of their facilities were protected by FPS, and we therefore did not include them in our review. In addition to the contact named above, Heather Halliwell (Assistant Director), Eli Albagli, Steve Caldwell, Roshni Davé, Colin Fallon, Kathleen Gilhooly, Jill Lacey, Hannah Laufe, Ying Long, Sara Ann Moessbauer, John Mortin, and Nitin Rao made key contributions to this report. | GAO has designated federal real property management as a high-risk area due, in part, to the continued challenge of facility protection. Executive branch agencies are responsible for protecting about 370,000 non-military buildings and structures; the Federal Protective Service (FPS) protects over 9,000 of these. ISC--an interagency organization led by the Department of Homeland Security (DHS)--issues physical security standards for agencies' use in designing and updating physical security programs. GAO was asked to review physical security programs at executive branch agencies with facilities that FPS does not protect. This report examines (1) the sources that inform agencies' physical security programs and (2) the management practices agencies use to oversee physical security and allocate resources. GAO reviewed and analyzed survey responses from 32 agencies. GAO also interviewed officials and reviewed documents from 5 of these agencies, which were selected as case studies for more indepth analysis. The survey and results can be found at GAO-13-223SP . Agencies draw upon a variety of information sources in developing and updating their physical security programs. The most widely used source, according to survey responses from 32 agencies, is the institutional knowledge or subject matter expertise in physical security that agencies' security staff have developed through their professional experience. The second most used source are standards issued by the Interagency Security Committee (ISC). The standards, which are developed based on leading security practices across the government, set forth a decision-making process to help ensure that agencies have effective physical security programs in place. However, according to survey responses, the extent of agencies' use of ISC standards varied--with some agencies using them in a limited way. Agency officials from the case-study agencies said that certain conditions at their agencies--such as the types of facilities in the agencies' portfolios and their existing physical security requirements--contribute to limited use of the standards. ISC officials said that the standards are designed to be used by all agencies regardless of the types of facilities or their existing security programs; the standards can be customized to the needs of individual facilities and do not require the use of specific countermeasures. ISC has an opportunity to clarify how the standards are intended to be used when it trains agencies on them; during quarterly meetings with member agencies, where ISC can share best practices on the use of the standards; or when ISC engages in other outreach on the standards. Clarifying how agencies can use the standards may result in their greater use. Greater use of the standards may maximize the effectiveness and efficiency of agencies' physical security programs. Agencies use a range of management practices to oversee physical security activities. For example, 22 surveyed agencies reported that they have a manager at the agency-wide level responsible for monitoring and overseeing physical security at individual facilities. In addition, 22 surveyed agencies reported that they have some documented performance measures for physical security. Such performance measures can help agencies evaluate the effectiveness of their physical security programs and identify changes needed to better meet program objectives. Agencies' use of management practices such as having a physical security manager responsible for allocating resources and using performance measures to justify investment decisions could also contribute to more efficient allocation of physical security resources across an agency's portfolio of facilities. However, some agencies make limited use of such practices to allocate resources. For example, only 13 reported that they have a manager for allocating resources based on risk assessments. In contrast, a majority of agencies reported having managers for other aspects of physical security, including those related to oversight. Greater use of management practices for allocating resources is particularly relevant given that the surveyed agencies identified allocating resources as the greatest challenge. As the government's central forum for exchanging information and disseminating guidance on physical security, ISC is well positioned to develop and disseminate guidance about management practices that can help agencies allocate resources across a portfolio of facilities. However, ISC's key physical security standards do not currently address management practices for allocating resources across an agency's entire portfolio of facilities. DHS should direct ISC to conduct outreach to executive branch agencies to clarify how its standards are to be used, and develop and disseminate guidance on management practices for resource allocation as a supplement to ISC's existing physical security standards. DHS concurred with these recommendations. |
There are certain statutory authorities under which the President may draw down articles and services from the inventory and resources of U.S. government agencies. Section 506(a)(1) of the Foreign Assistance Act of 1961, as amended, allows for drawdowns of defense articles from the stocks of DOD and defense services of DOD and for military education and training to foreign countries or international organizations in emergency situations. Before exercising this authority, the President must determine and report to Congress that an unforeseen emergency exists, requiring immediate military assistance that cannot be met under any other law. This special authority was more recently used in 2013 to provide airlift and refueling support for counterterrorism efforts in Mali; in 2014 to provide defense articles and services, as well as military education and training to assist the government of Iraq in combating the Islamic State of Iraq and Syria; and in 2015 to provide military assistance to Ukraine. (See fig. 1.) The maximum aggregate value of drawdowns under Section 506(a)(1) cannot exceed $100 million in any fiscal year. Section 506(a)(2) of the Foreign Assistance Act, as amended, authorizes the President to draw down articles and services from the inventory and resources of any U.S. government agency and military education and training from DOD and use them to assist foreign countries or international organizations in a number of nonemergency situations. Before exercising this authority, the President must first determine and report to Congress that any such drawdown is in the national interest of the United States. The maximum aggregate value of drawdowns under Section 506(a)(2) is $200 million in any fiscal year, with no more than $75 million provided from DOD inventory and resources. Section 552(c)(2) of the Foreign Assistance Act, as amended, authorizes the President to direct the drawdown of commodities and services from the inventory and resources of any U.S. government agency. In order to exercise this authority, the President must determine that an unforeseen emergency exists, that providing assistance in amounts in excess of funds otherwise available is important to the national interests of the United States, and that the unforeseen emergency requires the immediate provision of such assistance. The maximum aggregate value of drawdowns under Section 552(c)(2) in any fiscal year is $25 million. Since 2011, there have been 13 drawdowns of defense articles and services pursuant to the three authorities cited above (see table 1). None of these drawdowns used the Section 506(a)(2) authority. State and DOD are the government agencies primarily charged with planning and executing uses of drawdown authority. State officials said they typically begin the process by developing drawdown proposals under the above authorities when an international crisis arises. Since 2011, officials said they have used drawdowns in conflict situations, such as in Ukraine and Syria. State’s Bureau of Political-Military Affairs along with DOD’s Defense Security Cooperation Agency (DSCA), the National Security Council, the Executive Office of the President, and in some cases other executive branch agencies participate in an interagency process to develop a recommendation for articles and services that the U.S. government should provide under the drawdown authorities (see fig. 2). Based on the estimated value and availability of the articles and services, the agencies agree on the parameters of the drawdown to recommend to the President, and State prepares a justification package that includes the Presidential Determination for the President’s signature, which is published in the Federal Register. The President may also delegate authority to make the determination to the Secretary of State, and documents this delegation in a memorandum that is published in the Federal Register. State notifies Congress of the President’s intent to exercise his authority before the President signs the determination and then notifies Congress once the determination has been made. According to State, the steps described above can be completed in about 2 weeks but usually require about 2 months before the implementation of a drawdown can begin. DSCA officials said they execute drawdowns after the President signs the determination by working with the military services and other DOD entities to determine what specific assistance the military services will provide and which of the services will provide it. A DSCA country program director creates an execution order with a maximum number of the articles or services to be provided through the drawdown, which may be updated over time. The country program directors work directly with the military services to track the execution of the drawdown, and the military services are responsible for providing execution data to update an automated database. The military services provide the defense articles and services they have available in their existing inventories. The military services cover the costs of the drawdown from their existing funds and without new appropriations. State officials said that the authority for a drawdown does not expire, and that the drawdown can be used until the maximum authorized dollar amount established for it in the Presidential Determination is reached, or until the crisis has been dealt with or the foreign policy goal has been met. State did not have a means to readily access justification package documents related to presidential use of drawdown authority because it had not assigned responsibility or established a process for centrally managing these documents. Although State policy specifies that the Bureau of Political-Military Affairs, Office of Regional Security and Arms Transfers, leads State and interagency processes for presidential drawdowns, the bureau does not manage all of the key documents associated with the use of drawdown authority, nor is there a mechanism to centrally manage such documents. Standards for Internal Control in the Federal Government also indicates that all documentation and records should be properly managed and maintained, and that documentation should be readily available for examination. Consequently, it took several months for State to fully respond to our request for key documentation on drawdowns, which includes memorandums to the Secretary of State and Office of the President, and a memorandum of justification containing background information about the crisis a drawdown is intended to address. State officials had to contact individual bureaus that worked on the drawdowns in fiscal years 2011 to 2015 to recover the justification packages that contained background information and context for why the drawdowns were authorized. In addition, State officials initially were not able to readily provide documentation for several drawdowns, such as the 2011 drawdown to Libya, for which State produced documents over 4 months later. State produced documents for a drawdown to Iraq 8 months after our original request. State officials also confirmed that they do not maintain drawdown documents in one centralized place, but that individuals in each of State’s six regional bureaus may maintain documents on drawdowns affecting countries within their purview. We found that there was no single point of contact responsible for consolidating all the drawdown documentation and no mechanism established to maintain key documents related to the President’s drawdown. Without a mechanism to ensure that key documents relating to the use of drawdown authorities are readily available, State is unable to produce documentation on drawdowns in a timely manner, consistent with federal internal control standards. DOD has not closed and has not provided certain reports to Congress on the execution of drawdowns since 2011 despite congressional interest in receiving information regarding assistance provided through drawdowns. In particular, Section 506(b)(2) of the Foreign Assistance Act, as amended, requires that the President keep Congress fully and currently informed of all defense articles, defense services, and military education and training provided under Section 506, including providing a report to Congress detailing what was delivered. The requirement to provide a report does not specify a date by which the reports must be submitted, but instead states that these reports shall be provided upon delivery of such articles, or upon completion of the services or education and training. DOD has provided no Section 506 reports for the eight presidential drawdowns undertaken pursuant to this authority in fiscal years 2013 through 2015. From 2010 until the end of calendar year 2013, DOD was also responsible for providing an annual report to Congress on drawdowns under Section 1247 of the National Defense Authorization Act for Fiscal Year 2010. DOD provided reports to Congress in response to this requirement. Under DOD guidance, DSCA is primarily responsible for preparing Section 506 reports. DSCA practice has been that this reporting requirement arises when all articles, services, or both have been delivered, according to DSCA officials. DSCA officials noted that all of the drawdowns since 2011 are still being executed, meaning that there are still articles and services to be delivered. DSCA officials also noted that they work with State’s Bureau of Political-Military Affairs to determine the best time to close a drawdown as completed, and noted that State has not determined to close out any drawdowns since 2011. State officials said that they do not have an active role in DSCA’s reporting to Congress but that they would expect to review Section 506 reports before DOD submits them to Congress. According to DSCA’s guidance, a termination date of not more than 18 months after the initial execution order will be stated in the execution order, unless otherwise directed by the country program director. DSCA officials stated that the termination date and the closure date that would trigger the reporting requirement are not the same. They also stated that if a particular drawdown reached its termination date with authority left (for example, only $10 million of the $25 million authorized has been used), DSCA would not terminate the drawdown if a crisis is still ongoing. For example, in December 2013 the President authorized $60 million in assistance to support African Union-led operations in the Central African Republic, and as of 2015, over $26 million remained undelivered, and the drawdown remains active more than 2 years later. In addition, DSCA officials stated that they may choose not to close a drawdown, even if all the available authority has been used, if a subsequent related drawdown is still active. For example, in 2013, the President authorized $50 million under Section 506(a)(1) to provide airlift support to Chad and France to assist in their operations in Mali. According to DSCA officials and documents, this drawdown has reached its authorization level but has not been closed because DSCA is waiting on subsequent drawdowns of the same nature to be completed before it reports to Congress. Although DOD has not submitted Section 506 reports, it submitted Section 1247 reports until this reporting requirement terminated at the end of calendar year 2013. The Section 1247 reports contain information about all the articles or services delivered, as well as the military service that is implementing the drawdown, the quantity of items delivered, and the value. They addressed elements related to those required under Section 506(b)(2) and included drawdowns that DOD still considers to be in an active status. As noted earlier, State also notifies Congress of the President’s intent to exercise his authority before the President signs the determination and then notifies Congress once the determination has been made. These notifications, however, do not address the information required in Section 506 reports. Table 2 shows the status of notifications of and reports to Congress on presidential drawdowns of defense articles and services since 2011. Although State has consistently notified Congress of each drawdown in advance of the authority being used, without receiving Section 506 reports on the assistance delivered during the course of the drawdown, Congress is not receiving comprehensive and current information about the extent of the President’s use of drawdown authority. Drawdowns give the President the flexibility to provide defense articles and services, and military education and training, to foreign countries and international organizations in a time of crisis without first seeking specific appropriations from Congress. Federal internal control standards note that documents should be readily available for examination. However, while State’s Bureau of Political-Military Affairs leads State and interagency processes for presidential drawdowns, the bureau does not manage all of the key documents associated with the use of drawdown authority, nor is there a mechanism to centrally manage such documents. State’s lack of a single point of contact or centralized mechanism for maintaining drawdown documents weakens its ability to make key documents associated with the justification for drawdowns readily available. Furthermore, in making the accommodation in the Foreign Assistance Act that allows drawdowns to occur without first seeking specific appropriation from Congress, Congress required in Section 506(b)(2) that the President keep it fully and currently informed on the use of Section 506 authority. While Congress prescribed no specific frequency for providing Section 506 reports, DSCA has not submitted any Section 506 reports since 2011 to Congress on drawdowns because, according to DSCA, the drawdowns have not yet been closed as completed. Without periodic reports to indicate the status of the drawdowns under this authority, Congress does not have detailed information on the extent of the President’s use of drawdown authority. We are making the following two recommendations: To help ensure that key State documents and records on the presidential use of drawdowns are readily available, the Secretary of State should assign responsibility or develop a mechanism for maintaining State’s justification package documents. To help ensure that Congress has the information it needs on the President’s use of drawdown authority, the Secretary of Defense should direct DSCA to report more frequently to Congress on information outlined in Section 506(b)(2) of the Foreign Assistance Act, as amended, even if delivery of all the articles and services authorized has not been completed, or if the crisis is still ongoing. We provided a draft of this report to DOD and State for comment. DOD agreed with our recommendation, but State did not. DOD’s and State’s written comments are reprinted in appendices II and III, respectively. In its written comments, DOD concurred with our recommendation that it report more frequently to Congress on the information outlined in Section 506(b)(2) of the Foreign Assistance Act, as amended. DOD also provided us with technical comments, which we incorporated into the report as appropriate. In its written comments, State did not concur with our recommendation that the Secretary of State should assign responsibility or develop a mechanism for maintaining State’s justification package documents. State noted that there are officials responsible for maintaining key drawdown documents. State also noted that the Office of Regional Security and Arms Transfers is the lead office for security related drawdowns and maintains the key drawdown documents. In our report, we do note that State’s Bureau of Political-Military Affairs, Office of Regional Security and Arms Transfers, leads State and interagency processes for presidential drawdowns. However, we found that the bureau was unable to readily produce a complete list of uses of presidential drawdown authorities. We further noted that the bureau does not manage all the key documents within the office associated with the use of drawdown authority, nor is there a mechanism to centrally manage such documents. We based this information on multiple interviews with State officials, including those who confirmed on December 4, 2015, that they do not maintain a central drawdown repository or office dedicated to drawdowns. For example, an Office of Regional Security and Arms Transfers official said that she had knowledge of and documentation for only the specific drawdowns that she worked on. Other Bureau of Political-Military Affairs officials concurred with her statement. As such, there has been no one point of contact within the Bureau of Political- Military Affairs or State to consolidate all of the information and documentation regarding drawdowns. The State officials also said that State had to contact individuals who worked on the documents to make them available. State’s written comments further state that it is more useful to have a single Regional Security and Arms Transfers officer responsible for leading the entirety of the response to an emergency, including any drawdowns and the documents related to them, rather than having a single officer responsible for all drawdowns. We believe it would be beneficial for State to ensure that key documentation for presidential drawdowns is centrally maintained. According to federal internal control standards, documentation provides a means to retain organizational knowledge and mitigate the risk of having that knowledge limited to a few personnel, as well as a means to communicate that knowledge as needed to external parties, such as external auditors. By not implementing this standard and relying on individual officials to maintain drawdown documentation, State could not readily identify and provide us with documentation for drawdowns if those officials responsible for specific drawdowns were no longer with the bureau. The lack of a central office or official responsible for maintaining documents relevant to drawdowns apparently accounted, at least in part, for State’s not providing us with a list of all drawdowns since 2002, or with documentation for drawdowns prior to 2011. State also disagreed with the amount of time it took to provide documents. However, we stand by our finding that it took State several months to fully respond for our request for key documents. Specifically, on July 29, 2015, we requested a list of all the uses of presidential drawdown authorities and associated documents. We followed up with another written request for these same documents on August 4, 2015. On September 8, 2015, State’s Bureau of Political-Military Affairs provided documents for seven drawdowns, noted it had some additional classified documents related to the original seven drawdowns, and said that it had no additional documentation. At that time State still had not provided a complete list of its uses of drawdown authorities. We subsequently identified five other uses of drawdown authorities by examining Federal Register notices and sent requests for the documentation for these drawdowns. In one case (Libya) that we highlighted in the report, in November 2015 we again requested that State provide key documents related to this drawdown. State did not provide the key documents until January 2016—over 4 months after the original document request. Overall, it took State 8 months, from August 4, 2015—the date of our written request—until March 17, 2016, to provide the documents related to all 13 uses of drawdown authority since 2011. We are sending copies of this report to the appropriate congressional committees, the Secretary of State, the Secretary of Defense, 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) 512-7331 or johnsoncm@gao.gov. 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 IV. This report examines, since 2011, (1) the U.S. government’s process for planning and executing drawdowns; (2) Department of State (State) efforts to manage records related to decisions to use drawdown authorities; and (3) the status of drawdowns and Department of Defense (DOD) efforts to report to Congress on defense articles, defense services, and military education and training delivered through drawdowns to recipient countries or international organizations. To assess the U.S. government’s process for planning and executing drawdowns, we interviewed officials from State and DOD, two agencies charged with planning and executing uses of drawdown authority, particularly with respect to defense drawdowns. We contacted the National Security Council to determine whether it had a listing of the uses of drawdown authority during the current administration, but the official who replied indicated that the agency did not have any such information. We reviewed the White House website on Presidential Actions and Presidential Memorandums for drawdowns and Delegation of Authority memorandums. We reviewed the Federal Register notices on drawdowns from fiscal years 2002 to 2015 as the source of publically available information on drawdowns. We chose 2002 because that was the date of publication of our prior report on drawdowns, but we found that there was a period from fiscal year 2007 to fiscal year 2010 when there were no uses of drawdown authority, so we focused this report on drawdowns in fiscal years 2011 to 2015. To assess the reliability of the data, we interviewed cognizant officials at State and DOD, and compared the data in the Federal Register to documents we obtained from DOD, and determined that they were sufficiently reliable for showing the drawdowns in fiscal years 2011 through 2015. To assess State efforts to manage records related to decisions to use drawdown authorities, we interviewed State officials and reviewed their available documentation on drawdowns. We also reviewed Federal Register notices on drawdowns to determine whether the documents State provided on drawdowns represented all drawdowns from 2011 through 2015. We also reviewed State’s Foreign Affairs Manual and Foreign Affairs Handbook to determine who within State is responsible for presidential drawdowns and to review State’s policies on records management. To assess the status of drawdowns and DOD efforts to report to Congress on defense articles, defense services, and military education and training delivered through drawdowns to recipient countries or international organizations, we requested copies of all Section 506 reports submitted to Congress, of which there were none, and of any other reports or information from 2011 through 2015. This included a review of DOD’s Section 1247 reports to see which were submitted and what reporting elements they contained. We also interviewed DOD officials about how they collect and maintain data on drawdowns under presidential authorities and their rationale for not submitting any Section 506 reports. We reviewed DOD data on drawdowns from 2011 to 2015 to determine the status of drawdowns, including the termination date and the amount of authorization left on the drawdowns. To assess the reliability of these data, we interviewed cognizant DOD officials about how they collect and maintain data on drawdowns, and determined that the data were sufficiently reliable for reporting on the status of drawdowns. We reviewed a sample Section 506 report in the Defense Security Cooperation Agency’s (DSCA) Handbook for Foreign Assistance Act (FAA) Drawdown of Defense Articles and Services to see what reporting elements it would contain if one were submitted. The handbook also provided information about DSCA’s process for executing drawdowns, such as setting a termination date for drawdown execution orders and congressional reporting requirements. We conducted this performance audit from July 2015 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contacts named above, Jeff Phillips (Assistant Director), Tom Gosling (Assistant Director), Leah DeWolf (analyst in charge), David Dayton, Martin de Alteriis, Susannah Hawthorne, Jeff Isaacs, Amie Lesser, Eddie Uyekawa, and Alex Welsh made key contributions to this report. | The President has special legal authorities that allow him to direct the drawdown of defense articles, such as vehicles, food, or medical equipment, and services, such as airlift support, as well as military education and training, to provide assistance in response to an international crisis. Since 2011, there have been 13 drawdowns. The President may authorize up to $325 million each year in drawdowns. A House Armed Services Committee report accompanying a bill for the National Defense Authorization Act for Fiscal Year 2016 included a provision for GAO to conduct a review of drawdown authority. This report examines, since 2011, (1) the U.S. government's process for planning and executing drawdowns, (2) State efforts to manage records on decisions to use drawdown authorities, and (3) the status of drawdowns and DOD efforts to report to Congress on defense articles and services delivered through drawdowns to recipient countries or international organizations. GAO analyzed documents relevant to drawdowns and interviewed State and DOD officials. Drawdown proposals to provide U.S. assistance for an international crisis are typically developed through an interagency process led by the Departments of State (State) and Defense (DOD), and involving the National Security Council and the Executive Office of the President. State and DOD work with other agencies to determine whether to use a drawdown authority and identify the assistance to be provided. Based on the estimated value and availability of the articles and services, the agencies agree on the parameters of the drawdown. State prepares a justification package, and the President signs a Presidential Determination to authorize the drawdown. DOD then executes the drawdown by working with the military services to provide the articles and services. State policy specifies that the Bureau of Political-Military Affairs leads State and interagency processes for presidential drawdowns. Key documents for this process include a memorandum of justification containing background information about the drawdown. However, inconsistent with federal internal control standards, State lacked readily available documents related to drawdowns, and there is no central office or official responsible for maintaining key drawdown documents. As a result, it took several months for State to fully respond to our request for drawdown documents. For example, State officials initially did not provide documentation for the 2011 drawdown to Libya, but provided the documents over 4 months later. Without a mechanism to ensure that key documents relating to the use of drawdown authorities are readily available, State is unable to produce documents in a timely manner. DOD provided some reports to Congress on the execution of drawdowns in 2011 and 2013. However, DOD has not submitted certain reports to Congress since 2011 despite a legal requirement to keep Congress fully and currently informed regarding assistance provided through drawdowns under one specific authority. DOD officials said that they have not submitted these reports because they have not closed any of the 13 drawdowns since 2011— articles and services are still to be delivered. Nevertheless, without periodic reports to indicate the status of drawdowns, Congress may not have detailed information about the extent of the President's use of drawdown authority. GAO recommends that (1) State should assign responsibility or establish a mechanism to maintain key drawdowns documents and (2) DOD report more frequently on defense articles and services provided through drawdowns. State did not concur with GAO's recommendation to establish a mechanism to maintain documents, but GAO stands by its recommendation, as discussed in the report. DOD agreed that it should report more frequently on drawdowns. |
Congress established the U.S.-China Economic and Security Review Commission (USCESRC) on October 30, 2000, through Public Law No. 106-398, which transferred to USCESRC the facilities, material, and staff of the U.S. Trade Deficit Review Commission. According to the commission’s charter, USCESRC must monitor and assess the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China. It must report results of its work in annual reports to Congress, addressing specific economic and security issue areas. The commission has had an annual budget of about $3 million since fiscal year 2005 and has requested an additional $1 million to fund its operations in fiscal year 2008. Appendix III provides additional details on the commission’s appropriations and expenditures. The commission consists of 12 commissioners, all but 3 of whom hold other positions. The leadership of the Senate and the House of Representatives appoint the commissioners to serve 2-year terms, which are staggered. In turn, the commissioners select a chairman and vice chairman from among themselves. The chairman and vice chairman rotate between Democratic and Republican appointees every year. Currently, a Democratic appointee is serving as chairman and a Republican appointee as vice chairman. The commission meets at the call of the chairman. A majority of commissioners must be present for the commission to conduct business. Appendix II depicts a timeline of commission-related events, including the election dates of all of the chairmen and vice chairmen since the inception of the commission. Each commissioner is compensated at an hourly rate computed from the annual rate of basic pay prescribed for level IV of the Executive Schedule (ES-IV). Generally, the commissioners submit a signed statement of hours worked on commission activities for a given pay period, and they are reimbursed for that time. However, a commissioner may not be reimbursed more than the annual rate of pay for an ES-IV in a given fiscal year, which was $143,000 for fiscal year 2006. The commissioners are supported by an executive director, and program and administrative support staff. The current executive director is a senior executive detailed from the Department of Commerce to the commission under a reimbursable agreement. Nine of the 11 staff are excepted service federal employees, who have 1-year appointments and serve at the discretion of the commission. Two administrative staff, including the associate director, work for the commission under 1-year personal service contracts. To produce its report, the commission undertakes activities such as holding hearings, conducting research, and traveling on fact-finding missions to China and other countries. At the direction of the commission, a commissioner or commissioners may hold hearings. Currently, at least one Democratic appointee and one Republican appointee co-chair each hearing. For example, the commission held 14 hearings in 2005 and 8 hearings in 2006 and plans to hold 8 hearings in 2007. Also, the commission relied on internal research from its professional staff and commission-sponsored external research by subject matter experts. The commission has not fully complied with the statutory requirements set forth in its charter. The commission has covered the required economic and security issue areas in its reports. However, since it was established in 2000, the commission has issued all of its annual reports after the required deadline and failed to issue an annual report in 2003. According to the commission’s charter, the commission is required to submit an annual report to Congress no later than June 1. The commission submitted interim reports to Congress in 2006 and 2007 in an effort to comply with this deadline. Further, the commission has implemented those FACA provisions it is capable of applying. The commission has complied with its statutory charter with regard to the subjects on which it reports and the scope of its activities. The commission has broad discretion to examine matters related to U.S.-China economic and security issue areas. Since the commission was established in 2000, Congress amended the statutory charter twice to modify the language related to the scope of its activities. We compared the mandated issue areas and annual report contents and found the commission’s annual reports covered the statutory economic and security issue areas. Despite statutory changes to the charter over time to narrow the number and extent of reporting topics, the commission has broad discretion on what specific matters to examine. The commission has the authority to interpret its own regulations and statute. The commission’s statutory charter was amended three times, and the second and third amendments modified the number of issue areas and revised the language related to the scope of the economic and security issue areas. The statutory charter originally mandated that the commission’s annual report “include, at a minimum, a full discussion of” the 10 issue areas. In 2003, the second amendment to the commission’s charter reduced the number of issue areas from 10 to 9 and revised the language related to the scope of reporting to instruct the commission to “focus, in lieu of any other areas of work or study” on the 9 issue areas. In 2005, the third amendment to the commission’s charter reduced the number of issue areas from 9 to 8 and revised the language related to the scope of reporting to instruct the commission to “investigate and report exclusively on each of the following” 8 issue areas. Table 1 compares the issue areas the commission is mandated to report on in the annual report. Our analysis of the content covered in the commission’s four public annual reports found that the economic and security issue areas were covered as required. We found the commission’s 2002 annual report covered the 10 economic and security issue areas mandated at the time. Some chapters address more than one reporting requirement and are listed multiple times. Furthermore, chapter 4 of the 2002 annual report covers political and civil freedoms, which was not a specified issue area but was within the scope of reporting because the charter originally mandated the commission’s annual report “include, at a minimum,” the 10 issue areas. Appendix IV provides details on the issue areas covered by the commission’s 2002 annual report. We found the commission’s 2004 and 2005 annual reports covered the 9 economic and security issue areas mandated at the time. Appendix V provides details on the 9 issue areas covered by the commission’s 2004 and 2005 annual reports. We found the commission’s 2006 annual report covered the 8 economic and security issue areas currently mandated. See table 2 for the 8 issue areas covered by the commission’s 2006 annual report. According to the chairman, the commissioners discuss the mandate in relation to the scope of activities and reporting. Furthermore, the commissioners discuss the scope of the issue areas identified in the commission’s statutory charter before reaching consensus on the annual work plan. While acknowledging that the mandate restricts the scope of reporting to the eight issue areas, several commissioners noted that they sometimes debate what the commission should cover under these areas because they leave room for interpretation. The chairman stated that the commissioners use the issue areas to plan commission activities, including research, hearings, and overseas trips. The commission has broad discretion to conduct activities to fulfill its reporting requirement and can base its reports on a variety of activities. During the commission’s quarterly business meetings at the conclusion of one calendar year and the beginning of the next, commissioners discuss the scope of activities identified by the commission’s statutory charter and reach consensus on the annual work plan. According to its statutory charter, the commission can hold hearings, conduct internal and external research, secure relevant information from U.S. departments and agencies through classified and unclassified briefings, and carry out fact-finding missions abroad. For example, the commission used all of these methods to collect information for the 2006 annual report. Specifically, the commission held eight public hearings on the required economic and security related issue areas and delivered a letter to Congress summarizing significant findings and providing interim recommendations after each. The commission authorized external research contracts on issues, such as China’s antisatellite and space warfare activities and China’s oil and gas investments abroad. The commission received briefings from several U.S. agencies, such as the Department of Defense and the intelligence community. An official commission delegation conducted a fact-finding mission to China, Hong Kong, and Taiwan in June 2006. During the 2007 reporting cycle, the commission has held five public hearings as of July 2007 and plans to hold three others through September 2007. All examine topics related to the eight mandated economic and security issue areas. The commission also plans to award external research contracts. For example, the commission recently selected a proposal submitted in response to an advertised request for proposals (RFP) and awarded a contract providing for a report tracing the parts and components supply chains for three key U.S. weapon systems. Throughout 2007, the commission plans to receive classified and unclassified briefings from U.S. departments, agencies, and the intelligence community. A commission delegation traveled to China and Hong Kong in April 2007, and another delegation of commissioners and staff traveled to Taiwan and India in August 2007. Since its inception, the commission has failed to submit its annual report to Congress in time to comply with the statutory reporting deadline. The commission’s charter requires the commission to submit its annual report to Congress no later than June 1 each year. The commission has issued its annual reports late or, in one instance for reasons discussed below, not at all. The commission was established in October 2000 and was not required to submit its first report until March 1, 2002. The charter was amended on November 12, 2001, to change the report issuance date to June 1, 2002. Congress modified the reporting date from March to June because, according to a former executive director, the commission “was getting organized and it would have been difficult to produce a report by March.” Even with the congressional amendment extending the reporting date 3 additional months, the commission issued its 2002 annual report on July 15, 2002. Our analysis of the commission’s annual report issuance dates reveals inconsistent submission dates, with longer delays in 2005 and 2006. For example, the delays in the issuance dates ranged from 9 days in 2004 to 161 days in 2005. The final 2006 report was issued to Congress 151 days after the deadline. To comply with the June 1 deadline, the commission submitted interim reports in 2006 and 2007. However, the former was 20 days late; the latter was on schedule. In its budget request for fiscal year 2008, the commission has requested the issuance date for the annual report be extended to December 1. Table 3 shows the June 1 annual report issuance dates since the inception of the commission and number of days each annual report was late. The commission has not issued its annual reports on time because appointment dates for commissioners and the commission work cycle activities are not aligned with the annual report issuance deadline. Figure 1 shows this misalignment. The commission has scheduled its work cycle activities according to when commissioners are appointed, not by the statutory June 1 annual reporting date. Currently, the commission’s work cycle activities for developing, producing, and submitting its annual report to Congress is from January through November. The commission approves its annual work cycle schedule after the new chairman and vice chairman and the new commissioners are in place early in the calendar year. According to the commission’s charter, the President pro tempore of the Senate, acting on the recommendation of both majority and minority leaders, appoints six commissioners, and the Speaker and the Minority Leader of the House each select three commissioners for 2-year terms that begin in January and end in December of the following year, and they can reappoint commissioners; the terms are staggered. They should appoint commissioners no later than 30 days after the date on which each new Congress convenes. Congress regularly convenes on January 3, unless Congress by law designates a different day to convene. Thus, they normally should appoint commissioners no later than February 2. In practice, they have appointed 26 of 45 commissioners after this date. For example, in 2003, the commission did not produce an annual report because the required number of commissioners to form a quorum was not appointed or reappointed until May 6, 2003, giving the commission only 26 days to issue its annual report by the June 1 deadline. Figure 2 shows the actual ranges of commissioner appointment dates. The current misalignment makes it difficult for the commission to develop and produce the annual reports on schedule. The chairman, vice chairman, and executive director estimate that the commission needs about 11 months to conduct the work and research necessary to produce a robust annual report that addresses the required economic and security issue areas and that reflects bipartisan consensus. Thus, moving the annual report submission date or the timing of commissioner appointments would provide a work cycle with enough time to develop and produce a report on schedule, according to the commission. If the annual work schedule were aligned with the June 1 deadline, without changing the commissioners’ terms, newly appointed commissioners would be required to participate in determining key findings and recommendations to Congress based on activities that occurred before they were appointed, according to the three most recent chairmen. Furthermore, the composition of the commission could change significantly in the middle of the reporting cycle. For example, in 2007, the 2-year terms of seven commissioners, including the current chairman and vice chairman, will expire on December 31, 5 months before the 2008 report is due. The commission will not have a quorum to conduct its work until at least two commissioners are (re)appointed. In its budget request for fiscal year 2008, the commission has requested Congress to move the annual report issuance date to December 1. The commission has, to the extent possible, taken steps to comply with FACA and adhere to those provisions it can implement. FACA was designed to provide for the accountability, management, and transparency of advisory committees located within the executive branch. FACA can apply to federal advisory committees created by the President, other executive branch entities, or an act of Congress. Initially, the legislation establishing the commission exempted it from FACA. In November 2005, Congress amended the commission’s charter so as to apply FACA to its activities. While the commission is in compliance with those provisions of FACA it can implement, according to commissioners and commission officials, implementing some provisions has been problematic. The commission is an independent legislative branch entity, and neither the legislation mandating applicability of FACA nor its underlying history provides the commission with guidance for how it should implement FACA. The commission therefore consulted with GSA—which is responsible for executive branch compliance with FACA—on how it might implement FACA. Based on these consultations and its own interpretation of FACA, the commission determined that it could implement certain FACA provisions but not others. Table 4 shows the FACA provisions and which of these the commission determined it could implement. According to GSA officials, the commission has taken reasonable steps to comply with the spirit of FACA. For example, after consulting with GSA, the commission sent an official to a 2-day GSA training session on how to comply with FACA. Also, the commission has adhered to the provisions of FACA that require advisory committees to allow the public to attend meetings and file statements. Specifically, the commission currently advertises its meetings and holds public hearings and open annual report drafting sessions. However, the commission cannot implement the FACA sections imposing certain administrative requirements on agency heads because those sections apply to commissions operating within larger agencies. Opening annual report drafting sessions to the public is problematic, according to the commission, because the presence of public observers, including Chinese and other international press and foreign officials, inhibits the discussion of economic and security-related issues among commissioners. For example, the 2006 annual report drafting sessions were open to the public, and the commission’s discussions and personal opinions related to findings and recommendations were reported in the national and international press prior to the commission reaching consensus. Additionally, drafts of the commission’s annual report were made available to the media prior to commissioners reaching final concurrence on official findings and congressional recommendations. As a result, the commission included in its fiscal year 2007 budget a request that FACA no longer be applied to it. However, in its fiscal year 2008 budget request, the commission dropped the removal request. Weaknesses in the current organizational structure and management policies and procedures hinder the effectiveness of the commission’s operations and put the commission at risk of fraud, waste, abuse, and mismanagement. According to internal control standards for the federal government the organization structure provides the general framework for management to plan, direct, and control operations to achieve its objectives and internal control activities are designed and implemented to help ensure that management’s directives are carried out. Specifically, in terms of its organizational structure, the commission has not formally defined and assigned key duties and responsibilities that are typically divided or segregated among different people in order to reduce the risk of error or fraud. The commission has heavily relied on its associate director for managing most administrative operations and staff, and commissioners have generally played a passive role in the management of the commission. In terms of management policies and procedures, the commission has not appropriately documented and communicated human capital, procurement, ethics, and financial management policies and procedures to commissioners and staff. Weaknesses in the commission’s current organizational structure for managing administrative operations and staff hinder its effectiveness and put the commission at risk of fraud, waste, abuse, and mismanagement. According to the control environment standard, management should ensure that the organizational structure, among other things, is appropriate for the organization’s size and functions, clearly defines areas of responsibility, appropriately delegates authority, and establishes a suitable hierarchy for reporting. Specifically, the commission has not defined and assigned key management duties and responsibilities, which are typically divided or segregated among different people. Also, most if not all of these duties and responsibilities have fallen on a single individual, the associate director. The commission has not formally assigned key management duties and responsibilities in accordance with the control environment standard. Specifically, we found that the commission has not formally assigned human capital, procurement, or budgeting and financial management and reporting responsibilities to any administrative staff. The only exception is that the commission designated the associate director as the ethics officer, making her responsible for, among other things, helping commissioners and staff address ethics and conflict-of-interest matters. Regardless of its size, under both the control environment standard and human capital principles, an organization should have individuals with specialized knowledge, skills, and abilities necessary to perform one or more of these complex and technical administrative responsibilities effectively. Commission officials told us during our review that they recognize the commission has to clarify administrative roles and responsibilities, identify individuals who will be responsible for them, and segregate duties among staff. Figure 3 shows the organizational structure of the commission and, illustrates, among other things, that the commission formally has an ethics officer but no human capital, procurement, financial, or other administrative officers and no legal counsel. This failure to formally assign administrative responsibilities across the organization hinders checks and balances and monitoring, undermines segregation of responsibilities, compromises the accountability for and effectiveness of administrative procedures, and puts the commission at risk. For example, the commission has not formally assigned responsibility for procurement to a qualified official. The chairman, executive director, and associate director have played de facto roles as procurement officers by signing contracts, and currently the executive director is acting as procurement officer for most research contracts. In the absence of a formally designated procurement officer, it is not clear who has the authority to negotiate and sign contracts, who should receive goods and services and maintain records, and who should monitor procurement decisions and activities, compromising the integrity of procurement activities. Also, it is not clear whether individuals carrying out these activities have the necessary background, expertise, experience, and training to do so. Since its inception, the commission has delegated to its associate director the responsibility for running most management functions and supervising all administrative staff, thereby creating risks. This concentration of duties and responsibilities is not in accordance with a good internal control environment. Most commissioners have played a limited and passive role in the management of the organization. Most commissioners work part time, and they told us that they focus on producing the annual report rather than on management matters. Under the direction of the chairman and vice chairman, the executive director is responsible for the overall management of the commission, including program as well as administrative operations and staff. However, the executive director has mainly focused on managing the commission’s program operations and staff, which also concentrate on producing the annual report. As a result, the commission has greatly relied on its associate director, who reports to the executive director, chairman, and vice chairman, for leading administrative operations and staff (see fig. 3). Almost all administrative duties and responsibilities have fallen to the associate director. According to the position description, the associate director must have expert knowledge of federal rules and regulations on human capital, procurement, and budgeting and financial management and reporting, which involve highly legal and technical problems and sensitive issues. Also, the associate director must have knowledge of the commission’s program objectives and policies to carry out a full range of work activities related to operations and administration. In addition, the incumbent must have the ability to work on a bipartisan basis with commission members and to handle administratively confidential and personal information. The associate director told us that her position description accurately reflects her responsibilities. Moreover, she is responsible for managing nine administrative issue areas. These are broad and varied and include managing budget and financial management; facilities and administrative services; public and media affairs; hearings, briefings, and meetings; and other duties, such as representing the commission in interagency meetings, planning and carrying out administrative projects and studies, and training and supervising subordinate staff. For example, as the ethics officer, she is responsible for providing ethics training, collecting and reviewing financial disclosure forms, and providing advice on conflict-of-interest matters. Also, she serves as the principal adviser to the executive director and the commission on personnel-related matters; interprets and applies personnel and pay authorities provided to the commission; interprets and applies legislative branch guidance, authorities, and legal requirements and federal personnel regulations and directives affecting the commission; and seeks opinions and guidance from the U.S. Senate Legal Counsel, GSA, and the Office of Personnel Management on personnel matters for which no clear guidance exists. In addition, in terms of budgeting and financial management and in coordination with the chairman and executive director, she is responsible for developing budget plans, goals, and objectives for overall projects and working with the GSA budget office; developing and reviewing other budget data for automated input into the Office of Management and Budget (OMB) MAX system; responding to OMB requests for supplemental information; developing budget material in support of the commission’s budget requests and congressional budget justifications; supporting the chairman and other commissioners at hearings and generating documents that provide spending authority, OMB apportionment of carryover, and appropriated funds; assuring the accuracy of the monthly and year-end Report of Budget Execution of OMB and the Treasury Department; and monitoring OMB directives for commission application and appropriate action. To fulfill her duties and responsibilities, the associate director has limited administrative support. Commission officials told us that because the commission is small and has a small budget, it cannot afford to secure the services of management specialists with the expertise that it needs in different areas, including legal expertise on administrative matters. During our review, the commission hired an assistant director/office manager to improve its administrative capabilities. However, this individual has limited responsibilities and does not supervise any administrative staff. We observed that the four other administrative staff worked under the close supervision of the associate director because they were also new hires or because sometimes they could not resolve problems without assistance. It was not clear that some of the administrative staff had the background, experience, and training to carry out responsibilities if the associate director delegates them. For example, a staff member who performs budget and financial management duties has recently required extensive assistance to solve problems related to a financial spreadsheet used in day-to-day operations. Furthermore, she said that she would benefit from training on accounting and related software. We found that commission staff had received little internal or external training. Concentration of duties and responsibilities creates risks. By concentrating so many responsibilities in one individual, this organizational arrangement, among other things, curtails checks and balances and monitoring, hampers segregation of responsibilities, and requires that this individual have a high level of legal and technical expertise in administrative functions, such as human capital, procurement, and budgeting and financial management and reporting. For example, as the sole purchase cardholder, the associate director has broad authority in procuring supplies and services for the commission. However, as the designated funds’ manager of the commission, the associate director may also approve the payments of these purchases omitting any supervisory review of the purchase card transactions made with commission appropriations. Concentration of duties and responsibilities also creates risks because key staff may leave the organization. The associate director has been with the commission since its inception. Thus, she has worked with all of the chairmen, vice chairmen, and executive directors of the commission. The associate director is a retired federal official working under a personal services contract for the commission. According to the chairman and executive director, the commission does not have qualified back-up staff or a plan for transitioning staff to take on the associate director’s multiple responsibilities should the associate director leave the commission. The commission’s policies and procedures for managing administrative operations and staff are insufficient, incomplete, or not adequately documented, thereby impairing their effectiveness and putting the commission at risk of fraud, waste, abuse, and mismanagement. Effective internal control activities help ensure that management’s directives are carried out and are an integral part of an entity’s stewardship of government resources. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives, such as the process for approving new hires and authorizing rates of pay. Specifically, despite the commission’s adopting 17 rules and other efforts to put management policies and procedures in place since October 2002, human capital, procurement, ethics, and financial management and reporting policies and procedures are insufficient or incomplete, and many basic operational practices are not documented. We found no evidence that legal and management experts have vetted policies and procedures to ensure they are technically sound, which is a best practice. Furthermore, existing policies and procedures are not fully documented and consolidated in policy and procedures manuals. The commission’s human capital policies and procedures are insufficient or incomplete. Because of these internal control weaknesses, human capital procedures do not provide reasonable assurance that these activities, such as hiring, evaluating, training, and EEO practices, are performed effectively. Under effective internal control, management should have appropriate, comprehensive, documented, and fair procedures for hiring, training, evaluating, compensating, and terminating staff. Specifically, the commission has only partially implemented formal performance evaluation procedures. Also, it has incomplete formal procedures for hiring and does not have formal procedures regarding training and EEO. Legal and management experts have not vetted human capital policies and procedures to ensure they are technically sound. The commission did not evaluate any of its staff prior to 2005. Nevertheless, it provided bonuses to staff without having formal ratings in 2004 and 2006. The commission is in the process of implementing staff performance evaluation policy and procedures adopted in May 2006. The commission did not develop and implement these staff evaluation procedures before because, according to commission officials, it did not have the resources to do so. According to the executive director, the commission informally evaluated staff in 2005 and 2006 and will formally evaluate its staff in 2007. The commission’s new employee performance management policy and procedures aim to motivate staff to perform at their highest levels and give supervisors instruments to evaluate employees’ performance. These policies and procedures rely on four tools: a position description for each employee’s position, an employee performance plan, an annual performance evaluation for each employee and, if needed, a performance improvement plan to enhance the performance of an employee whose work is unsatisfactory. The employee performance management calendar starts with the preparation of the employee performance plans in December of the previous year, continues with the staff evaluation period from January to December, and ends with the finalization of individual performance evaluations in February of the following year. Based on these performance evaluations, supervisors recommend salary increases and cash awards in late February. Following these recommendations, the commission may give salary increases and cash awards in March. The commission started implementation of these procedures for calendar year 2007 in December 2006 with the development of individual performance plans and intends to finish implementing the procedures in early 2008. According to the executive director, the implementation is on schedule, and staff have their individual performance plans on file. Because the commission is still implementing the procedures for 2007, we did not evaluate the new policy and procedures. The commission has incomplete written procedures for hiring staff. Under the charter of the commission, the chairman may appoint, fix the compensation, and terminate the employment of the executive director and any other staff. Under rules 4 and 5 of the commission, as amended in November 2005, the commission must approve the hiring and firing of the executive director, and the chairman and vice chairman must approve the hiring and firing of other staff after consultation with other commissioners. However, beyond these rules, the commission has not formalized its hiring practices through further written procedures that would help ensure that hiring new program and administrative staff is fair, transparent, and competitive. For instance, no procedure in place captures that, since 2006, the commission has developed vacancy announcements, based on its position descriptions, and publicly advertised them through its Web site and various media, such as USAJOBS and the OPM Web site. Furthermore, the roles played by the executive director and the associate director in managing human capital are not formally defined, and the records that the commission and these officials have to keep during hiring are not formalized in written procedures. The commission does not have written training guidelines for its program and administrative staff. Training allows an organization to invest in its human capital and focus this investment on organizational goals and objectives. It helps ensure that staff have the knowledge, skills, and abilities to fulfill their responsibilities. Internal and external training of administrative staff help them comply with policies and procedures, safeguard resources, and prevent errors. Some of the commission’s program and administrative staff told us that training would help them improve their professional and technical skills. For example, staff mentioned that systematic support for training would help them improve language or technical skills. Staff stated that the commission should have training guidelines in place so that they have a fair opportunity to develop their skills. Staff told us that they had individually requested training support. Without training guidelines, the commission cannot ensure that training supports organizational objectives and that staff has fair access to it. The commission does not have written equal employment opportunity (EEO) procedures. Although the commission is not subject to EEO legislation, commission officials told us that the commission has followed EEO principles, but it has no written procedures. According to these officials, the commission is aware of the importance of these procedures when, for example, hiring or terminating staff. A lawsuit that the commission settled with a former staff member was partially based on an EEO complaint. In the absence of these EEO procedures, the commission cannot ensure that human capital procedures (such as recruitment, hiring, evaluation, promotion, compensation, awards, and training procedures) are fairly implemented. Also, it cannot monitor EEO-related results. The commission has some written procedures for research-related procurement, but it does not have written procedures for non-research- related procurement. Because of this internal control weakness, procurement procedures do not provide reasonable assurance that procurement activity is performed effectively and is not subject to fraud, waste, and abuse. Also, procurement procedures need to ensure as much transparency, competition, and accountability as possible. However, legal and procurement experts have not vetted the commission’s procurement rule to ensure that it is technically sound or in accordance with best practices. Specifically, regarding research-related procurement, rule 12 of the commission states that the chairman and vice chairman must support research contracts after receiving recommendations from the co-chairs of the commission’s research working group. The research working group is responsible for defining research needs and preparing research proposals. It has four members—two co-chairs and two other commissioners. The chairman and the vice chairman select the co-chairs of the group from among the commissioners from different political parties. Rule 12 also says that the full commission must approve research contracts in excess of $25,000. This research-related procurement procedure does not include practices the commission has used since 2005 to ensure the transparency and competitiveness of its research-related procurement. Under these undocumented practices, for example, if the research working group determines that funding outside research would contribute to the commission’s mission, it prepares a request for proposal (RFP) with support from the commission’s staff. After approving the RFP, the commission puts the RFP on its Web site and disseminates it to selected academic institutions and policy institutes. However, the commission does not use other means to widely circulate the RFP. After examining all of the responses to the RFP, the research working group selects one and recommends it to the chair and vice chair, or to the commission. In fiscal year 2005, the commission competitively awarded seven research contracts for a total of $105,475 (see app. VI). Only one of these was above $25,000. In fiscal year 2006, the commission competitively awarded five research contracts for a total of $77,926. None of these was above $25,000. During 2007, the commission plans to continue awarding research contracts using these practices. In contrast, the commission does not have any written procedures in place for nonresearch procurement. This procurement involves a variety of items, such as the costs of hearings, consulting services, and office supplies and equipment. In fiscal years 2005 and 2006, the commission spent about 65 percent and 77 percent, respectively, of its total procurement budget in nonresearch procurement (see apps. VI and VII). In the absence of nonresearch-related procurement procedures, the commission has limited assurance that the procurement is as transparent, competitive, or best value for price as possible, or that responsibilities for it are segregated among qualified staff. For example, as discussed in the following section on financial management and reporting, the commission made significant purchases of office equipment, however, the staff did not document these pricing and purchasing decisions and it is difficult to verify that the best value was obtained. Earlier, we noted the absence of a formally designated procurement officer can compromise the integrity of procurement activities and together with the lack of procedures put the commission at risk of fraud, waste, abuse, and mismanagement. During our review, we identified a transaction that fell outside the scope of our individual transaction testing. The transaction involved computer consulting work conducted by a relative of the associate director that initially did not appear to be approved by the commission. We learned that the associate director’s son, who is not an employee of the commission and not under formal contract with the commission, had access to the commission’s computer system and the sensitive information it contains. The associate director confirmed that her son had had access to and worked on the system. She explained that her son had set up the computer system for the Trade Deficit Review Commission and was paid for those services by that entity. Subsequently, at its inception, USCESRC inherited this computer system. The associate director told us that 4 years later, in 2004, when the system experienced a major failure due to an external power surge, she obtained expert and consulting services from her son to assist with the recovery of the data and redesign and upgrade of the system, for which the commission paid him $6,600. The associate director acting as contracting/ordering officer approved the invoice authorizing the payment to her son. In addition to the invoice, she also gave us a copy of the statement of work relating to the invoice. We have seen no other documentation relating to this work other than the statement of work and the invoice. The chairman, vice chairman, and executive director of the commission at that time informed us that they knew the associate director planned to obtain the services of her son, but, because of lack of formal procedures for approving nonresearch procurement, they were unaware of the details. After 2004, when problems arose with the system, he continued to provide assistance and other services without receiving additional reimbursement from the commission. As a part of providing assistance and other services, he had access to the system both at the commission and off site via the Internet. We brought this matter to the attention of the current chairman and executive director, and they told us they were aware that the associate director’s son had worked on the system after 2004 to troubleshoot the system he had developed. In the absence of formal approvals or documentation of his work for the commission after 2004, they were unaware of his providing other services to the commission and about the terms and conditions he was operating under. The current chairman and executive director were confident that he had received no compensation for these services. They also indicated that as a result of our inquiry, they intended to take steps to stop this person from having further access to the computer system and providing further support and services to the commission without the approval of the chairman and vice chairman. When the commission accepts services without remuneration, as authorized by law, it has to document such action in order to protect the government’s financial interest should the provider of the services submit a payment claim for such services. Further, since this situation involved access to the commission’s computer system, the commission has to document the scope of the access authority granted, which if intentionally exceeded would, among other things, constitute a possible violation of legislation dealing with fraud and related activities in connection with computers. The commission’s ethics procedures for both commissioners and staff have shortcomings. According to guidance for a good internal control environment, management should have appropriate, comprehensive, and documented written ethics policies and procedures and require that all members of an organization periodically acknowledge ethics policy and procedures by signature. Specifically, two rules of the commission provide ethics guidelines for commissioners and staff. According to commission rule 16, commissioners must exercise impartial judgment in performing their duties; may never solicit or accept a gift as part of their official duties, other than a gift of incidental value; may not use their position in the commission or the information they receive as part of their duties for personal gain; and may not receive a present of any kind, other than of incidental value, from China and Taiwan. This existing rule does not include ethics guidelines regarding speaking engagements and payment of related travel expenses. The commission has discussed establishing guidelines on speaking engagements but has not done so, according to commission officials. The commission has not vetted its ethics procedures for commissioners with legal and management experts to ensure these procedures are technically sound, in accordance with best practices. Commission rule 17 requires staff to comply with Senate ethics rules. In March 2007, the executive director conducted the commission’s first training on the Senate ethics rules for all program and administrative staff. He also gave each staff member a copy of the ethics rules. Previously, he and the associate director, who is the formally designated ethics officer, had discussed these ethics rules with staff individually. We found no evidence that the commission requires commissioners and staff to periodically acknowledge ethics policy and procedures by signature. In addition, the commission has no rule about entering into contracts with relatives of commissioners and staff, in accordance with best practices. In terms of financial disclosure, we found that commission officials who should have filed financial disclosure reports had done so, and the reports did not show conflict of interest. Commissioners and staff who are required by the Ethics in Government Act of 1978 to file financial disclosure reports must file the reports with the Secretary of the Senate in its Office of Public Records. Commission officials who earned a rate of pay equal to or in excess of $109,808 for a period equal to or in excess of 60 days must file financial disclosure reports. Senate ethics rules note that public disclosure of an official’s personal financial interests is a key component of an effective code of conduct. After collecting and processing the forms, the Office of Public Records sends the forms to the Senate Select Committee on Ethics and, within 30 days, makes them available to the public electronically. If the committee needs additional information or finds errors in the forms, commissioners and staff may need to file amendments. According to our review of commission and Senate records, commission officials who should have filed financial disclosure forms had done so since the inception of the commission. The reports covering 2006 were due on May 15, 2007. According to the commission’s ethics officer, six commissioners, including one former commissioner, should have filed these reports. Three of them did so, and the other three requested and received a filing extension until August 15, 2007. The three commissioners who requested extensions filed their reports by the August deadline, according to the associate director. The commission has not sufficiently documented its ethics, human capital, procurement, and budgeting and financial management and reporting policies and procedures to ensure their effectiveness and to inform and guide commissioners and staff. Effective internal control activities would include a comprehensive collection of management policies and procedures, which are properly managed and maintained, so that management and staff can apply these activities properly. Without a complete collection of comprehensive management policies and procedures, commissioners and staff do not have access to documents in paper or electronic form containing all of the information needed for effectively implementing these policies and procedures, and the commission is at risk, especially if staff responsible for key operations leave the commission. More important, without a systematic effort to consolidate management policies and procedures, some remain incomplete, unwritten, or not vetted by legal and administrative experts. The commission is currently working to consolidate its management policies and procedures by developing office manuals. For example, the commission has in draft a policy manual and a procedures manual. Commission officials acknowledged the need for policy and procedures manuals but told us the manuals have not been completed because of a lack of resources. The commission’s internal control over financial management and reporting was not adequate to provide reasonable assurance that financial activities were properly processed and recorded and complied with federal laws and regulations. Effective internal control is the first line of defense in safeguarding assets and preventing and detecting errors and fraud. We noted weak or missing internal control in our examination of the commission’s (1) non-payroll-related transactions, (2) travel and purchase card activity, and (3) time and attendance (T&A) reporting. Our tests of the commission’s non-payroll-related transactions for fiscal years 2005 and 2006 found deficiencies, such as missing or inadequate supporting documentation, lack of proper authorization and approval, and improper classification. The commission’s application of the government travel and purchase card programs lacks written guidance, proper segregation of duties, and adequate training. In addition, we identified questionable purchases of over $13,000 made with the commission purchase card. Our review of the commission’s payroll process for fiscal years 2005 and 2006 showed that the commission’s T&A records were not always validated by the employee or approved in accordance with the policy described by the commission’s management. As a result, the commission’s financial resources are at an increased risk of fraud, waste, abuse, or mismanagement. Our tests of the commission’s non-payroll-related transactions for fiscal years 2005 and 2006 found deficiencies such as missing or inadequate supporting documentation, lack of proper authorization or approval, and improper classification. We statistically sampled 59 commission non- payroll-related debit transactions totaling approximately $1.1 million from fiscal years 2005 and 2006. Ten of the 59 transactions had one or more internal control failures, leading us to conclude that the controls commission staff said were in place were not operating effectively. Based on the results of our work, we estimate that the total dollar value of non- payroll-related debit transactions with ineffective controls during the 2- year period we examined is not more than $1.2 million. The following are examples of the type of internal control weaknesses identified in our sample transactions: Four transactions lacked proper documentation to support travel-related expenditures centrally billed to the commission travel credit card. The invoices submitted to GSA for payment processing included only the credit card statement without supporting documentation, such as copies of approved travel authorizations or vouchers and lodging invoices. Although we found annotations on certain credit card statements indicating that amounts were internally cross-referenced by the commission to individuals’ travel vouchers, copies of approved vouchers or support for the lodging expenses incurred were not attached for GSA verification. In other sample items tested, reimbursements for business expenses were processed for commission staff or commissioners with only an e-mail or a handwritten note as supporting documentation. Typically, the invoice or bill from the supplier or vendor represents the claim against the government for the items sent or delivered, and is also used to verify that quantities, prices, and calculations are accurate. Two transactions were not properly authorized and approved: both were payments under what the commission called a personal services contract for hours worked and miscellaneous business expenses claimed for reimbursement by the associate director. The first transaction, in the amount of $3,823.60, was approved by the office manager, who was subordinate to the contract payee. In the second transaction, for $5,315.69, the contract payee signed the commission chairman’s name approving the payment that the contract payee claimed, and therefore independent verification that the services had been received and conformed to the specifications of the contract was not documented. Although the commission is relatively small, the separation of key duties and responsibilities is a key control to reduce the risk of error or fraud. According to GAO’s Standards for Internal Control in the Federal Government, no one individual should control all key aspects of a transaction. Our sample included two large transactions totaling $90,075 that were improperly reported as expenses for fiscal year 2006 by the commission at the end of fiscal year 2006. The items, for $70,000 and $20,075, were obligations for renovations to the commission’s office space that were finalized in fiscal year 2007. Because the goods and services had not been received by the end of fiscal year 2006, these two items should not have been reported as expenses in fiscal year 2006. These errors were not detected by commission staff until we questioned the transactions as part of our testing. According to the commission staff, the errors occurred when the commission notified GSA that the funds should be obligated based on the purchase order but mistakenly placed the obligated balances on the pending accruals worksheet submitted to GSA at year end. In following up, we found that the related goods and services were received and paid for in fiscal year 2007. During our review, we also noted that the commission did not develop or document criteria for official representation expenses or a means to properly track appropriated funds for this purpose. Appropriations for the commission for fiscal years 2005 and 2006 included a provision that no more than $5,000 of the amount appropriated each year was available for official representation expenses, which include entertainment. Representation appropriations permit officials of agencies whose activities involve substantial contact with foreign officials to reciprocate for courtesies extended to them. According to the associate director, this is how the commission has defined its use of representation expense, based upon the commissioners’ discussions. However, neither the decision to limit representation expense to the entertainment of foreign nationals on trips to Asia nor the criteria for classifying transactions as representation expenses has been documented. Also, the commission did not have a formal means to track such transactions for fiscal years 2005 and 2006, as indicated by the manual schedules of representation expenses that were prepared at our request and were adjusted based on our inquiries. The final schedules provided to us for representation expenses for fiscal years 2005 and 2006 totaled $2,687 and $4,996, respectively. However, without definitional guidance and a formal means of accumulating these transactions, it is difficult to determine the completeness and accuracy of the amounts provided. As a result, it is difficult for commission management to know whether the commission kept within its $5,000 statutory limit on representation, and we could not ascertain if it had done so. The commission’s travel card and purchase card programs lack written guidance, proper segregation of duties, and adequate training. In addition, we identified questionable purchases of over $13,000 made with the commission purchase card. According to internal control standards, management is responsible for developing policies and procedures that fit the agency’s operation and are an integral part of operations. As discussed earlier, internal control standards also state that key duties need to be divided or segregated among different people to reduce the risk of error and fraud. This should include separating the responsibilities for authorizing, processing, recording, and reviewing transactions, and handling any related assets. Internal control standards also require that all personnel possess and maintain a level of competence that allows them to accomplish their assigned duties, as well as understand the importance of developing and implementing good internal control. This includes identifying appropriate knowledge and skills as well as providing needed training. We noted a lack of written policies and procedures for authorizing and approving temporary duty travel for commissioners, staff, and invited guests in the 23 travel card transactions we examined for fiscal years 2005 and 2006. The Federal Travel Regulation (FTR) states that internal policies and procedures must be established for processing travel authorizations and travel reimbursements as well as establishing policies and procedures relating to payment of per diem expenses and miscellaneous expenses. The associate director confirmed that the commission applies the guidance in the FTR. The lack of written guidance puts the commission at risk of not processing all travel-related expenses consistently and in accordance with the FTR. In reviewing the travel card transactions, we noted that one cardholder’s purchases totaling approximately $4,000 were for personal use. Although we did not find any indication that the individual sought reimbursement from the commission for these transactions, the FTR states that government-issued travel cards may be used only for official travel-related expenses. We also found instances where an individual both authorized travel and approved/certified travel expenses for reimbursement. According to our discussion with commission officials and staff, all travel is to be authorized by the commission chairman. In instances where the chairman is the traveler, he or she authorizes his or her own travel. However, the associate director sometimes signs for the chairman authorizing travel. The associate director also prepares travel vouchers claiming reimbursement for travel expenses for the commissioners and staff or designates an administrative assistant to do so. Then, as the designated approving official, the associate director approves the travel voucher claim for reimbursement. We also observed some instances where the associate director signed the traveler’s name and also approved the claim for reimbursement. In order to have proper segregation of duties, no one individual should control all aspects of a transaction. Also, the FTR states that the traveler must ensure all travel expenses are prudent and necessary and submit the expenses in the form of a proper claim. This is documented with the traveler signing the travel voucher in block 13 of Standard Form 1012, whereby the traveler asserts that, “I certify that this voucher is true and correct to the best of my knowledge and belief, and that the payment of credit has not been received by me.” This certification was lacking on several commission travel claims we reviewed because the traveler did not sign the voucher. By not following proper procedures for claiming and reimbursing travel expenses, the commission is subject to an increased risk of fraud or error. The commission’s associate director, who has responsibility for travel card use and is the approving official, has received no formal training in administering the travel card program. According to GAO’s internal control standards, all personnel need to possess and maintain a level of competence that allows them to accomplish their assigned duties, as well as understand the importance of developing and implementing good internal control. This includes identifying appropriate knowledge and skills as well as providing needed training. Based on the travel vouchers we reviewed, the associate director appeared to be knowledgeable about some travel regulations, such as the disallowance of certain unauthorized expenses on travel claims — including alcoholic beverages or individual entertainment charges on hotel invoices. However, formal training on the FTR could have increased compliance with the FTR, such as submitting claims for payment within 5 days after completing a trip or authorizing first or business class travel as required by the FTR. Of the 22 travel voucher claims we reviewed, only 1 was submitted within the 5-day time period. Also, documentation of FTR-required authorization for first or business class travel was not provided in seven instances. The commission did not have written policies and procedures concerning use of the purchase card. The purchase card is used to buy products or obtain services for everyday operations. Although the commission is generally not covered by the Federal Acquisition Regulation (FAR), the commission, as a participant in GSA’s SmartPay Program, is subject to the FAR for purchases of supplies and services made with the government purchase card. The associate director told us she was not aware of the laws, regulations, and procurement policies and procedures under the FAR as it related to the use of the purchase card. Further, she was not aware of any restrictions on the use of the card other than using it for meeting commission objectives. For example, the associate director was not aware of the micro-purchase threshold, currently at $3,000. While we noted over $13,000 of computer hardware and software purchases that appeared on the commission’s June 2006 purchase card statement, each individual item did not exceed the micro-purchase threshold. The commission purchased this computer equipment via the Internet because, according to the associate director, they were the best value. Commission staff did not document these pricing and purchasing decisions and the FAR does not require documentation of competitive quotations solicited under the micro-purchase threshold amount if the contracting officer or other individual appointed for purchases under the purchase card program considers the price to be reasonable. While we noted over $13,000 of computer hardware and software purchases that appeared on the commission’s June 2006 purchase card statement, each individual item did not exceed the micro-purchase threshold. Nevertheless, it is difficult to verify that the best value was obtained without documentation of the pricing decisions. Although the associate director is officially the sole authorized purchase cardholder for the commission, we identified cases in which the associate director asked other staff to use the purchase card to buy products or obtain services. For those transactions, the staff signed the purchase card receipts even though they were not the authorized cardholder. Sometimes it was not clear who was involved in particular transactions. For example, we reviewed one receipt signed by someone other than the associate director in the amount of $408 for toner cartridges, and the associate director could not tell us whose signature was on the receipt. Effective internal control requires that transactions are authorized and executed only by persons acting within the scope of their authority. This is the principal means of assuring that only valid transactions to commit resources are initiated or entered into. The commission’s associate director has not received formal training in administering the purchase card program. The associate director purchased bottled water monthly with the purchase card, which is an example of an improper transaction. Improper transactions occur when appropriated funds are used for which appropriations are generally not available. Bottled water is typically considered a personal expense, and appropriated funds may be used for it only with documentation that available drinking water poses a health risk. Training of the purchase cardholder and all staff in the laws and regulations applying to purchase card transactions is an important step in ensuring that the purchase card is not misused. As shown in table 5, we identified questionable purchases totaling over $13,000 made with the commission purchase card. We considered questionable transactions as those where items were purchased at an excessive cost or for a questionable government need, or the support was insufficient for a determination. They included transactions at Macy’s, Sam Goody, and Corner Bakery. The associate director told us that all of the questionable purchases we identified were for official commission business. According to the commission, all of the purchases from the Senate gift shop were small items such as pens or business card cases that were presented as gifts during commission fact-finding trips to China and Taiwan. Over three- fourths of the purchases in table 5 were for food, which included catering for commission hearings or quarterly business meetings. According to the associate director, the food was primarily for commissioners, commission staff, and witnesses working exclusively on a particular hearing where it may have been inconvenient or counterproductive to break for lunch. We did observe instances where nongovernmental personnel participated in various panel sessions at certain hearings, and it may have been beneficial for scheduling purposes to provide lunch or other refreshments. However, as a general rule, the government may not furnish free food to employees at their official duty station even when they are working under unusual circumstances. Our review of the commission’s payroll process for fiscal years 2005 and 2006 showed that the commission’s T&A records were not always completed and approved in accordance with the policies and procedures described by the commission. We reviewed all applicable T&A records for four commissioners in fiscal years 2005 and 2006 and found that 37 percent were not reviewed and approved by the executive director in accordance with the described policies and procedures. We also reviewed selected T&A records for three commission staff for fiscal years 2005 and 2006 and found that over one-half were not approved by the executive director, and 10 of the 25 staff T&A records we reviewed were not approved by a certifying officer in accordance with commission policy. According to the commission staff responsible for payroll, the certifying officer is responsible for (1) reviewing T&A records to ensure that each one is properly approved by the executive director and (2) affirming that the hours are accurately entered into the online payroll data entry system that the commission uses to communicate with GSA. Failure to adhere to this policy increases the risk that inaccurate or inappropriate time charges will be entered into the system, resulting in potential errors in wages paid and recorded by the commission. Supervisory authorization and approval is a key part of ensuring the propriety of T&A information. According to GAO’s time and attendance guidance, the supervisor or other authorized official should review and authorize employees’ planned work schedules and applications for leave, and review and approve employee submissions of actual time worked and leave taken, as well as information in T&A reports, and any adjustments or corrections to T&A records. This lack of T&A oversight is further compounded by the fact that the commission’s 12 members generally had differing approaches to charging time incurred on commission activities. We identified a great range in the number of hours charged by the commissioners in fiscal years 2005 and 2006, from some commissioners who did not charge any time to commission activities, to one commissioner who charged almost 1,900 hours in one fiscal year. We also noted several instances where the number of hours charged to commission activities and paid to a commissioner exceeded the standard 80 hours for the pay period. While exceeding 80 hours in a given pay period is permissible, this practice and other changes to the time and attendance information resulted in numerous manual adjustments to the Commission’s recorded payroll to reflect the excess hours or retroactive time. Manual adjustments can lead to inaccuracies and inconsistencies and provide opportunities for error. Further, manual adjustments increase the importance of reconciliations to ensure that all data are captured and recorded in a timely fashion. The accuracy of time and attendance information is particularly important because the amount of time devoted to commission activities is a factor46 in commission ethics filing requirements. Congress created the commission almost seven years ago to advise it about the impact of China’s growing economic and military capabilities on the United States. The commission’s primary vehicle for communicating its findings to Congress and the American people is the annual report. However, the commission has issued none by the mandated deadline because the appointment dates for commissioners and the commission’s work cycle schedule are not aligned with the annual report issuance deadline. Seven of the current 12 commissioners’ terms will expire in December 2007, and a reconstituted commission will again face the challenge of meeting a June 1 reporting deadline. Unless the commissioners’ appointment dates and the commission’s work cycle schedule are aligned with the report issuance date, it is unlikely the commission will issue future reports on time. Officers and employees of the legislative branch who are compensated for a period in excess of 60 days during a calendar year at the annual rate of pay equal to or in excess of 120 percent of the basic rate of pay in effect for the Grade GS-15 of the general schedule must file a public disclosure report with the Senate. controls is heightened by the fact that it is not subject to the degree of oversight and legal requirements of most federal agencies. To improve the timeliness of the commission’s annual reports, Congress should consider aligning the commissioners’ appointment dates with the annual report issuance date. Depending on its needs, Congress could, for example, either move the commissioners’ appointment date from January to July, so that the commission has enough time to plan and issue its report by June 1 the following year, or keep the commissioners’ appointment date in January and move the report issuance date to December 1. To improve management of its operations and reduce risks, the commission should apply internal control standards aimed at (1) strengthening its organizational structure so that key management duties and responsibilities are segregated and (2) improving its management policies and procedures so that they are well-documented, communicated, and consistently applied and reflect expert legal and managerial advice where appropriate. Specifically, we recommend that the commission take the following five actions: Review the organization’s staffing needs for management functions, including human capital, procurement, budgeting, and financial management; properly segregate key duties and responsibilities among specific officials; and ensure that these officials have appropriate knowledge, experience, and training to perform these management functions. Fully implement recently developed human capital polices and procedures for evaluating the commission’s professional and administrative staff, and put in place comprehensive written hiring, training, and EEO-related procedures. Establish comprehensive written research and non-research-related procurement policies and procedures that ensure transparency and competition as much as possible. Expand the ethics guidance for commissioners to include guidelines for speaking engagements and payment of related travel expenses, and require that commissioners and staff review and formally acknowledge the ethics guidance periodically. Put in place policy and procedures manuals and obtain advice from legal and management experts to make sure that policies and procedures are technically sound. Furthermore, to improve internal control over financial management and reporting, the commission should document applicable policies and procedures and communicate them to applicable commission staff, and segregate key duties and responsibilities, to the extent possible, so that no one individual controls all key aspects of a transaction. Specifically, we recommend that the commissioners take the following three actions: Strengthen key controls over non-payroll-related transactions by ensuring that all transactions are supported by adequate documentation and are properly authorized, approved, and classified; and developing and documenting criteria for classifying transactions for the purpose of official representation, and developing and documenting a means to track such transactions within its accounting and reporting structure. Implement key controls over the commission’s government travel and purchase card programs by providing training for staff who administer and use the government travel and purchase card programs, and developing and documenting commission policies and procedures with regard to food provided at commission hearings, quarterly business meetings, or any related events, in compliance with federal appropriations law prohibiting free food to government employees. Conduct all T&A reporting in accordance with commission policies and procedures by checking for proper authorization and approval before processing T&A records as part of the biweekly payroll procedures, and verifying that approval and certification is documented. We provided a draft of this report to the commission and GSA. We obtained written comments from the commission, which are reprinted with our responses in appendix VIII. GSA had no comments on our draft. The commission concurred with our recommendations and noted that these recommendations have the potential to help ensure that its operations are both legal and appropriate. The commission indicated that it will follow GAO’s internal control standards to develop a plan for addressing our recommendations even though these standards are not binding on legislative branch entities, such as the commission. The commission emphasized that its charter is brief and offered the commission little guidance on what internal control mechanisms it should employ and how they should be structured and applied. Regarding the commission’s request for GAO to serve as the commission’s official legal and management expert, in order to be able to conduct work in accordance with GAGAS, GAO prefers not to accept any nonaudit work that could potentially create an independence impairment in fact or in appearance with respect to the entities it reviews. While GAO is willing to share (nonbinding) advice, the commission is responsible for making such decisions and implementing the policies and procedures to manage its operations. The commission can secure the services of needed legal and management experts by hiring them and developing them through training, for example, or by contracting with outside parties for these services. The commission’s comments on the draft of the report, including the technical comments we received from the executive director, asked that we clarify various parts of our report. We revised our report, as appropriate. We are sending copies of this report to interested congressional committees, USCESRC, and GSA. 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 and your staffs have any questions about this report, please contact me at (202) 512-4347. 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 IX. In this report, we assess the extent to which (1) the U.S.-China Economic Security Review Commission (USCESRC) has complied with its charter, (2) the commission has had an organizational structure and policies and procedures for managing its operations effectively, and (3) internal control over the commission’s financial management and reporting has provided reasonable assurance that resources are not at risk. To assess the compliance of the commission with its reporting requirements and other provisions specified in its charter, we obtained and analyzed the commission’s statutory charter; pertinent legislation and regulations, such as the Federal Advisory Committee Act (FACA); and related commission documentation. According to its charter, as amended, the commission must implement FACA, which provides a legal and institutional framework for the operation of advisory committees. We observed two quarterly business meetings of the commission on February 2 and May 25, 2007. We interviewed the 12 current commissioners and two former commissioners, including a former chairman of the commission and a commissioner who left the commission when his appointment expired at the end of 2006. Also, we interviewed the current executive director and the two previous executive directors of the commission. We reviewed information and met with officials from the General Services Administration (GSA) and the Congressional Research Service (CRS). To assess the organizational structure and procedures the commission has in place to manage its administrative operations and staff and achieve its mission effectively, we obtained and analyzed commission records, such as documents describing the organizational structure of the commission and ethics and conflict of interest, human capital, procurement, and financial management procedures that the commission had in place during our review. In reviewing these organizational structure and policy and procedures, we focused on whether they, as internal control mechanisms, are in accordance with internal control standards for the federal government, such as the internal control environment and internal control activities standards. While these standards are not binding for legislative branch agencies, they are a statement of best practices and adherence to these standards provides reasonable assurance against fraud, waste, abuse, and mismanagement. These standards give management of federal agencies, regardless of size, the responsibility and discretion to develop and implement mechanisms for internal control necessary for achieving organizational objectives, managing operations and staff effectively, and ensuring the agency is not at risk. Effective internal control provides reasonable, not absolute, assurance of meeting agency objectives. In analyzing the organizational structure and administrative procedures, we assessed whether they were properly documented, communicated, and implemented. In analyzing human capital and equal employment opportunity procedures, we secured commission information and reviewed GAO guidance. A GAO expert reviewed the human capital information. In reviewing procurement procedures, we obtained commission documentation and GAO information. A GAO expert reviewed the procurement information. In reviewing ethics and conflict of interest procedures, we obtained commission documentation and Senate Select Committee on Ethics, and the Secretary of the Senate Office of Public Records information. A GAO expert reviewed the ethics and conflict of interest information. In assessing the organizational structure and administrative procedures, we observed two quarterly business meetings of the commission on February 2 and May 25, 2007, respectively. We interviewed the 12 current commissioners and 2 former commissioners, including a former chairman of the commission, and a commissioner who left the commission when his appointment expired at the end of 2006. Also, we interviewed the current executive director and the two previous executive directors of the commission. In addition, we interviewed all of the commission staff, including six program staff and six administrative staff. The latter included the associate director and office manager/assistant director who are responsible for administrative matters. We reviewed information and met with officials from the Senate Select Committee on Ethics, and the Secretary of the Senate Office of Public Records. In order to determine the extent to which the commission effectively executes its financial management and reporting responsibilities in accordance with internal control standards, we gained an understanding of the commission’s overall financial management and reporting process by interviewing the commission officials and staff with those responsibilities. We also spoke with representatives of GSA’s External Services Division to gain an understanding of GSA’s role in the commission’s financial management and reporting process. We used applicable law and commission policy, as well as our standards for internal control in the federal government as our criteria. We developed our understanding of the key processes and controls over non-payroll- related transactions, travel and purchase card transactions, and payroll, from inception at the commission’s office up until the point that the commission submits vouchers to GSA for processing. We then assessed the extent to which certain key controls and procedures were effectively applied to the various types of transactions at the commission. We selected a statistical sample of 59 debit transactions totaling approximately $1.1 million from a population of 1,991 debit transactions totaling approximately $4.5 million for fiscal years 2005 and 2006 to test specific internal control activities over non-payroll-related transactions, such as adequacy of supporting documentation, evidence of proper authorization or approval, and proper classification. The non-payroll- related population included transactions related to purchasing, travel, leases, payment to contracted employees and other miscellaneous transactions. Results from the statistical sample were projected to the population of non-payroll-related transactions for years 2005 and 2006. To test the reliability of the non-payroll-related transaction data provided, we (1) performed electronic testing of required data elements, (2) reviewed existing information about the data and the system that produced it, and (3) worked closely with commission and GSA officials to identify any data problems. When we found discrepancies such as zero- dollar transactions or those with descriptions we could not understand such as nonfederal summary codes, we brought them to GSA’s attention and worked with them to correct the discrepancies before conducting our analyses. We determined that the data were sufficiently reliable for the purposes of our report. To examine commission travel card transactions, we obtained a database of commission travel card transactions from Citibank for fiscal years 2005 and 2006 and used data mining techniques to select potentially questionable travel card transactions. Our selections were made based on the dollar amount of an individual transaction, transaction volume on individually billed travel card accounts, group travel events, and any transactions associated with what are generally considered to be popular vacation areas. We traced selected transactions to supporting documentation, examined supporting evidence, and made appropriate inquiries to the associate director for transactions meeting these criteria. To examine commission purchase card transactions, we obtained a database of commission purchase card transactions from Citibank for July 2005 through June 2006 and used data mining techniques to select potentially questionable purchase card transactions based on merchant category codes. This database covered 3 months of fiscal year 2005 (July 1, 2005, through September 30, 2005) and 9 months of fiscal year 2006 (October 1, 2005, through June 30, 2006) which we considered sufficient for our review. To test the controls over the commission’s payroll transactions, we used a nonstatistical sample because we could not readily obtain detailed or aggregated salary information in electronic format for either staff or commissioners by fiscal year. We performed analytical procedures to assess if salary expenses were reasonable for fiscal year 2005 and 2006. We nonstatistically selected four commissioners and verified that they were paid at the authorized rates of pay for fiscal years 2005 and 2006. We also nonstatistically selected eight staff and recalculated their respective salaries for fiscal years 2005 and 2006 based on their authorized rate of pay. In order to assess the time and attendance part of the payroll process, we reviewed all T&A records for the same four commissioners for fiscal years 2005 and 2006 to determine whether they were completed and approved in accordance with the policy as described by the commission. We also selected three of the eight staff persons previously sampled nonstatistically, and reviewed all respective T&A records for fiscal years 2005 and 2006 to determine whether they were completed and approved in accordance with commission policy. We did not audit the commission’s Statement of Budget Execution (Standard Form 133) or the Year-End Closing Statement (Standard Form 2108), nor do we express an opinion on them. We performed our work from October 2006 to September 2007 in accordance with generally accepted government auditing standards. From its inception in fiscal year 2001 through fiscal year 2007, the commission has received approximately $17.4 million in appropriations to fund its operations, as indicated in table 6. The commission has requested $4 million for fiscal year 2008. According to the commission, the $1 million in additional funding will support, among other things, internal and external research efforts and implementation of GAO recommendations. The commission’s largest annual expense is for the commissioner and staff salaries, as shown in table 7. Other annual commission expenses include contracting research and professional services, leasing office space in Washington, D.C., and incurring other costs to carry out its mission. The commission is not subject to any financial reporting or audit requirements. The commission developed a set of rules that require the commission to prepare a report detailing budget and expenditure information to be submitted to the commissioners for their review. The Commission Rules also require quarterly reporting of the status of funds, personnel actions, status of procurement of contracts, and other financial information. According to the executive director, the status of funds report is an internal document used to keep track of commission expenditures against its approved annual spending plan. The commission entered into an agreement with the GSA Heartland Finance Center in Kansas City, Missouri, to perform financial reporting and accounting each fiscal year. This includes processing (1) obligations and payments that have been authorized by the commission, (2) receipts and disbursements of funds available to the commission from the U.S. Treasury, and (3) all applicable payroll functions. GSA also provides quarterly reports and year-end financial information to OMB and the Department of the Treasury. GSA does not have an oversight role described in its memorandum of understanding with the commission. We found the commission’s 2002 annual report covered the 10 economic and security issue areas mandated at the time. Table 8 provides details on the issue areas covered by the commission’s 2002 annual report. We found the commission’s 2004 and 2005 annual reports covered the nine economic and security issue areas mandated at the time. Table 9 provides details on the issue areas covered by the commission’s 2004 and 2005 annual reports. Appendix VI: USCESRC Procurement, Fiscal Year 2005 $40,000 Report on advanced technology products for Palo $6,000 U.S. patent laws working paper $3,000 Briefing paper Palo Alto hearing $14,000 Monitor and analyze U.S.-China economic $10,000 Advice, strategies, and facilitation for Seattle hearing $22,475 Report on Chinese plan to acquire and utilize U.S. $10,000 World Trade Organization compliance study for Feb. Hearing (Feb. 2005) Bell Harbor International Conference Center, Lotos Club, Stanford University, Prague Security Studies U.S. Senate Catering, Corner Bakery, and others $12,327 D.C. hearings, meetings, and briefings (catering expenses) Karterian Systems Group Richard Harris $5,800 Media relations for WTO hearing Feb. 3-4, 2005 $18,900 Hearing consulting—multiple hearings $2,000 Media relations for Palo Alto hearing April 22-23, $1,344 Consulting Proliferation Hearing March 10, 2005 Translation of news articles Chinese to English Translations from Czech to English (Prague symposia) D.C. hearings, meetings, and briefings (catering expenses) Office upgrade (construction and materials) The following are GAO’s comments on the commission’s letter dated September 11, 2007. 1. In the Highlights and on page 2, it is clear that GAO’s assessment of organizational structure and management policies and procedures is based on internal control standards for the federal government. While these standards are not binding for legislative branch agencies, we advocate all federal entities follow them because they are a statement of best practices and adherence provides reasonable assurance regarding the prevention or prompt detection of fraud, waste, abuse, and mismanagement. We encourage the commission to adopt these standards, which give management of federal agencies, regardless of size, the responsibility and discretion to develop and implement the mechanisms for internal control necessary for providing reasonable assurance that the objectives of the agency are being achieved with regard to effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. 2. We characterize the commission’s views on pages 5 and 46. 3. With regard to the section on internal control over financial reporting, and the projection of the results of the statistical sample over nonpayroll transactions, the commission requested specific wording changes related to the potential impropriety or illegality of all or any specific transactions. We did not make those changes because the objective of the sampling performed was to determine whether the controls over non-payroll-related transactions were in place and operating effectively. As stated in the objectives, scope, and methodology in appendix I, we selected a statistical sample of 59 debit transactions totaling approximately $1.1 million from a population of 1,991 debit transactions totaling approximately $4.5 million for fiscal years 2005 and 2006 to test specific internal control activities over non- payroll-related transactions, such as adequacy of supporting documentation, evidence of proper authorization or approval, and proper classification. The non-payroll-related population included transactions related to purchasing, travel, leases, payment to contracted employees and other miscellaneous transactions. Results from the statistical sample were projected to the population of non- payroll-related transactions for fiscal years 2005 and 2006, where we estimated that the dollar value on non-payroll-related debit transactions with ineffective controls during the 2-year period we examined is not more than $1.2 million. Because this $1.2 million estimate exceeds the tolerable error of $224,715, we concluded that the controls were ineffective as stated in the report. 4. The commission partially disagreed with our observation that free food was being provided to the commissioners because, beginning in fiscal year 2006, it began a practice of deducting the cost of the food from commissioner salaries. We did not review the specific transaction details related to this practice, and we are unable to say to what portion of the $9,386 this practice applies. Further, this practice does not ensure that the commission prevents the use of appropriated funds to furnish free food to government employees and is subject to errors and inconsistencies. 5. On page 46 of the report, we note that GAO prefers not to accept any nonaudit work that could potentially create an independence impairment in fact or in appearance with respect to the entities it reviews. In addition to the contact named above, Adam Cowles (Assistant Director), Sharon Byrd, Richard Cambosos, Stephen Donahue, Mark Dowling, Elizabeth Martinez, Mary Arnold Mohiyuddin, Jeremy Rothgerber, Juan Tapia-Videla, McCoy Williams, and Matthew Wood made key contributions to this report. The team benefited from the expert advice and assistance of Martin de Alteriis, Karen Deans, Francine DelVecchio, William Doherty, Etana Finkler, Carol Henn, India Jenkins, Ramon Rodriguez, Debra Rucker, Jena Sinkfield, and William Woods. | In October 2000, Congress established the U.S.-China Economic and Security Review Commission to assess the national security implications of the trade and economic relationship between the United States and the People's Republic of China and issue an annual report by June 1. The 12-member commission has a budget of about $3 million. As requested, GAO assessed the extent to which the commission has (1) complied with its charter, (2) had an organizational structure and policies and procedures for managing its operations effectively, and (3) had internal control over the financial management and reporting that provides reasonable assurance that resources are not at risk. To address these objectives, GAO analyzed the commission's charter, annual reports, records, and management policies and procedures and interviewed commissioners, executive directors, and staff. GAO focused on fiscal years 2005 and 2006 financial transactions. Although the contents of the commission's annual reports have complied with statutory reporting requirements, the commission has not met the annual reporting deadline. It issued its 2005 and 2006 reports over 5 months late because the commissioners' appointment dates and the commission work cycle activities are not aligned with the annual reporting deadline. For example, over half the commissioners' terms will expire in December, 5 months before they are to approve and issue the 2008 report. However, the commission has taken steps to comply with applicable provisions of the Federal Advisory Committee Act. The commission's organizational structure and management policies and procedures have weaknesses and are not in accordance with GAO's internal control standards for the federal government. The commission has not formally defined and assigned key management duties and responsibilities that are typically divided or segregated among different people. Also, policies and procedures were insufficient, incomplete, or not adequately documented. For example, GAO found that the commission had no written policies or procedures to ensure that the procurement of certain goods and services was transparent, competitive, and at the best value. Internal control over financial management and reporting was not adequate to provide reasonable assurance that activities were properly processed and recorded and complied with federal laws and regulations. GAO noted weak or missing internal controls in three broad areas. In examining non-payroll-related financial transactions, GAO found inadequate documentation, lack of proper authorization and approval, and improper classification, including $13,000 in questionable purchases. The purchase and travel card programs lacked written guidance, proper segregation of duties, and adequate training. Also, time and attendance records were not always approved according to the commission's policies and procedures. As a result of inadequate control in these areas, the commission's financial resources are at an increased risk of fraud, waste, abuse, and mismanagement. |
The automation of mail sorting and distribution activities with state-of-the- art technology is a core component of the Service’s strategy to achieve its goals for efficiency, effectiveness, and financial performance. According to the Service, the success of this strategy relies, in considerable part, on the Service’s ability to provide address management services that help mailers accurately address their mail and adopt automation-compatible address standards. The NCOA program is one of several Service address management programs under the direction of the Manager, Address Management, located at the National Customer Support Center in Memphis, TN. The Manager reports to the Vice President, Operations Planning, at Service headquarters. The NCOA program began in 1986 and extended the use of change-of- address information submitted by postal customers to the Service by providing that information to business mailers for updating their mailing lists. This is important to the Service because sorting, transporting, delivering, and, in some cases, disposing of improperly addressed mail costs the Service money—estimated by the Service in 1996 at about $1.5 billion a year. The Service estimated that of the 191 billion pieces of mail it processed in 1997, incomplete or inaccurate address elements adversely affected the delivery of about one-third, or over 63 billion pieces. NCOA change-of-address data are widely disseminated to business mailers through a network of 21 private businesses licensed, for a fee, by the Service. Licensees are responsible for maintaining a complete and current NCOA master file. Every week, the NCOA program office is to provide licensees a copy of the latest NCOA file update via computer tape. Licensees are to use these tapes to update the NCOA files they maintain. These tapes include address deletions, additions, and changes. Licensees are to use their updated NCOA master files and the address- matching logic designed into their computer software to update addresses on their and their customers’ mailing lists. Each licensee’s address matching software is to be tested and approved by the NCOA program office. The Service requires the software to meet strict performance standards as specified in the licensing agreement, and licensees are to use only the approved software to provide the NCOA service. In providing this service, licensees are to update an address on a mailing list only when a name and address on that list match a name and old address in the NCOA file. Service authority to disclose address information about its customers is limited by certain privacy guarantees in two federal laws. One of them, Section 412 of the Postal Reorganization Act of 1970, as amended (39 U.S.C. 412), provides that no officer or employee of the Postal Service shall make available to the public by any means or for any purpose any mailing or other list of names or addresses of postal patrons or other persons, except for census purposes or as otherwise specifically provided by law. The Privacy Act of 1974 (5 U.S.C. 552a) provides individuals broader protection from the unauthorized use of records that federal agencies maintain about them and gives them right of access to those records. Subsection (n) of the act specifically restricts certain uses of a name and address as follows: “An individual’s name and address may not be sold or rented by an agency unless such action is specifically authorized by law.” More generally, under the Privacy Act, agency records may be disclosed provided such disclosures are compatible with the purpose for which the records were collected. Under subsection (m)(1) of the act, NCOA licensees operate on behalf of the Service and are subject to the provisions of the act to the same extent that employees of the Service would be. To determine the actions the Service has taken in response to our recommendations that it prepare and implement formal written procedures to strengthen its oversight of the NCOA program, we interviewed the Manager, Address Management and National Customer Support Center; technical managers who oversee certain Service- administered address management processes and programs, including the NCOA program; and the NCOA program manager. We obtained and reviewed the two procedures manuals the Service prepared in response to our earlier recommendations. The “NCOA Procedure Guide” was undated but, according to the program manager, became effective beginning in about September 1996. It prescribes oversight procedures and processes for (1) reviewing and documenting reviews of licensees’ proposed NCOA-related advertisements and sales methods; (2) receiving, responding to, and documenting Service responses to postal customer NCOA-related inquiries and complaints; and (3) scheduling, conducting, and managing the results of Service audits of NCOA program licensees. The second manual, the “NCOA Integrity Procedures Manual,” dated October 1998, describes seed records, their purposes, and the procedures and organizational responsibilities for carrying out the seeding process. To verify that written procedures were being followed and assess whether they responded to our recommendations, we (1) discussed the procedures with the NCOA program manager and other managers and staff responsible for program operations and oversight; and (2) reviewed records and files documenting the oversight processes of seeding, responding to and resolving postal customer inquiries and complaints, reviewing licensee’s proposed advertisement, and auditing licensees. Specifically, we discussed the seeding process with the program office’s project leader, who had primary responsibility for carrying out the process. We reviewed reports and documentation related to the seeding process, including tests of the process for alerting NCOA program officials to the possible release of seed record addresses, during the January 1996 through March 1999 period. We had discussions with the program manager responsible for handling customer inquiries and complaints and reviewed program files and records. We had no way to determine whether all inquiries and complaints received at the program office were logged and responded to. However, we randomly selected 18 of the 32 file drawers where inquiry and complaint records were stored, and we reviewed the entire contents of each. We discussed selected examples with the program office technical staff responsible for researching and responding to customer concerns. We examined documentation of licensees’ NCOA-related advertisements that had been submitted to and reviewed and approved/disapproved by the Service as required by the licensing agreement and specified in the NCOA Procedure Guide. We reviewed all available documentation in the program office’s official licensee files, and we discussed selected examples of advertisements with the program office staff responsible for the review and approval process. For the licensee audit process, we reviewed the results of all audits conducted from September 1995 through March 1999 that were documented in the program office’s audit files. We discussed the audits with the program manager and reviewed examples of audit results with responsible program office staff. To assess the Service’s response to our recommendation that the Privacy Act-related restriction on the use of NCOA-linked data to create new- movers lists be communicated explicitly to licensees’ customers, we discussed the issue with the Service’s Chief Counsel, Consumer Protection Law; a Service Senior Attorney in Washington, D.C.; and the Manager, Address Management, in Memphis. We conducted our review between September 1998 and May 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Service and received written comments from the Postmaster General, which we have included in appendix I. His comments are discussed near the end of this report. The Service has taken steps to strengthen its oversight of the NCOA program and help ensure that the program operates in compliance with the privacy provisions of federal laws. The Service has developed and implemented written procedures formalizing its oversight processes and responsibilities for (1) seeding NCOA address change updates released to licensees, (2) addressing customer NCOA-related inquiries and complaints, and (3) reviewing and approving licensees’ proposed advertisements promoting NCOA-related services. However, our review revealed that the procedures the Service developed to ensure that mail sent to seed record addresses is appropriately identified, and the program office alerted to a possible release of a seed record address by a licensee, were not working as intended. As a result, the Service has no assurance that the seeding process provided an effective oversight mechanism. In 1996, we found several weaknesses in the Service’s practice of using seed records as an oversight measure to detect the improper release of NCOA data by licensees. We recommended that the Service develop and implement formal, written procedures that addressed the responsibilities and timetables for using the seeding process as an oversight mechanism. Our more recent work at the NCOA program office showed that, in response to our recommendations, the Service prepared formal written procedures that delineate program office responsibilities for carrying out the seeding process. Further, our work showed that the written procedures were generally being followed. However, we found another problem—the program’s process for alerting program officials that mail was sent to a seed record address (and therefore a licensee had possibly released a seed record address) was not working as intended. As a result, the Service had no assurance that the seeding process was providing the program oversight intended. According to NCOA program officials, the process of seeding NCOA files provides program oversight by helping to detect and deter the improper release of NCOA data by licensees. They said that NCOA file updates have been seeded since the program began in 1986. Seed records are fictitious name and address data that the program office periodically places in NCOA file updates provided to licensees. These names and addresses are designed uniquely and do not identify postal customers who have moved and submitted mail-forwarding forms to the Service, or any other postal customer. Therefore, licensees should not be able to match the seed record names and addresses with names and addresses on their mailing lists or their customer’s mailing lists when using the Service-approved name and address-matching computer software. Service procedures state that mail sent to a seed record address is to be intercepted by the local post office and photocopied. The photocopy is to be returned to the NCOA program office, thereby alerting program officials of the possibility that a licensee has improperly released a seed record address. Program officials could then identify the licensee that released the seed record by tracing it back to the licensee that received (and subsequently released) the seed record. According to program officials, licensees are aware that NCOA file updates are seeded but are not able to identify the seed records. In our 1996 review, we found that the Service had informal, unwritten procedures for seeding. Specific responsibilities and timetables for carrying out the seeding process were not delineated. We found that, because of inattention to program management, seed record addresses for a 9-month period in 1993 and 1994 were inadvertently not included in licensee file updates. Thus, the Service’s oversight of the program through use of the seeding process was not in effect during this period. Subsequent to our 1996 review, the Service developed written procedures that describe seed records; their purpose; and the procedures, responsibilities, and timetables for implementing and using the seeding process as an oversight mechanism. The procedures include steps such as developing the seed record addresses, placing them into the licensees’ NCOA file updates at specified times, and testing the retrieval process for mail sent to seed record addresses. On the basis of our discussions with NCOA officials and our review of seeding files and reports, it appears that program office staff were following most of the written procedures. For example, files we examined showed that 10,000 to 20,000 seed records were implanted in licensees’ databases continuously throughout the period January 1996 through March 1999. Also, as required by the procedures, the Service annually added new seed records to the licensees’ master file updates. However, we found that Service “tests” of the seeding process revealed that procedures for alerting program officials that mail had been sent to a seed record address were not working as intended. Specifically, we found that the NCOA program office was not always alerted by postal delivery units when test mail was sent to seed record addresses. As a result, the Service could not be assured that it would be appropriately alerted if actual mail were to be sent to seed record addresses. In turn, the Service could not be assured that it would always be made aware that a licensee had released a seed record address, should this occur. According to the Service, instructions for appropriately identifying and notifying program officials of mail sent to seed record addresses are sent by the program office to affected postal delivery units throughout the postal system each year. Periodically, the program office sends mail to seed record addresses to test whether the identification and notification process for mail sent to seed record addresses is working properly. If it is working properly, the applicable delivery units will identify mail sent to seed record addresses and return a photocopy of it to the program office, thereby alerting program officials that mail was sent to a seed record address. However, we found that local delivery units were not always appropriately alerting program officials when test mail was sent to seed record addresses. Data provided to us by the program office showed that program officials were appropriately notified of only about 6 percent of nearly 1,000 test mailings sent out during the period October 1998 to February 1999. The program office did not have complete records showing the results of test mailings prior to this period. Although the program office has procedures for following up with delivery units when these units do not handle test mail appropriately, program office reports on test mail results showed that these procedures were not always followed. The program manager said that the process of sending test mail to seed record addresses, and following up with the appropriate delivery units when test mail was not returned, had been a manual process; however, because the process was labor intensive, it was automated in early 1999. The program manager said that, because the process is automated, when program officials are not appropriately notified that a delivery unit received test mail, the system will automatically generate correspondence advising the delivery unit manager that procedures were not followed for test mail sent to a seed record address. According to program officials, the automated process was only recently implemented. Therefore, its effectiveness in identifying and correcting problems in handling test mail sent to seed record addresses had not been determined at the time of our review. Determining why delivery units did not always appropriately notify NCOA program officials when test mail was received was not within the scope of our review. Further, delivery units are in a different Service organizational component and are not under the authority of NCOA program officials. However, until the process for appropriately identifying test mail and notifying program officials when test mail is sent to seed record addresses is working completely as intended, the Service cannot be assured that program officials would be appropriately notified if actual mail were sent to seed record addresses. In turn, the Service cannot be assured that the seeding process would detect an improper release of NCOA data by a licensee. In our 1996 review, we found that the NCOA program office’s complaint investigation process was informal and lacked structure. We were therefore unable to assess the effectiveness of the complaint process as a program oversight mechanism. We recommended that the NCOA program office develop and implement written oversight procedures providing for the systematic recording of all NCOA-related complaints received, including actions taken to resolve the complaints. On the basis of our recent review, we believe that the actions taken by the Service provide the formal structure needed to ensure that the complaint investigation process could be an effective licensee oversight mechanism. In our earlier review, NCOA program officials told us that they investigate program-related inquiries and complaints from postal customers, licensees, and the licensees’ customers to provide another program oversight and control mechanism. They said that inquiries and complaints were important because they can alert the Service to possible problems involving the quality of NCOA program services that licensees are providing, as well as to instances of licensees’ noncompliance with the terms and provisions of the licensing agreement. However, the office could not provide us with any evidence of a process for logging inquiries and complaints received, investigating them, and reporting the results of the investigations internally or to the inquirers or complainants. In our most recent review, we found that the procedure guide contained written procedures providing formal structure to the program’s process for receiving, researching, and responding to customer inquiries and complaints and documenting the results of these actions. Our examination of the program office’s inquiry and complaint files, combined with our discussions with program office managers and staff, showed that the procedures had been implemented. Specifically, we found documentation showing that (1) NCOA-related inquiries and complaints had been entered into an electronic tracking system and (2) research and analysis needed to respond to inquiries and complaints had been conducted and, where appropriate, responses provided. The NCOA program manager told us that since about September 1997, over 38,000 inquiries and complaints had been logged into a database at the program office. Documentation relating to these inquiries and complaints was retained in 32 file drawers located in the program office. Although we had no way to verify that all inquiries and complaints received were logged in and responded to, we randomly selected 18 of these drawers and reviewed the entire contents of each. On the basis of this review and our discussions with program managers and staff, it appears that the Service was following procedures and appropriately utilizing inquiries and complaints as a program oversight mechanism. We reported in 1996 that we had been unable to fully evaluate the effectiveness of the NCOA program office’s oversight of licensees’ program-related proposed advertising as prescribed in the licensing agreement because program officials had not documented their oversight efforts. We recommended that the Service develop and implement written oversight procedures for obtaining and reviewing licensees’ program- related proposed advertisements, documenting the review, and notifying licensees of the results within the time period prescribed in the licensing agreement. On the basis of the results of our current review, we believe that the Service has substantially complied with our recommendations and has in place a formalized process for ensuring generally that licensees’ proposed advertising is in compliance with the provisions of the licensing agreement. The licensing agreement requires licensees to adhere to Service guidelines relating to the wording, content, and design of proposed advertisements that mention the NCOA program to ensure that the relationship between licensees and the Service is correctly represented. In addition, the licensing agreement requires that all licensee advertisements be pre- approved by the NCOA program office prior to their use. According to the agreement, the program office is to provide licensees a written notice of its approval or disapproval of proposed advertisements within 20 days of receipt of this material, or the licensees may consider the proposed advertisement approved. In our earlier review, however, we found little documentation of an advertisement review process, and it appeared that NCOA program officials did not always review licensees’ program-related advertisements. For example, we found that at least two licensees had submitted proposed advertisements for review that contained material promoting the availability of new-movers lists linked to NCOA data, which was in violation of the licensing agreement. Even though licensees were precluded by the licensing agreement from advertising the availability of new-movers lists based in any part on NCOA-related data, program officials took no action to disapprove the advertisements. In our most recent review, we found that the program office’s oversight of NCOA-related proposed advertisements had improved, and licensees were generally meeting the terms of the licensing agreement related to advertising. Specifically, we found that licensee files in the program office contained varying types and amounts of proposed advertisements. In addition, most of the advertisements submitted for approval had a document noting either the approval or disapproval of the advertisement within the 20-day period prescribed. If the advertisement had been disapproved, reasons for the disapproval and suggested changes were also documented. Although we reviewed all advertisements contained in the program office files, we had no way to determine whether licensees had submitted all of their advertisements for review. Program officials told us, however, that office staff regularly review publications where licensees are known to advertise frequently to help verify that the licensees are using only approved advertisements. In addition, we found examples of advertisements that had not been approved and the related follow-up correspondence with the licensees. Program officials told us that when these situations are discovered, they contact the licensee and require a written explanation. In December 1998, the program office sent letters to all of the licensees stating that effective January 1, 1999, if a licensee fails three times within a 1-year period to obtain program office approval before an NCOA-related advertisement is used, the licensee may be suspended from the NCOA program. Our 1996 review disclosed that licensee audit files at the NCOA program office were poorly maintained, and that the number of licensee audits conducted by the program office was unclear. As a result, we could not determine whether the Service’s licensee audits were providing effective and meaningful oversight of licensees’ compliance with the licensing agreement or the applicable privacy provisions of federal law. We recommended that the Service enforce the provision of the licensing agreement that licensees be audited a prescribed minimum number of times each year and suspend or terminate, as appropriate, licensees that fail consecutive audits. Our follow-up review of licensee audit files at the program office revealed that problems similar to what we found earlier still existed. Specifically, we found that the program office had not (1) performed the required minimum number of annual licensee audits, (2) performed the required minimum number of on-site licensee audits every 24 months, (3) performed timely licensee reaudits after a failed audit, and (4) always or promptly suspended or terminated licensees that failed two consecutive audits. Further, it appears that the licensee audit files at the program office were still incomplete because program officials told us that they had performed more on-site audits than could be verified by documentation in the audit files. Nevertheless, even when these additional audits are taken into consideration, we determined that the Service did not perform all audits required. The licensing agreement requires licensees to pass three audits each year, and the Service’s procedure guide specifies that the program office is to audit each licensee a minimum of three times per year. Also, at least one on-site audit is to be conducted at the premises of each licensee every 24 months. On-site audits can be unannounced and include both tests of the licensees’ NCOA software accuracy and verification of the licensees’ compliance with other provisions of the licensing agreement, such as the provision that licensees prevent unauthorized access to the NCOA file. Audits not conducted on-site are administered by the program office through a test computer tape mailed to the licensees. According to program officials, these audits focus on the comprehensive assessment of the accuracy of the licensees’ NCOA name and address-matching software. The licensing agreement sets a strict standard of 99-percent accuracy for licensees’ name and address-matching software that is to be rigorously tested in the audit process. Licensee software that does not meet the standard is to fail the audit. NCOA program officials told us that when a licensee fails an audit, they notify the licensee by telephone. Additionally, the Service’s Contracting Officer, who is located at the Service’s headquarters in Washington, D.C., officially notifies the licensee of the audit failure by sending a written 30-day “Cure Notice” with a description of the deficiencies identified in the audit. When the licensee notifies the program office that the deficiencies have been corrected, or after the 30- day period has expired, whichever comes first, the NCOA program office is to reaudit the licensee. Although in practice the Service does not suspend licensees that fail an initial audit, its procedure guide states that the Service can suspend licensees that fail audits and do not correct the deficiencies identified by the end of the 30-day period. The suspension may continue until the deficiencies have been corrected and confirmed by a reaudit. Further, the license agreement provides that licensees that fail two consecutive audits are to be suspended or terminated. Upon a third consecutive audit failure, licensees are to be terminated. Because of the contractual relationship between the Service and the licensees, only the Contracting Officer, who is not under the authority of the NCOA program office, may suspend or terminate licensees. Service licensee audits are designed to check for both the failure of the software to make correct name and address matches and for instances where the software produces an incorrect match. The failure of a licensee’s software to make appropriate matches can result in the licensee not providing its customers all the address corrections that should be provided through the NCOA program service. Incorrect matches, which are more serious, can result in the licensee improperly releasing new addresses from the NCOA database in violation of privacy law. The procedure guide states that incorrect matches found during an initial audit will result in an automatic audit failure, and that the licensee will be required to immediately make the necessary software corrections and will be reaudited. According to the licensing agreement, Service licensee audits are an important oversight measure for helping to ensure that the provisions and performance standards of the licensing agreement are met, the integrity of the address correction services licensees provide is maintained, and the program operates in compliance with privacy guarantees of federal law. Because licensees’ NCOA software that fails an audit is not performing to the prescribed licensing standards, we believe that (1) performing the required number of licensee audits, (2) promptly reauditing licensees that fail audits, and (3) promptly suspending or terminating licensees that fail successive audits are important features of the Service’s responsibility to help ensure the integrity of the NCOA program. However, according to the documentation in the licensee audit files at the program office and other information provided by the Service indicating that additional audits had been performed, the program office did not perform the minimum number of annual licensee audits prescribed by its procedure guide during fiscal years 1996 through 1998. Table 1 illustrates that in fiscal year 1996, the Service did not audit 7 of 25 licensee systems the required minimum number of 3 times; in fiscal year 1997, 10 of 25 licensee systems were not audited the required minimum number of 3 times; and in fiscal year 1998, 8 of 25 licensee systems were not audited the required minimum number of 3 times. Moreover, because the program office did not always perform the minimum number of annual licensee systems’ audits prescribed by its procedure guide, licensees were not always required to prove the integrity of their systems by passing at least three audits each year, as specified in the licensing agreement. Specifically, documentation in the licensee audit files at the program office, combined with additional documentation provided to us by program officials, showed that in fiscal year 1996 only 12 (48 percent) of 25 licensee systems passed the minimum of 3 audits; in fiscal year 1997, only 7 (28 percent) of 25 systems passed 3 audits; and in fiscal year 1998, only 9 (36 percent) of 25 systems passed 3 audits. Thus, the Service cannot be assured that licensees are consistently providing the address correction services intended by the program or consistently releasing only name and address data permitted by law. In addition, according to documentation in the audit files and additional information provided by program officials, the program office did not conduct at least one on-site audit of each licensee system every 24 months as prescribed by the procedure guide. Only 18 licensee systems received on-site audits during the 42-month period we reviewed; also, as of May 1999, 14 licensee systems were overdue for an on-site audit. Further, according to documentation in the audit files and the additional information provided by program officials, the program office did not always do timely reaudits of licensees that failed initial audits. We believe that promptly reauditing licensees that fail initial audits is important to ensure program integrity because after failing an initial audit, licensees are permitted to continue providing NCOA program services with software that does not comply with performance standards specified in the licensing agreement. However, as table 2 shows, of 35 licensee system audit failures during the period we reviewed, 9 systems were not reaudited until 61 to 90 days after the initial audit failure; and 3 were not reaudited until over 90 days after the initial audit failure. We noted that one licensee system reaudit in the “over 90 days” category was not completed until 210 days after the failed initial audit. Because this audit failure involved an incorrect name and address match—an automatic failure because of the possibility that the licensee was releasing name and address data in violation of privacy law—for this 210-day period, the licensee could have been inappropriately releasing NCOA-related data. Finally, we found three instances where licensees failed two consecutive audits yet were not promptly suspended, suspended at all, or terminated from the program. One licensee failed two successive audits and was not suspended until 17 days after the second audit. Another licensee failed two successive audits and was not suspended until 67 days after failing the second audit. A third licensee failed two successive audits and was never suspended. That licensee received a passing score on the third audit, which was conducted 147 days after the initial failed audit. According to the licensing agreement, licensees that fail two successive audits are to be either suspended or terminated from the program. By not promptly suspending or terminating these licensees, the Service allowed these licensees to continue providing NCOA program services for varying periods of time with software that was not in compliance with the performance standards specified in the licensing agreement. Program officials told us they had performed more on-site audits than could be verified by evidence in the audit files, but they were initially unable to provide us with supporting documentation. However, after we had completed our audit work at the program office, program officials sent us documentation indicating that 18 licensee systems had received on-site audits during the period we reviewed—10 more than indicated by documentation we had found in the program office audit files. The documentation the Service sent us consisted of recently signed statements from officials of some licensees indicating that these additional on-site audits had been performed. Even after counting these additional audits reported by the Service, we determined that it did not perform the minimum number of annual audits or on-site audits required during the periods included in our review. This deficiency in the number of audits performed, coupled with the lack of documentation in the audit files evidencing all of the audits reported by the Service, indicated that the NCOA program audit process was not a fully effective oversight mechanism. The NCOA program manager attributed these problems—not performing the required minimum number of annual audits and on-site audits, not performing timely reaudits, and not promptly suspending or terminating licensees that failed successive audits—to (1) an insufficient number of staff to handle the program office’s increasing workload; (2) high rates of turnover among program audit staff during this period, which reduced the number of experienced auditors; and (3) the need to assign program office staff to respond to an unexpectedly high volume of customer calls to the program office regarding the Service Move Update program implemented in 1997. Previously, we reported that the Service had not clearly communicated through NCOA program licensees to the licensees’ customers the privacy law-related restriction on the use of NCOA-linked data to create or maintain new-movers lists. Specifically, the Service had not stated in the NCOA Processing Acknowledgment Form that NCOA data are not to be used to create or maintain new-movers lists. The licensing agreement requires licensees to have their customers sign this form before receiving NCOA-linked services. The Service, however, had communicated this restriction to the licensees in the licensing agreement. The licensing agreement stated, in part, that “Information obtained or derived from the NCOA File or service shall not be used by the Licensee, either on its own behalf or knowingly for its customers, for the purpose of creating or maintaining new-movers lists.” The Service stated that it placed this restriction on licensees as a “good business practice” and to address concerns raised by Congress and the public, not because use of the NCOA-linked data to create or maintain new-movers lists was restricted under the Privacy Act. We disagreed with the Service’s assessment of the Privacy Act and expressed our view that use of NCOA-linked data by a licensee to create a new-movers list would not be consistent with the limitations imposed by the act. We recommended that the Service use the acknowledgment form that licensees’ customers are to sign to explicitly notify the customers that the use of NCOA-linked data to create or maintain new-movers lists is not permitted. The Service disagreed with our recommendation in 1996 and stated that it believed that (1) a restriction on the creation and maintenance of new- movers lists from NCOA-linked data was not required by privacy law, (2) enforcement of such a restriction on customers of licensees would be impracticable, and (3) we had misinterpreted the purpose of the acknowledgment form when we said that it was “to limit the use of NCOA- linked data by the customers of licensees.” Our recent review showed that the Service has not implemented our recommendation that it amend or revise the acknowledgment form to explicitly convey this restriction to the customers of licensees. Service officials believe that the design and implementation of the NCOA program fully complies with applicable federal privacy laws. Service attorneys responsible for this issue told us that the Service continues to believe that the use of NCOA-linked data to create or maintain new-movers lists is not restricted by the Privacy Act. With regard to licensees, the Service’s position stems from the view that a licensee wears two hats—one when performing address correction services as an agent of the Service and another as a private business. In the Service’s view, after a licensee performs address correction services as an agent of the Service, it is then free under the Privacy Act to use NCOA-linked data to create or maintain new-movers lists. With regard to the licensees’ customers, the attorneys said that the Service has no responsibility to attempt to restrict the use of NCOA-linked data by a private business with which it has no legal relationship. We disagree. The Service collects change-of-address information from postal customers for the limited purposes of address list correction and mail forwarding, not for the purpose of creating and maintaining new- movers lists. Therefore, we continue to believe that use of NCOA-linked data to create or maintain new-movers lists by licensees of the Service, who are viewed under the Privacy Act as if they were employees of the Service, would not be consistent with the limitations imposed by the Privacy Act. Further, we continue to believe that more specific language in the acknowledgment form that licensees’ customers sign could help ensure that use of NCOA-linked data is limited to the purposes for which it was collected. Through the NCOA program, the Service has extended the use of address change information that its customers report for mail forwarding purposes to provide business mailers with current name and address and address- format information for customers on their mailing lists. This program helps ensure that postal customers’ mail is more accurately addressed and thereby reduces Service costs associated with additional handling of improperly and inaccurately addressed mail. However, by creating a postal customers’ change-of-address database, the Service is obligated to use and protect the data in compliance with the constraints of applicable federal privacy laws. The Service has been partially responsive to our previous recommendations to strengthen oversight of the NCOA program in that it developed and implemented written procedures for (1) seeding NCOA file updates released to licensees and (2) reviewing, responding to, and documenting customers’ NCOA-related inquiries and complaints and licensees’ NCOA-related advertising. However, the Service has not effectively implemented program procedures and requirements for (1) ensuring that it is appropriately alerted when mail is sent to seed record addresses, (2) auditing and reauditing licensees, and (3) suspending or terminating licensees that fail successive audits. Although in early 1999 the Service made procedural changes that it believes will help ensure that mail sent to seed record addresses is appropriately brought to its attention, it is too early to determine the effectiveness of those changes. In addition, the Service reported that it had performed more licensee on-site audits than were documented in licensee audit files at the NCOA program office. However, the effectiveness of the licensee audit process as a program oversight mechanism is diminished when the Service does not perform all required audits and does not document the audit results. Until these program oversight and enforcement procedures are effectively implemented and documented, the Service cannot be assured that (1) the process of seeding NCOA file updates provided to licensees will be effective in alerting the Service to licensees’ improper releases of NCOA data, (2) licensees are audited to ensure that they are in full compliance with federal privacy law and NCOA program requirements, and (3) licensees not in compliance are precluded from continuing to receive and disseminate program data. Although the NCOA program office is responsible for auditing and reauditing licensees, the problems we identified related to ensuring the effectiveness of seeding NCOA file updates as an oversight mechanism, and delays in suspending or terminating licensees that fail two consecutive audits do not appear to be completely under its control. Local postal delivery units that are in a different Service organizational component and are not under the authority of NCOA program officials appear to be involved in the former problem. Only the Contracting Officer, also in a different organizational component and not under the authority of NCOA program officials, has authority to suspend or terminate licensees from the NCOA program. Finally, in spite of the recommendation we made in our previous report, the Service has not changed the acknowledgment form to explicitly convey to licensees’ customers the restriction against using NCOA-linked data to create or maintain new-movers lists. The Service also has not changed its position that it has no responsibility to attempt to restrict the use of NCOA -linked data by licensees’ customers with whom it has no legal relationship. We disagree with the Service. We continue to believe that by including specific language in the acknowledgment form signed by licensees’ customers that they should not use NCOA-linked data to create or maintain new-movers lists, the Service would help to ensure that NCOA program data are used only for the purposes for which such data were collected. If Congress is concerned about the failure of the Postal Service to implement the recommendation we made in our prior report concerning the creation and maintenance of new-movers lists by customers of its licensees, it may wish to amend the Postal Reorganization Act of 1970. An amendment could either (1) expressly prohibit the use of change-of- address data by licensees and their customers in the creation or maintenance of new-movers lists or (2) specifically require the Service to have its licensees and their customers acknowledge in writing that they have been informed and understand that change-of-address data may not be used for any purpose not authorized by law, including the creation or maintenance of new-movers lists. To help ensure that the NCOA program operates in compliance with applicable provisions of federal privacy law and NCOA program requirements, we are making the following recommendations. The Postmaster General should ensure that NCOA program officials (1) conduct the minimum number of annual and on-site audits, as well as reaudits of licensees as required by the licensing agreement and the program procedure guide and (2) document in the program office files licensee audits performed, the results of those audits, and actions taken. The Postmaster General should also ensure that NCOA program officials and other appropriate Service officials coordinate actions to identify and correct weaknesses in the process of alerting program officials when mail is sent to seed record addresses so that the process works as intended and ensure that licensees that fail successive audits are promptly suspended or terminated, as appropriate, from the program or that the licensing agreement is revised to reflect Service policy regarding when licensees will be suspended or terminated. On July 19, 1999, we received written comments from the Postmaster General on a draft of this report. Among other points he made about the NCOA program, the Postmaster General stated that the Service believes that the program is a valuable service that directly benefits ratepayers by contributing to the stabilization of postage rates. Regarding the Matter for Congressional Consideration and our position that the Service should explicitly convey to licensees’ customers the restriction against using NCOA-linked data to create or maintain new-movers lists, he stated that the Service continued to believe that it has neither the legal responsibility nor the practical ability to regulate how the owners of mailing lists may use those lists once they have been matched against the NCOA database. He said that without an effective way to enforce a prohibition on the creation of new-movers lists, such as sending Postal Inspectors into mailers’ plants, revising the acknowledgment form to explicitly prohibit their use would be an empty gesture. We recognize the Service’s view regarding the challenges associated with enforcing a restriction on licensees’ customers with whom they have no contractual relationship. Nevertheless, as discussed in this report, the Service collects change-of-address information for the limited purposes of address list correction and mail forwarding, not for the purposes of creating and maintaining new-movers lists. Thus, in our view, the challenges associated with enforcement should not preclude the Service from notifying and receiving acknowledgment from licensees’ customers that use of NCOA-linked data to create new-movers lists is not permitted. Given that our views on this issue differ from the Service’s, we believe that our suggestion that Congress consider the issue remains appropriate. The Postmaster General generally agreed with our recommendations for improving oversight of the NCOA program. Specifically, he stated that regarding our recommendation concerning the periodic audits and reaudits of licensees as required by the license agreement and the program procedure guide, the Service understands the importance of licensee oversight through regularly scheduled audits and has taken steps to ensure that the required audits will be performed for each licensee each year. He stated, however, that because these audits, particularly the on-site audits, are labor intensive and can be performed only by technically knowledgeable staff, on occasion it may be necessary to defer some audits temporarily in order to have the resources available for other high-priority tasks. He stated that, nevertheless, the Service would make every effort to keep the licensee audit schedule current. The Postmaster General stated that the Service also agreed with the second part of our recommendation concerning the need for more thorough documentation of licensee audits, the results of those audits, and the actions taken. He stated that the NCOA program office has already implemented the recommendation and developed a standardized documentation process that accurately reports the results of audits. Regarding our recommendation to strengthen the process for alerting program officials when mail is sent to seed record addresses, the Postmaster General stated that the Service believes that the improvements currently being implemented will fully respond to the concerns we raised and that these improvements should be implemented nationally by September 1999. Regarding our proposed recommendation that the Service comply with the provisions of the licensing agreement to suspend or terminate licensees that fail successive audits, the Postmaster General stated that while the Service agrees with the recommendation, it thinks it is important to evaluate each audit failure on its own merits because it is in the best interest of the Service to work with licensees in ensuring that their systems work properly and are compatible with NCOA’s programs. He further stated that, when warranted and appropriate, the Service would invoke these provisions against licensees to preserve the integrity of the program and to protect the privacy of customers’ change-of-address information. We believe that the actions taken or planned described by the Postmaster General are responsive to our recommendations to him. Furthermore, we believe that the Postmaster General’s position that it is in the best interest of the Service to work with licensees in ensuring that their systems work properly and are compatible with the NCOA’s programs and that licensees would be suspended or terminated when warranted and appropriate is reasonable. However, we believe that the Service should change its licensing agreement to reflect such a policy. Accordingly, we have revised our recommendation to state that the Service should either suspend or terminate licensees that fail successive audits in accordance with the licensing agreement or change the licensing agreement to reflect the Service policy that licensees will be suspended or terminated when the Service believes that such actions are warranted. We are sending copies of this report to Representative Chaka Fattah, Ranking Minority Member of your Subcommittee; Senator Thad Cochran, Chairman, and Senator Daniel Akaka, Ranking Minority Member, Subcommittee on International Security, Proliferation, and Federal Services, Senate Committee on Governmental Affairs; William J. Henderson, Postmaster General; and Karla W. Corcoran, Postal Service Inspector General. We will make copies available to others upon request. Major contributors to this report are acknowledged in appendix II. If you have any questions about this report, please call Bernard L. Ungar on (202) 512-8387 or Sherrill Johnson on (214) 777-5600. In addition to those named above, Robert T. Griffis, Dorothy M. Tejada, Alan N. Belkin, and Jill P. Sayre made key contributions to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO updated its previous report on the U.S. Postal Service's National Change of Address (NCOA) program, focusing on: (1) the actions the Service has taken in response to GAO's 1996 report; and (2) whether any additional actions are needed to strengthen the Service's oversight of the program. GAO noted that: (1) as recommended, the Service has developed and implemented written procedures that addressed its NCOA program oversight and control responsibilities for: (a) using seed records to help detect the unauthorized disclosure of NCOA data by licensees, should it occur; and (b) reviewing, responding to, and documenting NCOA-related complaints and inquiries from postal customers and NCOA-related proposed advertisements by licensees; (2) however, procedures designed by the Service to ensure that it is alerted when mail is sent to seed record addresses were not working as intended; thus, the Service lacked assurance that the seeding process provided an effective program oversight mechanism; (3) further, even though required to do so by the licensing agreement or by prescribed program procedures, during the 1996 through 1998 period GAO examined, the Service did not always: (a) conduct the minimum number of licensee audits, including on-site audits; (b) promptly reaudit licensees that failed initial audits; or (c) promptly or always suspend or terminate licensees that failed successive audits; (4) also, the Service reported that it had performed more licensee audits than were documented in its audit files; however, even when GAO included these additional audits in its data, GAO determined that the Service did not perform all audits required; (5) the Service has taken no action on GAO's recommendations that it explicitly state, in the acknowledgement form signed by customers of licensees, that NCOA program-linked data are not to be used to create or maintain new-movers lists; and (6) GAO continues to believe that more specific language in the acknowledgement form could help ensure that use of NCOA program-linked data is limited to the purposes for which they were collected. |
DHS, DOE and FERC have taken various actions to address electromagnetic risks to the electric grid, and these actions generally fall into four categories: (1) standards, guidelines, tools and demonstration projects; (2) research reports; (3) strategy development and planning; and (4) training and outreach. Additionally, some of the actions DHS and DOE have taken generally aligned with recommendations made by the EMP Commission. Because federal agencies generally do not own electric grid infrastructure, federal actions to address GMD risks are more indirect through such things as developing standards and guidelines, and conducting research that could benefit electric grid owners and operators. Federal agencies have also been involved in strategy development and planning, as well as training and outreach efforts, as a means of preparing federal officials and others to respond to both EMP and GMD events, and enhancing knowledge about electromagnetic risks. For example, DHS’s Science and Technology Directorate (S&T) led the design and development of a prototype transformer that can be more easily transported to another location to help restore electric power in a timelier manner. DHS has also participated in various training and outreach events to enhance understanding of EMP and GMD events. DOE’s primary efforts include supporting research to enhance the understanding of the potential impacts to the electric grid from electromagnetic events. More detailed information on key federal agencies’ actions taken since 2008 to address electromagnetic risks can be found in Appendix II of our March 2016 report. Although DHS and DOE did not report that any of their actions were taken in response to the EMP Commission recommendations, some actions taken by both agencies have aligned with some of the recommendations. Specifically, of the seven recommendations made by the EMP Commission related to the electric grid, some of the actions that DHS and DOE took aligned with four of them: conducting research to better understand the interdependencies of critical infrastructures, addressing the vulnerability of control systems to an EMP attack; identifying responsibilities for responding to an EMP attack; and utilizing industry and other governmental institutions to assure the most cost-effective outcomes. For example, with respect to the recommendation on conducting research to better understand interdependencies of critical infrastructures, DHS’s Sector Resilience Report: Electric Power Delivery includes some assessment of how various critical infrastructures— including the energy, communications, and transportation sectors, among others—are interdependent in maintaining operations. For more detailed information regarding how identified federal actions align with these seven EMP Commission recommendations, see Appendix III of our March 2016 report. In our March 2016 report, we found that DHS had not clearly identified internal roles and responsibilities for addressing electromagnetic risks to the electric grid or communicated these to external federal and industry partners. While multiple DHS components and offices, including the National Protection and Programs Directorate (NPPD), the Federal Emergency Management Agency (FEMA), and S&T, had each conducted independent activities addressing electromagnetic risks to the electric grid, none had been tasked with lead responsibility for coordinating related activities within the department or with federal and industry stakeholders. As a result, during the course of our review for our March 2016 report, we experienced ongoing challenges in identifying applicable DHS personnel and related departmental actions. For example, NPPD officials had difficulty identifying their specific roles and activities addressing electromagnetic risks to the electric grid, including efforts to collect or synthesize available risk information to provide input into department-wide risk assessments. Furthermore, industry representatives and other federal officials told us it is not clear who within DHS is responsible for addressing electromagnetic risks. The 2008 EMP Commission report recommended that DHS make clear its authority and responsibilities, as well as delineate the functioning interfaces with other governmental institutions, regarding EMP response efforts. We concluded that designating internal roles and responsibilities within DHS regarding electromagnetic risks and communicating these to federal and industry partners could provide additional awareness of related activities and help ensure more effective and coordinated engagement with other federal agencies and industry stakeholders, and could help reduce the risk of potential duplication, overlap, or fragmentation within the department or across federal agencies. In our March 2016 report, we recommended DHS designate roles and responsibilities within the department for addressing electromagnetic risks and communicate these to federal and industry partners. DHS concurred with our recommendation and reported that their Office of Policy is coordinating across the department to identify and document applicable roles and responsibilities regarding electromagnetic issues to ensure full mission coverage while minimizing potential overlap or redundancy and expects to complete this effort by December 2016. These actions, if implemented effectively, should address the intent of our recommendation. In our March 2016 report, we found that DHS and DOE had not taken actions to identify key electrical infrastructure assets as required given their respective critical infrastructure responsibilities under the NIPP. The NIPP explicitly states that to manage critical infrastructure risk effectively, partners must identify the assets, systems, and networks that are essential to their continued operation, considering associated dependencies and interdependencies of other infrastructure sectors. The 2008 EMP Commission report also recommended that DHS and DOE prioritize nodes that are critical for the rapid recovery of other key sectors that rely upon electricity to function, including those assets that must remain in service or be restored within hours of an EMP attack. Neither DHS nor DOE reported any specific actions taken to identify critical electrical infrastructure as part of risk management efforts for the energy sector, including any systematic review of a 2013 FERC analysis of critical substations, or any further collaboration to determine the key elements of criticality that they believe should be considered when evaluating the vast array of infrastructure assets constituting the U.S. electric grid. The extensive size and scope of the electric power system necessitates collaboration among partners to ensure all individual expertise is effectively leveraged. As a result, we recommended in our March 2016 report that DHS and DOE direct responsible officials to review FERC’s electrical infrastructure analysis and collaborate to determine whether further assessment is needed to adequately identify critical electric infrastructure assets. DHS and DOE each concurred with our recommendation. DHS reported that NPPD is to collaborate with FERC to identify critical electrical infrastructure assets beginning with the evaluation of critical substations identified by FERC, and will explore elements of criticality that might not have been considered by FERC, in coordination with DOE. DOE stated that its Office of Electricity Delivery and Energy Reliability will review FERC’s electrical infrastructure analysis and will work with FERC and DHS to identify any additional elements of criticality and determine if further assessment is needed. Both DHS and DOE expect to complete these efforts by March 2017. These actions should address the intent of our recommendation. We found in March 2016 that although DHS components had independently conducted some efforts to assess electromagnetic risks, the department had not fully leveraged available risk information or conducted a comprehensive analysis of these risks. Within the Office of Policy, there is recognition that “space weather” and “power grid failure” are significant risk events, which DHS officials have determined pose great risk to the security of the nation. However, DHS officials were unable to provide detailed information about the specific risk inputs— namely threat, vulnerability, and consequence information—that were used to assess how electromagnetic events compared to other risk events, or how these inputs were used to inform DHS’s applicable risk- management priorities. Further, officials within NPPD were unable to identify any specific actions taken or plans to systematically collect or analyze risk information regarding electromagnetic impacts to the electric grid as part of department-wide risk assessment efforts. According to the NIPP, to assess risk effectively, critical infrastructure partners—including owners and operators, sector councils, and government agencies—need timely, reliable, and actionable information regarding threats, vulnerabilities, and consequences. Additionally, the electric grid remains vulnerable to other potential threats, such as physical and cyberattacks. We concluded that better collection of threat, vulnerability, and consequence information through existing DHS programs and strengthened collaboration with federal partners could help DHS better assess the relative risk ranking of electromagnetic events versus other risks and help inform asset protection priorities. Moreover, according to subject-matter experts, the impact to the electric grid from electromagnetic threats may vary substantially by location, network and operating characteristics, and other factors. For example, key reports on GMD indicate that high-voltage transformers located at higher latitudes in the United States are likely subject to increased potential for adverse impacts from GMD events than those at lower latitudes. Further collection of information on sector interdependencies could also help DHS to assess the potential economic consequences associated with long-term power outages and provide information to help assess the cost- effectiveness of various mitigation strategies. In our March 2016 report, we recommended that DHS’s NPPD and Office of Infrastructure Protection (IP) work with other federal and industry partners to collect and analyze key inputs on threat, vulnerability, and consequences related to electromagnetic risks. DHS concurred with our recommendation and reported that the department has initiated efforts to assess electromagnetic risk and help determine priorities. For example, DHS stated the Department has a joint study with DOE underway that will analyze the hazard environments, impacts, and consequences of different sources of EMP and GMD on the electric grid to determine events of concern and potential means of mitigation. DHS expects to implement these efforts by December 2016 and if implemented effectively, should address the intent of our recommendation. We also found in March 2016 that key federal agencies, including DHS and DOE, as well as industry partners had not established a fully coordinated approach to identifying and implementing risk management activities to address EMP risks. According to the NIPP Risk Management Framework, such activities include identifying and prioritizing research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. The publication of the National Space Weather Action Plan in October 2015 identified many key federal activities in these areas regarding the GMD risk; however, no similar efforts had been proposed regarding EMP risks to the electric grid. DHS officials stated an EMP attack generally remains a lower risk priority compared to other risk events with higher probability such as natural disasters or cyberattacks. DOE officials also noted resource limitations and competing priorities as the key driver for not pursuing additional risk management activities specifically related to EMP events. However, we found that even if an EMP attack is not determined to be among the highest resource priorities for DHS and DOE relative to other risk events, there are opportunities for enhanced collaboration among federal agencies and industry stakeholders to address identified gaps and help ensure that limited resources are more effectively coordinated and prioritized. For example, recent reports issued by DOE and a leading research organization for the electric industry identified gaps in the information available regarding likely EMP impacts to modern grid technologies and electronic control systems. They noted that such information remains important for developing applicable protective guidelines and equipment design specifications. In our March 2016 report, we recommended that DHS and DOE engage with federal partners and industry stakeholders to identify and implement key EMP research and development priorities, including opportunities for further testing and evaluation of potential EMP protection and mitigation options. DHS and DOE concurred with our recommendation and each identified actions to convene applicable stakeholders to jointly determine mitigation options and conduct further testing and evaluation. DHS stated S&T will work with DOE and the Electricity Subsector Coordinating Council to develop a joint government and industry approach to identify options for mitigating the consequences of an EMP event. DHS expects to implement this effort by September 2016. In addition, DOE stated it is working with the Electric Power Research Institute to develop an EMP Strategy that is scheduled for completion by August 31, 2016, and the strategy is to be followed by a more detailed action plan identifying research and development priorities and specific opportunities to test and evaluate EMP mitigation and protection measures. If implemented effectively, DHS and DOE’s actions should address the intent of our recommendation. We will continue to monitor DHS and DOE actions taken to address our March 2016 recommendations and have also recently initiated two additional reviews. One is evaluating the electromagnetic event preparedness of U.S. electricity providers and the other is a technical assessment of protective equipment designed to mitigate the potential impacts of a GMD on electrical infrastructure. We expect these projects to be completed by mid-2017. Chairman Perry, Ranking Member Watson Coleman, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact Chris Currie, Director, Homeland Security and Justice at (404) 679-1875 or CurrieC@gao.gov. 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 include Dawn Hoff, Assistant Director; Chuck Bausell, Kendall Childers, Josh Diosomito, Ryan Lambert, Tom Lombardi, Steven Putansu, John Rastler, and Cody Raysinger. 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 summarizes the information contained in GAO's March 2016 report, entitled Critical Infrastructure Protection: Federal Agencies Have Taken Actions to Address Electromagnetic Risks, but Opportunities Exist to Further Assess Risks and Strengthen Collaboration , GAO-16-243 . Key federal agencies have taken various actions to address electromagnetic risks to the electric grid, and some actions align with the recommendations made in 2008 by the Commission to Assess the Threat to the United States from Electromagnetic Pulse Attack (EMP Commission). Since 2008, the Department of Homeland Security (DHS), the Department of Energy (DOE), and the Federal Energy Regulatory Commission (FERC) have taken actions such as establishing industry standards and federal guidelines, and completing EMP-related research reports. GAO found that their actions aligned with some of the EMP Commission recommendations related to the electric grid. For example, DHS developed EMP protection guidelines to help federal agencies and industry identify options for safeguarding critical communication equipment and control systems from an EMP attack. Further, agency actions and EMP Commission recommendations generally align with DHS and DOE critical infrastructure responsibilities, such as assessing risks and identifying key assets. Additional opportunities exist to enhance federal efforts to address electromagnetic risks to the electric grid. Specifically, DHS has not identified internal roles and responsibilities for addressing electromagnetic risks, which has led to limited awareness of related activities within the department and reduced opportunity for coordination with external partners. Doing so could provide additional awareness of related activities and help ensure more effective collaboration with other federal agencies and industry stakeholders. Moreover, although DHS components have independently conducted some efforts to assess electromagnetic risks, DHS has not fully leveraged opportunities to collect key risk inputs—namely threat, vulnerability, and consequence information—to inform comprehensive risk assessments of electromagnetic events. Within DHS, there is recognition that space weather and power grid failure are significant risk events, which DHS officials have determined pose great risk to the security of the nation. Better collection of risk inputs, including additional leveraging of information available from stakeholders, could help to further inform DHS assessment of these risks. DHS and DOE also did not report taking any actions to identify critical electrical infrastructure assets, as called for in the National Infrastructure Protection Plan. Although FERC conducted a related effort in 2013, DHS and DOE were not involved and have unique knowledge and expertise that could be utilized to better ensure that key assets are adequately identified and all applicable elements of criticality are considered. Finally, DHS and DOE, in conjunction with industry, have not established a coordinated approach to identifying and implementing key risk management activities to address EMP risks. Such activities include identifying and prioritizing key research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. Enhanced coordination to determine key research priorities could help address some identified research gaps and may help alleviate concerns voiced by industry regarding the costs and potential adverse consequences on grid reliability that may be caused by implementation of such equipment. |
For CBP round 1, we found problems with the bidding process, including poor timing and lack of clarity in bid submission information and CMS’s inability to inform suppliers of missing financial documentation. In comparison with CBP round 1, CMS provided CBP round 1 rebid bidding information to suppliers earlier, and its financial documentation instructions were clearer and suppliers were notified of missing documentation. CMS also added program information about determining suppliers’ capacity, and provided directories to inform suppliers about state licensure requirements. CMS had difficulty providing clear bidding information in CBP round 1. For example, CMS provided new bidding information several times after the bid window opened, such as announcing the 10 financial measures used to evaluate the financial viability of bidding suppliers; clarified CBP round 1’s bidding information in response to supplier confusion, such as providing additional explanatory information concerning the request-for- bid instructions; and extended the bid window deadline. These changes in bidding information made it more difficult for suppliers to submit correct bids. CMS and Palmetto GBA acknowledged that during CBP round 1 suppliers did not always understand the request-for-bid instructions. The instructions were not available to suppliers until the day the bid window opened. During the first 2 months of the bid window, while suppliers were preparing their bid submissions, Palmetto GBA held informational bidder conference calls on how to submit bids and maintained audio recordings on the CBP Web site for a limited time. Questions also were not organized by subject matter, and while the Web site had a frequently asked questions section, it was difficult for suppliers to determine when questions had been added. CMS improved its communication with suppliers about bidding information for the CBP round 1 rebid. For example, CMS provided suppliers with bidding information before the bidding window opened on October 21, 2009, so that bid window extensions were not needed. Prior to the bid window opening, the rebid’s request-for-bid instructions had been available to potential bidding suppliers for over 2 months, since August 3, 2009, and CMS had already held seven informational bidder conference calls. Transcripts, audio recordings, and PowerPoint presentations from the calls were available on the Palmetto GBA CBP Web site throughout the round 1 rebid. CMS made two minor clarifications to the CBP round 1 rebid instructions. First, on the day the bid window opened, CMS provided the actual bid submission deadlines, including the covered document review date, and provided further instructions on how a supplier needed to approve a bid in the online bidding system and would submit the required hard copy financial documents. Second, on November 17, 2009, CMS clarified that the financial statements for the last operating year that suppliers were required to submit as part of their bids could be for either calendar or fiscal years. For the CBP round 1 rebid, Palmetto GBA maintained suppliers’ frequently asked questions on the CBP’s Web site by topic. The questions were provided for three topics—Bidding Guidelines, Bidding Process, and Payment Policies—and dated in chronological order, unlike in CBP round 1, so suppliers could more easily determine when new ones were posted on the Web site. The Web site also has a “What’s New” section to allow suppliers to find any new CBP information, for example, information for the suppliers that were offered contracts, such as the form to request that business locations be added or removed from their contracts. In our 2009 report, we found that financial documentation instructions were sometimes unclear in CBP round 1. CMS acknowledged that during CBP round 1 many suppliers had particular difficulty complying with the financial documentation requirements and that the statement of cash flow—described as a statement of changes in financial position—was the document most often missing. We found that CMS’s CBP round 1 financial documentation instructions did not clearly address differences among supplier business types—for example, a sole proprietorship business versus a publicly traded national corporation—and among the financial documents needed to submit a bid for each type. Because business types could not easily be cross-referenced to the request-for-bid instructions, suppliers were at risk of submitting incomplete or inaccurate financial documentation. We also found that CMS’s CBP round 1 request-for-bid instructions had inconsistent information about the requirements for the credit report and credit score submission. For example, the bid submission form stated that a credit rating and score—rather than using the term credit report—had to be submitted. Near the end of the bid window, Palmetto GBA then issued a “required document reminder” that all bidders had to submit both a credit report and a credit score. For the CBP round 1 rebid, CMS clarified financial documentation instructions by providing additional tools to guide suppliers through the bid submission process. The request-for-bid instructions included a chart—Required Financial Documents by Business Type—that more clearly explained which documents were to be submitted by business type. For example, the chart specified which portions of a supplier’s tax return were required based on its business type such as a sole proprietorship. The chart also included a credit report column that stated bidders must submit a “Credit Report with numerical score completed within 90 days of bid submission,” and the bid instructions included the same description. To further assist suppliers to provide the correct financial documents, the instructions included a Required Financial Documents appendix with sample documents and more specific explanations of the income statement, balance sheet, statement of cash flow, revenue and expense portion of the tax return, and the credit report, along with a Checklist of Required Hardcopy Documents for Bid Submission. For the CBP round 1 rebid, CMS officials told us they notified bidding suppliers that submitted their hard copy financial documents by the round’s covered review date of any missing documents, as required by MIPPA. Once notified, suppliers had 10 business days to submit their missing documentation. CMS officials told us that 791 suppliers submitted their financial documentation by the CBP round 1 rebid covered document review date and 321 were notified that they had missing documentation. Fourteen suppliers did not subsequently submit the missing documents and their bids were disqualified. For this review, tax record documents were the most often missing financial documentation. In CBP round 1, questions were raised about the capacity of some suppliers to fulfill their awarded contracts on day one of the CBP’s contract period, including whether they had experience providing the DME product category, had business locations in the competitive bidding areas, and could expand their businesses, if needed, to supply all Medicare beneficiaries in their competitive bidding areas. CMS officials told us that the CBP’s Program Advisory and Oversight Committee (PAOC) raised concerns that suppliers new to a competitive bidding area, new to a DME product category, or that reported high capacity figures would not be able to increase reported capacity in time to meet the projected demand for the DME items in the competitive bidding areas. To address the concerns, CMS officials told us that the agency added a systematic method of reviewing suppliers’ capacity and expansion plans for the CBP round 1 rebid. CMS developed a three-step method to determine whether a supplier new to a product category or a competitive bidding area or an experienced supplier that reported high capacity figures would be able to increase capacity to meet the projected demand for the DME items. The three steps were as follows: First, CMS determined whether the total capacity of all experienced suppliers in the competitive bidding area reporting modest growth projections and eligible for a competitive bidding program contract offer could meet the projected demand for items in the contract’s first year. If the capacity from these experienced suppliers was sufficient to cover the item demand on day one of the program, then the capacity offered by any additional suppliers with expansion plans and eligible for a contract offer was considered surplus capacity and no further review was conducted. Second, if the total capacity of the experienced suppliers identified in step one did not meet the projected demand for the first year of the contract, then CMS reviewed the expansion plans provided by the new and high- growth or high-volume suppliers to verify their capacity to furnish the items. The expansion plan review involved an in-depth examination of the supplier’s financial information, specifically to verify whether the supplier had the liquid assets and available credit needed to expand capacity. If the verified capacity from these suppliers with expansion plans was sufficient to meet demand, CMS determined that the suppliers eligible for a CBP contract offer had the ability to meet demand on day one of the program. Third, if the results of the first two steps indicated that more suppliers were needed to meet demand on day one of the program, CMS made more suppliers eligible for a CBP contract offer. As of September 10, 2010, CMS had not disclosed how many capacity evaluations were conducted during the CBP round 1 rebid. In 2009, we found that some suppliers that won CBP round 1 contracts were not yet licensed in states where they would be operating. For the CBP round 1 rebid, CMS further clarified the state licensure requirement, stating that suppliers must be licensed for the product category in the competitive bidding area in which they are bidding, and if a competitive bidding area covers more than one state, the supplier needs to obtain applicable licensure in all states. In order to better inform suppliers about these licensure requirements, CMS and Palmetto GBA provided licensure state directories for the 11 states included in the CBP round 1 rebid competitive bidding areas. The directories, which served only as guides for suppliers, provided a list of licenses required by each state for each product category for suppliers with a physical location in that state. Suppliers without a physical location in the state but that would be providing DME items and services to Medicare beneficiaries in the state were directed to consult the appropriate state licensing agency; contact information for those agencies was also provided. The suppliers were required to file copies of applicable state licenses with the National Supplier Clearinghouse—which processes Medicare enrollment applications by DME suppliers—prior to submitting a bid. CMS acknowledged that CBP round 1’s competitive bid submission system—CBSS—had operational problems that affected suppliers’ ability to submit their bids. These problems included, for example, loss of bid submission data caused by CBSS security features that automatically logged suppliers out after 2 hours and that timed out suppliers if there was no activity for 30 minutes, and cases when CBSS was unavailable because of unscheduled downtimes. Additionally, CBSS did not have a “cut and paste” function and manual data reentry was time-consuming and increased the risk of suppliers inputting incorrect data that could disqualify a bid. CMS officials also acknowledged that the CBSS user guide was not very detailed or user friendly. CMS developed a new electronic bid submission—DBidS—for the CBP round 1 rebid. DBidS was designed to address CBSS’s specific deficiencies by being more user friendly and easier for suppliers to navigate and providing a logical flow of the requested data, as well as detailed bidding instructions in user-friendly language. Suppliers were provided a DBidS reference guide on the DMEPOS Competitive Bidding Program Web site that included screen shot explanations for the bid submission Forms A and B. It also has a “copy and paste” function for the transfer of certain data and many data-saving points to minimize loss of data. Suppliers could have more than one employee access DBidS at the same time, but to control data input DBidS will not allow more than one employee to input the same data at the same time. DBidS has status indicators to indicate whether the bidding forms are “complete,” “incomplete,” or “pending approval,” and has links in the system to direct suppliers to the incomplete data. CMS officials told us that DBids did not have significant operational issues and only a few suppliers experienced minor problems. In CBP round 1, CMS sent notification letters to both the winning and losing suppliers before announcing the final winning suppliers that accepted contracts for the CBP. The letters sent to suppliers that had bids disqualified included an attachment using seven general reason codes to explain the grounds for the disqualifications. Disqualified bids were ineligible to compete on price and were not considered for a contract award. During CBP round 1, CMS also conducted a postbidding review process through which the agency considered concerns raised by losing suppliers and in some cases, reversed decisions to disqualify the bids of certain suppliers. We found that CMS had not effectively notified suppliers about the opportunity for this postbidding review process. To improve future rounds of the CBP, we recommended in our 2009 report that if CMS decides to conduct a review of disqualification decisions made during the CBP round 1 rebid and future rounds, CMS should notify all suppliers of any such process, give suppliers equal opportunity for such reviews, and clearly indicate how they can request a review. CMS agreed with our recommendation. For the CBP round 1 rebid, CMS sent notification letters to winning suppliers beginning in July 2010. CMS officials informed us that after the CBP round 1 rebid contracting process is completed, CMS plans to send letters to all disqualified suppliers with the reasons why their bids were disqualified. CMS officials said the letters will explain the process by which suppliers may ask questions and express concerns. CMS officials also stated that in the course of responding to such questions or concerns, if CMS determines an error was made, it is possible that a CBP contract may be offered to the supplier. As required by MIPPA, we will study the CBP round 1 rebid, including, for example, the program’s impact on Medicare beneficiary access to items and services and on DME small business suppliers. Our study is to be completed no later than one year after the CBP round 1 rebid’s Medicare competitively determined payments are first made, which become effective for covered items and services on January 1, 2011. In commenting on the information presented in this testimony, CMS officials stated they appreciated GAO noting the administrative improvements to the competitive bidding process the agency made for the round 1 rebid. The officials further stated that they believe that CMS made many improvements to the CBP. CMS also provided technical comments that we incorporated as appropriate. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you or other members of the subcommittee may have. For further information about this statement, please contact Kathleen M. King at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contact named above, key contributors to this testimony were Martin T. Gahart, and Christie Motley, Assistant Directors; Lori Achman; Kye Briesath; Krister Friday; Thomas Han; Erica Pereira; Hemi Tewarson; Opal Winebrenner; and Charles Youman. Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments. GAO-10-844T. Washington, D.C.: June 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.: November 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.: January 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.: September 22, 2005. Medicare: CMS’s Program Safeguards Did Not Deter Growth in Spending for Power Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. Medicare: Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies. GAO-04-765. Washington, D.C.: September 7, 2004. Medicare: CMS Did Not Control Rising Power Wheelchair Spending. GAO-04-716T. Washington, D.C.: April 28, 2004. 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. | To reduce spending on durable medical equipment (DME) and related items, under federal law the Centers for Medicare & Medicaid Services (CMS) is phasing in, with several rounds of bidding, a competitive bidding program (CBP) for certain DME and other items. Because of numerous concerns, the Medicare Improvements for Patient and Providers Act of 2008 (MIPPA) terminated the CBP round 1 supplier contracts and required CMS to repeat the CBP round 1, the rebid that began in 2009. In November 2009, GAO issued the report Medicare: CMS Working to Address Problems from Round 1 of the Durable Medical Equipment Competitive Bidding Program (GAO-10-27) that documented problems in CMS's implementation of CBP round 1. This statement discusses some of the problems GAO identified and how CMS has or plans to address them in the ongoing CBP rebid bidding process, particularly (1) the bid submission information provided to suppliers, (2) the electronic bid submission system, and (3) the bid disqualification notification process. For the 2009 report, GAO reviewed data provided by CMS and relevant laws and regulations, and interviewed CMS officials. For this statement, GAO also obtained select information on how CMS addressed the CBP round 1 problems identified in GAO's report by reviewing agency documents and interviewing CMS officials in August and September 2010. In the November 2009 report on CBP round 1, GAO noted that problems with the bidding process included poor timing and lack of clarity in bid submission information and the inability to inform suppliers of missing financial documentation. Several times after the CBP round 1 bid window opened, CMS provided new bidding information and clarified other bidding information. The bid window was also extended beyond the initial deadline. These changes made it more difficult for suppliers to submit correct bids. CMS improved implementation of these steps in the bidding process for the CBP round 1 rebid. For example, for the CBP round 1 rebid, CMS provided bidding information to suppliers prior to the bid window opening, including the rebid's request-for-bid instructions, which were available to potential bidding suppliers for over 2 months before the bid window opening. CMS also provided clearer financial documentation instructions and additional financial documentation tools to guide suppliers in the CBP round 1 rebid. For example, the request-for-bid instructions included a chart that more clearly explained which documents were to be submitted by the supplier's business type, for example, a sole proprietorship. CMS also conducted a financial document review during the round 1 rebid, which informed suppliers whether their bid submission was missing required financial documents. Of the 321 suppliers that were notified they had missing documentation, only 14 did not subsequently submit the missing documents. As CMS acknowledged, suppliers had difficulty entering bidding information in the bid submission system used in CBP round 1 and its user guide was not sufficiently detailed. CMS developed a new electronic bid submission system for the CBP round 1 rebid. CMS officials told us that the new system did not have significant operational issues and only a few suppliers experienced minor problems. GAO found that CMS had not effectively notified all suppliers about the opportunity for a postbidding review process in CBP round 1. To address GAO's 2009 recommendation that the agency effectively notify all suppliers of all aspects of the CBP round 1 rebid and future rounds, including any process to review disqualifications, CMS officials stated that the agency plans to notify the losing suppliers of the disqualification reasons by sending each of these suppliers a letter that will explain the process for asking questions or expressing concerns. Officials also stated that in the course of responding to suppliers' questions or concerns, if CMS determines an error was made, it is possible that the supplier may be offered a contract. In commenting on the information presented in this testimony, CMS officials stated they appreciated GAO noting the administrative improvements to the competitive bidding process the agency made for the round 1 rebid. The officials further stated that they believe that CMS made many improvements to the CBP. |
As detailed in our April 2015 report, in the summer of 2014, refiners purchased all the helium offered in BLM’s first-ever competitive helium auction at higher than expected prices. Two refiners purchased all 93 million cubic feet of helium that was auctioned at an average price of $161 per thousand cubic feet—significantly above the prices offered by most other bidders. BLM set the minimum starting bid for each lot at $100 per thousand cubic feet. At one point during bidding, the auction price rose as high as $180 per thousand cubic feet. We observed that participants who did not win at the auction stopped bidding when prices Most of reached from $105 to $130 per thousand cubic feet (see fig. 1).the representatives of refiners and nonrefiners we interviewed stated that the auction prices were too high for crude helium, especially during a time of global excess of helium supplies. BLM and some representatives of nonrefiners and a refiner, however, said the auction was a success for the federal government since it generated about $15 million in revenue, an amount that a senior helium program official said exceeded the agency’s expectations. In interviewing BLM officials and representatives of refiners and nonrefiners and reviewing BLM’s planned implementation actions, we identified multiple, possible explanations for why refiners won all the auctioned helium for higher than expected prices. These explanations included: Refiners may have been more willing to pay higher prices at the auction since their costs for refining crude helium are lower than those of nonrefiners. According to representatives of nonrefiners, the costs of purchasing auctioned helium and turning it into refined helium are lower for refiners than nonrefiners because refiners do not have to pay another company to refine their helium, a situation that gives refiners an advantage at the auction. Nonrefiners may not have bid higher at the auction because they did not know the costs and delivery terms for tolling. Representatives of nonrefiners we interviewed said that few tolling agreements were in place prior to the auction. Those agreements would have specified the rates for tolling any helium they purchased and provided details on when, where, and how purchased helium would be delivered. Changes to the way BLM proposed to deliver helium purchased at the auction may have provided an incentive to refiners to purchase as much helium at the auction as possible. BLM had announced before the auction that it would reserve some of its pipeline delivery capacity in fiscal year 2015 for helium purchased at the auction. Based on our review of BLM’s July 2014 Federal Register notice, purchasing helium at the auction would have allowed refiners to take advantage of the new delivery method and maximize volumes of helium they would receive through the pipeline. In the past, BLM divided sale volumes into two portions, one offered to refiners, and one offered first to nonrefiners. For example, in sales held in January and May 2014 under the first phase of the act, BLM offered 10 percent of the total volume of helium that it made available for sale to nonrefiners, and the refiners were offered 90 percent of the total volume, excluding helium for federal users. BLM officials said they changed this approach based on their interpretation of the 2013 act. the auction, nonrefiners purchased none of the federal helium that BLM made available for delivery in fiscal year 2015. As a result, the number of companies purchasing helium from BLM for delivery in fiscal year 2015 compared with fiscal year 2014 decreased from eight to four. In our April 2015 report, we found that BLM had taken steps to help improve reporting by refiners by clarifying one of the key terms in the tolling provision, but the agency did not have full assurance that refiners were satisfying the provision. The tolling provision requires refiners, as a condition of sale or auction, to make excess refining capacity available at commercially reasonable rates to certain nonrefiners. BLM officials told us that they considered signed tolling agreements between refiners and other parties, as well as refiners’ attempts to negotiate tolling agreements that did not result in signed agreements, to be evidence of refiners’ satisfying the tolling provision. This is because, if a refiner and nonrefiner do not agree on terms for tolling, the act does not require the refiner to toll. BLM has collected some information about refiners’ signed tolling agreements and refiners’ attempts to negotiate tolling agreements, but the agency has not obtained all relevant information about refiners’ efforts. In a July 2014 Federal Register notice, BLM directed refiners to report information about tolling agreements that they entered into during the preceding year by completing a tolling report form. However, refiners inconsistently reported information about their signed tolling agreements on these forms. For example, not all refiners reported the rates they charged for tolling. According to BLM officials, a representative of one refiner said that the refiner did not report the rate because the act does not require refiners to disclose information about agreements covering Officials we spoke with from less than 15 million cubic feet of helium. Interior’s Office of the Solicitor said that BLM could not require refiners to report information about signed tolling agreements for less than 15 million cubic feet in a Federal Register notice. BLM officials said they expect that many signed tolling agreements will be for less than 15 million cubic feet since nonrefiners typically accept delivery of helium in 1 million cubic feet increments. As a result, BLM officials said that having information about tolling agreements for smaller volumes from all refiners, including rates, would provide BLM with a better understanding of refiners’ efforts to satisfy the tolling provision. In addition, BLM requested that refiners report information about attempts to negotiate tolling agreements that did not result in signed agreements. According to officials with the Office of the Solicitor, the act does not require refiners to report this information, so reporting is voluntary. As a result, the refiners’ responses to BLM’s request were inconsistent. For example, some refiners reported that they had attempted to negotiate agreements but did not report details about the volume or rates offered. Officials from the Office of the Solicitor said BLM may need to issue a rule to require refiners to report on their signed agreements for less than 15 million cubic feet and their attempts to negotiate tolling agreements that do not result in signed agreements. But BLM officials said they do not intend to issue a rule, in part, because it is a time-consuming process that might delay future auctions and sales. However, options may be available for the agency to shorten the rulemaking process if, for example, the conditions for issuing an interim final rule without first issuing a proposed rule for public notice and comment have been satisfied. Until refiners consistently provide information about signed agreements to toll less than 15 million cubic feet of helium and about their attempts to negotiate tolling agreements, BLM cannot determine the extent to which refiners are satisfying the tolling provision by making excess capacity available at commercially reasonable rates. To provide the agency with better information to support its decisions when implementing the act, in our April 2015 report, we recommended that the Secretary of the Interior direct the Director of BLM to issue a rule—perhaps an interim final rule if BLM finds there is good cause to do so, given the time constraints—to require refiners to report information about (1) signed agreements to toll less than 15 million cubic feet of helium and (2) their attempts to negotiate tolling agreements that do not result in signed agreements. In written comments on a draft of our report, Interior did not agree with this recommendation and stated that existing mechanisms are providing BLM with sufficient information for the agency to administer the tolling provision, and that BLM is not in a position to develop a rule due to reduced resources, current workloads, and other high priority rulemakings and initiatives in which the agency is engaged. Also, Interior stated that the expense and time necessary to undertake a rule outweighed any immediate benefit. Interior said that the federal helium program would likely be nearing its conclusion by the time such a rule is in place. Subsequent to the issuance of our April 2015 report,letter addressing our recommendations, Interior further stated that to address concerns we raised in our report, BLM plans to collect information on tolling and tolling agreements through Federal Register notices. Interior stated that the Federal Register notice for the fiscal year 2016 auction and sale will include a request for refiners to voluntarily report tolling agreements for less than 15 million cubic feet and information about efforts to negotiate tolling agreements that were not successful. The letter stated that BLM believes making such requests in Federal Register notices will be an effective means of collecting this information. in a June 2015 As we stated in our report, we do not agree that existing mechanisms, including requests made in Federal Register notices, are providing or will provide BLM with the information it needs to be assured that refiners are satisfying the tolling provision. Under BLM’s approach, refiners’ reporting of certain information—specifically, signed agreements to toll less than 15 million cubic feet and their attempts to negotiate tolling agreements that did not result in signed agreements—remains voluntary, and not all refiners provided this information to BLM when the agency previously requested it. It is unclear how BLM would achieve a different result from future information requests under its proposed approach. We recognize that Interior and BLM must consider current workloads and other priorities when determining how to expend limited resources. However, if BLM does not issue a rule to require refiners to report this information, the agency cannot determine the extent to which refiners are making excess capacity available at commercially reasonable rates. Even if BLM cannot shorten the rulemaking process by, for example, issuing an interim final rule, the agency will continue implementing the act through fiscal year 2021, and the administration of the tolling provision could affect nonrefiners’ participation in the auctions. We continue to believe that undertaking a rulemaking is necessary so that BLM can have better assurance that refiners are satisfying the tolling provision through fiscal year 2021. BLM faces a number of decisions about its continued implementation of the act, including decisions related to its upcoming fiscal year 2016 helium auction and sale. On June 12, 2015, after we issued our April 2015 report, BLM published a Notice of Proposed Action in the Federal Register that outlined its proposal for holding the fiscal year 2016 auction and sale in August 2015. The notice stated that after a public comment period, BLM plans to issue a final notice before holding the fiscal year 2016 auction and sale. Regarding the fiscal year 2016 auction, BLM officials face a decision about how the agency will choose a method to conduct the auction, among other decisions. BLM’s summer 2014 auction was conducted live and in-person in Amarillo, Texas, and the agency broadcast the auction in real time over the Internet for public viewing. According to the June 2015 Notice of Proposed Action published in the Federal Register, BLM intends to use the live auction method for the fiscal year 2016 auction as well, but according to Interior’s June 2015 letter, the method BLM selects will be announced in the final Federal Register notice. The act requires BLM to conduct each auction using a method that maximizes revenue to the federal government. As stated in our report, representatives from some of the refiners and nonrefiners that participated in the auction told us they had concerns about BLM’s auction method. For example, a representative from one nonrefiner questioned whether holding a live auction where bids are offered sequentially would yield the highest revenues. BLM officials told us they considered multiple auction methods when initially choosing the live auction for the summer 2014 auction, but that they did not assess the auction methods based on maximizing revenue. Instead, they determined which method would be most logistically practical to administer. For example, they told us that they were concerned about holding an Internet-based auction because they did not want potential technological difficulties to disrupt the auction or prevent a company from participating. However, BLM economists told BLM helium program officials and us that there are several academic studies on different auction methods Interior used in the past. These methods included sealed-bid auctions and auctions where all lots were auctioned simultaneously rather than sequentially. BLM economists said that these academic studies could help identify an auction method that maximizes revenue. As of the issuance of our April 2015 report, however, BLM helium program officials had not evaluated the various methods. Without assessing each method based on revenue generation, we found that BLM would not have reasonable assurance that the live auction method will maximize revenue, as required by the act. As a result of this finding, we recommended that the Secretary of the Interior direct the Director of BLM to assess auction methods based on revenue generation, using available information, and select a method that would maximize revenue for the upcoming helium auction. In comments on our draft report, Interior concurred with this recommendation. Subsequent to the issuance of our report, BLM published its Notice of Proposed Action in June 2015 in the Federal Register, stating the agency’s intent to hold a live auction for fiscal year 2016. Three days later, Interior stated in its June 2015 letter addressing our recommendations that BLM’s economists were evaluating various auction methods to determine which is most appropriate to maximize revenue. The letter stated that BLM will base its selection of an auction method for the fiscal year 2016 auction on this evaluation and will provide details on the selected method in the final Federal Register notice. Chairman Lamborn, Ranking Member Lowenthal, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or fennella@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions to this testimony include Jeff Malcolm (Assistant Director), Cheryl Arvidson, Carol Bray, Cheryl M. Harris, Josie H. Ostrander, Leslie Kaas Pollock, Dan Royer, and Jeanette Soares. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Helium is a key nonrenewable resource with a variety of uses. The federal government maintains an underground reservoir near Amarillo, Texas, for the storage of both federally owned helium and helium owned by private companies. The Helium Stewardship Act of 2013 establishes a phased process for the privatization of the federal helium reserve in a competitive market fashion. As part of that process, BLM conducted an auction and two sales of federal helium in the summer of 2014. This testimony highlights the key findings of GAO's April 2015 report (GAO-15-394). Accordingly, it addresses (1) the outcomes of BLM's summer 2014 helium auction and sales, (2) BLM's administration of the act's tolling provision (tolling refers to a helium refiner processing or refining another party's crude helium for an agreed upon price), and (3) upcoming decisions BLM faces as it continues implementing the act. For the April 2015 report, GAO reviewed the 2013 act, BLM's auction and sales results, and tolling agreement reports; interviewed BLM and other Interior officials and representatives of 12 of the 13 refiners and nonrefiners that registered to participate in the auction. In April 2015, GAO found that refiners purchased all the helium offered in the Department of the Interior's Bureau of Land Management's (BLM) first-ever competitive helium auction, held in July 2014, at higher than expected prices. Two refiners purchased all 93 million cubic feet of helium that was auctioned at an average price of $161 per thousand cubic feet--significantly above the prices offered by most other bidders. BLM, refiners, and nonrefiners identified possible reasons for the auction's outcome, including that nonrefiners said that refiners had an advantage because their costs for refining crude helium were lower than nonrefiners'. After the auction, BLM sold more than 1 billion cubic feet of helium in two sales restricted to refiners. BLM has taken steps to help improve reporting by refiners, but GAO found in its April 2015 report that the agency did not have full assurance that refiners were satisfying the tolling provision of the Helium Stewardship Act of 2013. The tolling provision requires refiners, as a condition of sale or auction of helium under the act, to make excess refining capacity available at commercially reasonable rates to certain nonrefiners. BLM officials said that one way refiners can satisfy the provision is to attempt to negotiate tolling agreements. The act does not require refiners to report information to BLM about their attempts to negotiate agreements that do not result in signed agreements, so such reporting is voluntary. BLM requested that refiners report this information, but the refiners' responses were inconsistent. For example, some refiners reported that they had attempted to negotiate agreements but did not report details about rates offered. Officials from Interior's Office of the Solicitor said BLM may need to issue a rule to require refiners to report about their attempts to negotiate tolling agreements. However, BLM officials said they do not intend to issue a rule because it is a time-consuming process. Nevertheless, without information about refiners' attempts to negotiate agreements, BLM cannot determine the extent to which refiners with excess capacity are satisfying the tolling provision. Interior disagreed with GAO's recommendation that BLM issue a rule to, among other things, require refiners to report information about their attempts to negotiate tolling agreements that do not result in signed agreements. Interior disagreed with the recommendation because it believes existing mechanisms provide needed information. By relying on existing mechanisms, refiners' reporting of this information remains voluntary, and not all refiners provided the information when BLM previously requested it. GAO continues to believe that undertaking a rulemaking is necessary so that BLM can have better assurance that refiners are satisfying the tolling provision. In addition, GAO found in April 2015 that BLM faces a number of decisions as it continues implementing the act, including a decision about how the agency will choose a method for conducting its auction of a portion of the helium BLM will make available for delivery during fiscal year 2016. The act requires BLM to conduct each auction using a method that maximizes revenue to the federal government. BLM officials said they considered multiple methods before selecting the live auction method used for the July 2014 auction, but they did not assess the methods based on maximizing revenue. As of the issuance of GAO’s April 2015 report, BLM officials had not evaluated various methods, such as sealed bids or simultaneously auctioning multiple lots. Without assessing auction method options based on revenue generation, BLM does not have assurance that a live auction will maximize revenue as required. Interior agreed with GAO’s recommendation that BLM assess and select an auction method that would maximize revenue. In its April 2015 report, GAO made two recommendations to Interior. Interior concurred with one recommendation but not the other. GAO continues to believe that all of its recommendations have merit and should be fully implemented. For information, contact Anne-Marie Fennell at (202) 512-3841 or fennella@gao.gov |
The Social Security Disability Insurance (DI) and Supplemental Security Income (SSI) programs are the nation’s two largest federal programs providing cash payments to people with severe long-term disabilities. Between 1985 and 1995, the number of DI recipients increased almost 50 percent to about 5.7 million, and the number of disabled SSI recipients increased from 2.5 million to 4.9 million. In fiscal year 1995, the Social Security Administration (SSA) distributed over $61 billion in disability benefits for its DI and SSI programs. Over the past decade, SSA’s Office of Hearings and Appeals (OHA) has experienced unprecedented growth in both its backlog of DI and SSI hearings requests and the time it takes to process a disability appeal. While the agency has undertaken several efforts over the years to address the backlog issue, workload increases and long-standing problems associated with the program have impeded their success. The rapid growth in OHA’s pending case backlog and longer case-processing times have caused hardship for those disability claimants who are unable to work or to afford needed medical treatment while awaiting a final decision. On average, it takes more than a year to receive a final OHA decision from the time a claimant first files an application of disability. This extended waiting period has raised congressional concerns about SSA’s disability decision-making process. The DI program, enacted in 1956 under title II of the Social Security Act, provides monthly cash insurance benefits to insured severely disabled workers. The SSI program, enacted in 1972 under title XVI, provides monthly cash payments to aged, blind, or disabled people whose income and resources fall below a certain threshold. The Social Security Act defines disability under both programs as an inability to engage in substantial gainful activity by reason of a severe physical or mental impairment. The impairment must be medically determinable and expected to last at least a year or result in death. Claimants file an application for disability benefits—both DI and SSI—with one of SSA’s over 1,300 field offices. Applications, along with supporting medical evidence, are then forwarded to the appropriate state disability determination service (DDS). SSA arranges with state DDSs to make the initial medical determination of eligibility in accordance with SSA’s policies and procedures. Claimants who are dissatisfied with the initial DDS determination may request a “reconsideration” of the claim within 60 days of their notice of decision. During the reconsideration review, all evidence is reevaluated by DDS personnel who were not involved in the original decision, and a new, independent decision is made on the merits of the case. Claimants who disagree with the reconsideration decision have the right to a hearing before an administrative law judge (ALJ) in SSA’s OHA. A request for hearing may be filed by mail or telephone, or in person at either an SSA field office or an OHA hearing office. Upon receipt of a hearing request, hearing office support staff review and prepare the case file for hearing. If necessary, staff may recommend to the ALJ that additional medical evidence be developed before holding a hearing. The hearing is generally the first time in the disability determination process that a claimant has the opportunity for a face-to-face meeting with a decisionmaker. At the hearing, the claimant and witnesses—who may include medical or vocational experts—provide testimony. The ALJ inquires into the issues, receives relevant documents into evidence, and allows the claimant or the claimant’s representative to present arguments and examine witnesses. If necessary, the ALJ may further update the evidence after the hearing. When this process is completed, the ALJ issues a decision based on his or her assessment of the evidence in the case. Claimants who disagree with an ALJ denial are given another 60 days to request that the case be reviewed by SSA’s Appeals Council. A request for review must be filed through either a field office or a hearing office or directly with the Appeals Council. The Appeals Council may dismiss the request, affirm an ALJ’s decision, remand the case to an ALJ for further action, or issue a new decision. To determine the appropriate action, Council members, assisted by a large staff of analysts, decide whether the decision was supported by the evidence. The Appeals Council’s decision—or the decision of the ALJ, if the Appeals Council dismisses the request—becomes SSA’s final decision. After all SSA administrative remedies are exhausted, a claimant has further appeal rights within the federal court system, up to and including the U.S. Supreme Court. (See fig. 1.1.) The Administrative Procedure Act (APA), enacted by the Congress in 1946, protects the decisional independence of ALJs. To ensure ALJ independence, APA grants ALJs certain specific exemptions from normal management controls. For example, federal agencies may not apply performance appraisal requirements to ALJs and may remove ALJs only for “good cause,” as determined by the Merit Systems Protection Board. These safeguards were put in place to ensure that ALJ judgments were independent and that ALJs would not be paid, promoted, or discharged arbitrarily or for political reasons by the agency. However, ALJ independence is not unlimited. Because they are SSA employees, ALJs are subject to agency rules and regulations, and they must apply even those with which they disagree. Further, ALJ independence does not negate SSA’s authority to implement procedures for supervising and reviewing the ALJ decision-making process to ensure that agency policies and procedures are followed. The role of ALJs at SSA differs from that of other ALJs in the federal government in that SSA ALJs are responsible for both developing the hearings evidence and deciding the case. In other executive branch agencies, the responsibility for developing evidence is left to the claimants and their representatives. SSA hearings also differ from those of other executive branch agencies in that they are informal, nonadversarial proceedings; that is, SSA does not present a case challenging a claimant’s disability claim. Most other executive branch ALJs hold hearings that are formal, adversarial, and similar to a trial. During such hearings, attorneys on both sides present witnesses and documentary evidence and cross-examine witnesses in order to present the facts in a light favorable to their case. OHA headquarters is located in Falls Church, Virginia, apart from SSA headquarters in Baltimore. OHA operates 10 regional offices, 132 hearing offices, 3 class action management centers, and 5 word processing centers. Of OHA’s 7,100 employees, about 1,000 are located in Falls Church. OHA is headed by the Associate Commissioner for Hearings and Appeals, who is responsible for administering the hearings and appeals process and reports directly to SSA’s Deputy Commissioner for Programs and Policy. (See app. I for an SSA organization chart and app. II for an OHA organization chart). OHA’s Chief ALJ reports directly to the Associate Commissioner for Hearings and Appeals and is responsible for managing about 5,000 hearing office employees located in 10 regions. Each OHA region is headed by a regional chief ALJ (RCALJ), who is responsible for the operations of hearing offices in his or her respective region. In every hearing office, a hearing office chief ALJ (HOCALJ) oversees day-to-day office operations and provides guidance to ALJs, professional staff, and support personnel. Due to the rapid growth in OHA backlogs and case-processing times and their impact on public service, in July 1994 the former Chairman, and now Ranking Minority Member, of the House Committee on Ways and Means asked us to examine SSA’s efforts to address the problem. More specifically, the objectives of our assignment were to determine (1) those factors contributing to the growth in the backlog of appealed cases, (2) what steps SSA has taken in the past to address this backlog problem, (3) what SSA is currently doing to reduce the appellate backlog, and (4) what needs to be done in the long term to make the disability appeals process more timely and efficient. In conducting our review, we analyzed data on OHA workloads, backlogs, and processing times; reviewed over 50 government and nongovernment studies conducted over the past 20 years on the disability determination and appeals process (see app. IV); examined SSA’s previous initiatives to address OHA backlogs and improve the hearings and appeals process; and reviewed SSA’s Short-Term Disability Plan (STDP) and the agency’s longer-term Plan for a New Disability Claim Process (redesign plan). To supplement information obtained from the various reports and initiatives outlined above, we interviewed key SSA and OHA headquarters and regional management officials, as well as managers responsible for the development and implementation of SSA’s STDP and redesign plan; obtained the views of hearing office officials—chief ALJs, supervisory staff-attorneys, and hearing office managers—regarding SSA’s previous and current efforts to improve program efficiency and address OHA’s pending case backlog; and interviewed officials at state disability determination services in Florida, Georgia, Massachusetts, New York, and Texas to obtain their views on the status and expected impacts of the STDP initiatives. Our review was performed at SSA and OHA headquarters; four SSA regions—Atlanta, Boston, Dallas, and New York; and five OHA regions—Atlanta, Boston, Dallas, New York, and Philadelphia. By examining workload and performance indicators, we judgmentally selected regions and OHA hearing offices that would provide us with varied workload levels as well as varied experiences in managing their workloads. The selected offices also provided us with some geographical dispersion. We conducted our review between July 1994 and February 1996 in accordance with generally accepted government auditing standards. Over the last decade, OHA’s backlog of pending cases and case-processing times have grown rapidly, and claimants are waiting longer for disability decisions. SSA has acknowledged that current workload levels have placed the disability program under increasing public and congressional pressure, and that aggressive measures are necessary to address this “crisis” situation. The growth in OHA’s backlog of cases has been caused, in part, by the rapid surge in disability program applications and ever-increasing appeals to OHA. But backlog growth has also resulted because SSA has not adequately addressed several long-standing problems associated with its disability programs. These problems have been identified in numerous internal and external studies conducted over the last 2 decades. We reviewed these studies and found that SSA’s key long-standing problems can be classified into four basic categories: multiple levels of claims development and decision-making, fragmented program accountability, decisional disparities between DDS and OHA adjudicators, and SSA’s failure to consistently define and communicate its management authority over the ALJs. The number of disabled beneficiaries has steadily increased over the last decade. In 1985, there were 3.9 million DI recipients. In 1995, almost 5.7 million disabled workers and their dependents received more than $40 billion in DI benefits. Most of this growth occurred in the last 3 years, when 1.1 million beneficiaries were added to the rolls. The SSI program grew even more over the last decade, when the number of SSI recipients increased from 2.5 million to 4.9 million. Many factors have contributed to the number of people seeking disability benefits and the subsequent growth in the OHA workload, including the expansion of DI eligibility criteria, program outreach efforts, and poor economic conditions. Between 1985 and 1995, initial DI and SSI applications increased by 57 percent, from 1.6 million to 2.5 million. DDS denial rates for initial applications also increased during the same period, further enlarging the pool of applicants who could request an appeal. The number of requests for OHA hearings increased by 140 percent, from 245,000 in 1985 to 589,000 in 1995. As we have reported previously, the rising rates at which applications for disability benefits and accompanying appeals are being filed have caused tremendous workload pressures and processing delays for OHA. Between 1985 and 1995, OHA’s pending case backlog grew from 107,000 to about 548,000 cases. In addition, the average processing time for cases appealed to OHA—measured from the time a request for hearing is filed by the claimant—increased 110 percent, from 167 days to 350 days. Moreover, aged cases (those pending 270 days or more) increased from 5 percent of pending cases to 39 percent during the same period. Some applicants who have been awarded benefits on appeal to OHA after twice being denied by DDSs have waited more than a year after first applying. Table 2.1 shows the rapid growth in OHA’s workload, pending case backlog, and the time it takes to process an appealed case. In addition to the dramatic increases in workload discussed above, long-standing problems associated with the disability determination and appeals process have contributed to the backlog growth and increased case-processing time at OHA. In 1992, as part of its efforts to develop a number of strategic priority goals, SSA reviewed numerous internal and external studies of the disability determination and appeals process, several of which were completed more than 20 years ago. The agency acknowledged that, despite rapid workload increases and enormous changes in available technology, demographics, and the types of disabilities qualifying for benefits, disability processes had remained basically the same since the DI program was established in the 1950s. We also reviewed the above studies, and several other government and nongovernment reviews conducted over the last several decades, and categorized the key long-standing problems affecting SSA’s disability programs as (1) multiple levels of claims development and decision-making, (2) fragmented accountability for claims processing, (3) decisional disparities between DDS and OHA adjudicators, and (4) SSA’s failure to consistently define and communicate its management authority over the ALJs. The relationship of these problems to OHA’s pending case backlog and increased case-processing time is discussed below. SSA’s internal planning documents show that multiple levels of claims development and decision-making throughout the disability program have negatively affected OHA’s ability to provide timely and efficient service to all claimants who appeal. Within SSA, a denied disability claim may pass through as many as four decision-making levels (initial, reconsideration, ALJ hearing, and Appeals Council) before a final decision is rendered. As a claim moves from one level to the next it is readjudicated, and multistep procedures for review, evidence collection, and decision-making are employed. In addition to delays associated with multiple layers of review and decision-making, delays also occur as a claim moves from one employee or facility to another and waits at each employee’s desk to be processed. As workloads have grown, the amount of time a claim waits at each processing point has increased. Since 1985, average case-processing time at OHA has grown from 167 days to about 350 days. Following a 1992 review of OHA operations, SSA found that claimants can wait as long as 550 days to receive a hearing decision notice. The same report noted that, in the case of one claim, only 4 days of the 550 involved actual work on the claim. Some of the delay is necessary, however, because of scheduling and due process notice requirements. Other delays are often claimant initiated and may lead to hearing postponements or the need to further develop the evidentiary record. SSA has acknowledged that no single organizational component is accountable for the overall efficiency of disability claims processing, and that fragmentation issues have negatively affected the efficiency of the process. Currently, several organizational components are involved in disability claims processing—field offices, DDSs, hearing offices, and the Appeals Council—and each is accountable and responsible for reaching its own goals without responsibility for the overall disability claims process. SSA’s own internal reviews have found that poor coordination among components has reinforced a lack of understanding among OHA staff of the roles and responsibilities of other components and created the perception that no one is in charge of the disability programs. Fragmentation in the disability process is further evidenced by OHA’s organizational and operational separation from the rest of SSA. OHA’s headquarters is located in Falls Church, Virginia, while SSA’s headquarters is located in Baltimore. OHA regional staff are also separated from SSA regional staff. SSA’s own reviews have found that organizational fragmentation has led to a lack of interaction between OHA and the rest of SSA and fostered a “stepchild” mentality among many OHA employees. For example, SSA found that OHA staff had little sense of belonging to the wider SSA and were unfamiliar with its organizational structure, philosophy, and goals. This mentality has affected SSA’s ability to implement operational plans for the disability programs. Finally, SSA lacks a common automated database for managing claims as they move through the various components involved in the disability determination process. Consequently, as a claim moves from one organizational level to another, some data must be manually reentered into the computer by the various components, and the status of disability claims is not adequately recorded for reference by others. Outdated manual processes and fragmented automated systems have made improving the disability determination and appeals process difficult. In 1994, ALJs allowed benefits in about 75 percent of the cases they decided. By awarding a relatively high percentage of cases that DDSs have previously denied, ALJs may encourage more appeals to OHA. While all of the reasons for decisional disparities are not conclusively known, many have hypothesized that possible causes include the de novo hearings process, which allows claimants to submit additional evidence upon appeal; face-to-face interviews between ALJs and claimants; decisional errors by both DDSs and ALJs; and different applications of disability decisional policies at the DDS and ALJ levels. Some decisional disparities may be attributable to OHA’s de novo hearings process. Under this process, the ALJ does not review the DDS’ decision or rule on its adequacy. Instead, the ALJ conducts what is called a de novo hearing in which evidence is considered and weighed again, and the ALJ issues a decision based on his or her own findings. With the de novo hearing, claimants may submit new evidence to the ALJ that may not have been available at the time of the DDS review and decision. SSA’s reviews have found that more than a quarter of ALJ awards are based on such new evidence, which may include claimant testimony that their condition has worsened since the original DDS review. Thus, by design, some differences in decisional results are built into the system. Also, face-to-face interviews between ALJs and claimants may lead to disparate decisions. The ALJ hearing is generally the first time that claimants have the opportunity for a meeting with a decisionmaker. Unlike DDSs, which perform a paper review of the file to determine disability, ALJs personally interview claimants concerning their disability claim. A 1982 SSA study reported that a personal appearance by claimants during the hearing increased the likelihood of an ALJ allowance. In 1989, we reported that hearings provide ALJs with the opportunity to extensively question claimants and that, as a result, ALJs often reverse DDS decisions because they determine that claimants are more limited in their activities than DDSs had perceived. Errors made by both DDS staff and ALJs may also contribute to disparities. In a 1994 SSA study, a group of medical consultants and disability examiners found a 29-percent DDS error rate for cases appealed to OHA. In the same study, a group of ALJs found a 19-percent error rate in ALJ allowances. These relatively high rates of error suggest that obtaining consistency across the two levels may be difficult. Finally, some disparities may be attributable to SSA’s differing mechanisms for providing decisional guidance to DDSs and ALJs. To determine disability, SSA has a single standard composed of various statutes, regulations, Social Security Rulings, and court rulings governing eligibility. DDS decisionmakers are required to use SSA’s Program Operations Manual System (POMS), which is SSA’s detailed interpretation of the standard. ALJs, on the other hand, are not required to use POMS, which provides little decisional latitude. Instead, they base their decisions on their own interpretation of the statutes, regulations, Social Security Rulings, and court rulings. To an undetermined extent, different interpretations of the same disability standard may cause DDSs and ALJs to reach disparate decisions on the same claim. APA protects ALJ decisional independence. Although ALJs are SSA employees, APA prohibits SSA management from taking actions that might interfere with an ALJ’s ability to conduct full and impartial hearings. However, SSA has not consistently defined and communicated to regional and hearing office management the types of management actions that are legally permissible for managing ALJs without hindering judicial independence. SSA’s 1992 Office of Workforce Analysis report found that many ALJs are operating under the belief that they are exempted by APA from nearly all management control. As a result, SSA has experienced numerous legal and operational challenges to its efforts to better manage the appeals process. SSA management has also been reluctant to exercise its management authority over ALJs for fear it will violate APA. The APA issue continues to be important today, because the success of the redesign plan may be affected by the degree of ALJ cooperation and the extent to which SSA can mandate ALJ compliance with the plan’s initiatives. In 1989, we reported that, since the 1970s, ALJs had successfully opposed management initiatives to increase their productivity on the grounds that such SSA actions interfered with their decisional independence. Many ALJs believe they need to closely protect their judicial independence because of what they perceive as past excesses of agency authority. For example, in 1977 several ALJs sued SSA when it attempted to impose case production quotas on them. The ALJs alleged that SSA’s actions violated their decisional independence under APA and the Fifth Amendment of the Constitution. SSA ultimately settled the lawsuit, rescinded its policy of establishing quotas for ALJ dispositions, and revised transfer and training policies to remove any mention of production figures. In the early 1980s, SSA began targeting the decisions of ALJs with high award rates for special review. According to SSA, these reviews were conducted in response to congressional concerns that ALJs with high allowance rates could be more prone to errors. As a result of these reviews, some ALJs were to be subject to retraining and possible disciplinary actions. The initiative prompted a lawsuit by the Association of Administrative Law Judges, which claimed that the practice of targeting selected ALJs violated their decisional independence. Before the court’s ruling, SSA entered into a settlement agreement with the ALJs and rescinded its practice of targeting individual decisionmakers. Although APA is an important safeguard of due process, SSA’s own studies confirm that, in many instances, the act has been interpreted in a way that has impeded SSA’s ability to effectively manage day-to-day hearing office work and to implement uniform policies and procedures. For example, SSA’s 1992 Office of Workforce Analysis report noted that an “extreme” interpretation of APA by many ALJs had led to a lack of clear lines of management authority within hearing offices and impeded effective service delivery. SSA also found that hearing offices lacked procedural consistency and effective mechanisms to share “best practices,” because many ALJs believed judicial independence entitled them to establish their own “unique” work flow procedures. The report also noted that inconsistent procedures resulted in significant variations in the content and organization of hearing office files and created obvious problems when case files were transferred among offices to balance OHA’s workloads. SSA also reported a wide variety of organizational configurations among hearing offices, despite an agency effort to actively encourage “pooling” hearing office resources to increase efficiency and distribute work more evenly. Many ALJs opposed the pooling initiative, preferring instead a “unit” system in which each ALJ had his or her own personal staff. SSA reported that several ALJs had rejected the pooling configuration despite the agency’s findings that the “unit” system unnecessarily increased case-processing time. However, the report did not include any directives or recommendations for mandating ALJ compliance with SSA’s pooling efforts. In an early 1990s plan to improve the disability appeals process, SSA noted that significant ambiguities existed regarding the limits APA imposed on SSA management practices and that APA issues underlie many of the problems affecting the disability program’s variations in hearing office procedures, work flow, and workload management. In April 1995, SSA once again acknowledged the constraints APA imposed on its ability to manage and called for better clarifying APA principles. Our most recent field work confirmed that SSA still has not consistently defined and communicated the types of management actions that are legally permissible under APA. During our review, a number of SSA and OHA managers and staff told us that despite SSA’s recognition of the problems associated with ensuring ALJ compliance with agency initiatives, it has not resolved the issue. Staff commonly complained that ALJs often used APA protections to oppose initiatives they did not agree with and conceded that managers were reluctant to mandate ALJ compliance for fear of violating the act. They also told us that ALJ opposition to prior agency initiatives to improve the appeals process has contributed to the growth in OHA’s backlog of cases and that reducing the backlog will be difficult unless SSA addresses the APA issue. Officials in SSA’s Office of General Counsel also noted that while SSA is aware of the management tools available to it, there have been inconsistencies in the way this information has been communicated agencywide. In their opinion, SSA needs to develop a consistent APA message and thoroughly communicate it to both SSA and OHA field personnel. During the past decade, OHA’s backlog of pending cases continued to grow, even though SSA hired more professional and support personnel and increased its reliance on overtime to service the appeals workload. In 1994, SSA initiated both short- and long-term plans in response to the continued rapid growth in OHA’s pending case backlog and increasing criticism of SSA’s ability to effectively manage the DI and SSI caseloads. STDP represents SSA’s near-term effort to reduce OHA’s backlog of pending cases and improve case-processing times. The plan does not directly address the long-standing problems affecting SSA’s disability appeals process but instead relies on temporary “emergency” measures to alleviate workload pressures at OHA until SSA’s longer-term strategy is under way. Although STDP’s initiatives are now under way, implementation delays and the limited impact of key initiatives may impede SSA’s short-term efforts to achieve its backlog reduction goals. SSA’s second initiative—its Plan for a New Disability Claim Process, or redesign plan—when fully implemented, is intended to result in significant long-term improvements in the quality, accuracy, speed, and efficiency of disability claims processes. The plan is scheduled to be implemented in phases that will be completed sometime in fiscal year 2000. The redesign effort, which provides a framework for radically reengineering the entire disability process, is aimed at addressing three of the four long-standing problems we identified: multiple levels of claims development and decision-making, fragmented program accountability, and inconsistent decisions between DDS and OHA adjudicators. While SSA believes the redesign plan will eventually address many systemic program problems, the plan was still in the early implementation and testing stages at the time of our review. More importantly, the redesign plan does not include an initiative to clearly and consistently define and communicate SSA’s management authority over the ALJs. APA constraints have been a source of considerable management difficulties for many years, and if SSA does not act to address this issue, it may be hindered in its current efforts to reduce OHA’s pending case backlog and improve case-processing times. Over the last decade, SSA attempted to address the growth in OHA’s backlog of pending cases. Between 1985 and 1995, SSA increased field office ALJ staffing levels by 49 percent and support staff by about 45 percent (see table 3.1). From 1990 to 1995, the agency also increased its use of overtime more than 850 percent, from about 74,000 hours to 713,000 hours. Although the number of cases OHA processed annually increased from 246,000 in 1985 to about 527,000 in 1995, the growth in OHA’s workload during that time outpaced its case-processing capacity. In addition to devoting more staff resources and overtime to the backlog crisis, SSA initiated at least three major studies between 1990 and 1992 to identify issues affecting the performance of its disability programs. These reviews resulted in recommendations for improving program efficiency through such actions as standardizing some hearing office procedures, sharing agency “best practices” among offices, and improving access to training and automation for OHA personnel. During our field work, a number of SSA and OHA officials told us that prior agency initiatives were limited in their effectiveness because SSA focused primarily on minor process changes and applying additional resources to the disability program rather than addressing long-standing, systemic problems central to the backlog of cases awaiting processing. Several officials also noted that previous initiatives for improving the appeals process were limited in their effectiveness because SSA was reluctant to mandate ALJ compliance with them. SSA issued its STDP in 1994 in order to make some immediate progress toward reducing OHA’s backlog of pending cases. STDP includes 19 initiatives to expedite the disability determination process and reduce OHA’s pending case workload from its October 1994 level of 488,000 to 375,000 cases by December 1996. The plan’s goals are based primarily on two key initiatives that expand OHA prehearing conferencing proceedings and SSA regional screening unit activities. These initiatives target certain appealed cases for review and possible allowance by OHA attorneys or SSA regional staff before the ALJ hearing stage is reached. STDP relies heavily on the temporary reallocation of program resources to help OHA prepare cases and draft disability decisions. Under the plan, 150 OHA and SSA staff have been detailed to help prepare cases for hearings. Case preparation includes assembling and reorganizing claimant files, date stamping exhibits, and preparing evidence lists. Reallocating resources is intended to ensure that case files are organized in a way that facilitates the processing of disability cases. An additional 150 nonhearing office personnel have also been detailed to help draft hearing decisions. To further improve decision-writing capacity, 800 additional computers have been provided for use by OHA personnel. This influx of computers is intended to reduce OHA’s current dependence on manual processes and support personnel during the preparation of hearing decisions and to limit the movement of documents back and forth between staff for proofreading and editing. The initiative expected to have the greatest impact on reducing OHA’s backlog of cases involves the expansion of OHA prehearing conferencing. However, implementation delays associated with prehearing conferencing have affected SSA’s ability to achieve STDP’s goals. Before STDP, prehearing conferencing involved the review of certain appealed cases by OHA staff attorneys and paralegal specialists in the various OHA regions. These individuals conferred with claimant representatives after reviewing cases, conducted limited case development, and drafted decisions to be reviewed and approved by ALJs. With expanded prehearing conferencing under STDP, OHA attorneys have been given quasi-judicial powers, such as the authority to issue allowance decisions for certain appealed cases without ALJ involvement or approval. Under the initiative, OHA attorneys now engage in extensive development of the case record, conduct conferences with claimant representatives and sources of medical and vocational evidence, and are empowered to issue allowance decisions. If they cannot allow the claim on the basis of their review of the evidence, it is scheduled for hearing before an ALJ. OHA guidelines for prehearing conferencing give 595 senior attorneys the authority to issue allowance decisions. To fully implement the initiative, SSA had to pursue a regulatory change giving OHA staff attorneys the authority to decide certain appealed cases that were formerly limited to ALJ jurisdiction. But the process of defining the specific duties and responsibilities these attorneys would have under STDP was lengthy, and implementation did not begin until July 1995, or almost 6 months after the projected start date. Delays also occurred with other initiatives designed to support prehearing conferencing. For example, backlog reduction goals for prehearing conferencing are partly dependent upon STDP initiatives to provide more computers and staff to assist OHA with case preparation and decision-writing. But due to protracted collective bargaining negotiations with SSA’s union and other difficulties, full implementation of these initiatives was delayed for several months. Through expanded prehearing conferencing, SSA had originally expected to process 98,000 additional cases by December 1995 and 126,000 more by December 1996. However, 1995 goals were not achieved, and senior staff attorneys issued only 22,271 additional allowance decisions nationwide through February 1996. A second major initiative under STDP is intended to further reduce the flow of cases from DDSs to OHA hearing offices by increasing the effectiveness of SSA regional screening units. However, these units have not performed as expected. Before STDP, SSA established screening units in each region to review DDS reconsideration denials. Before an ALJ hearing occurred, screening unit examiners reviewed these cases to determine if an allowance could be made on the basis of evidence in the case file. Although screening unit allowances required ALJ approval, they expedited the decision-making process and prevented many cases from going into OHA’s hearings backlog. Under STDP, OHA staff attorneys have been assigned to all SSA regional screening units to dispose of more appealed claims before they reach an ALJ hearing. The decision to add OHA attorneys was based upon the experiences of SSA’s Boston and New York regional offices, which had tested the use of OHA attorneys in screening units and were obtaining higher allowance rates. According to SSA, the opportunity for screening unit examiners to discuss issues with an attorney gives examiners helpful insight into the intent of the POMS requirements and enables them to reverse incorrect DDS reconsideration denials earlier in the process. Most cases reviewed by the screening units are selected on the basis of computer-generated profiles that identify disability claims likely to be incorrectly denied by DDSs. SSA officials contend that “profiling” minimizes the risk of making incorrect allowances. However, to increase screening unit outputs, the case selection criteria were expanded in January 1995 to include all hearing requests accompanied by any additional evidence, even if the case did not meet the profile. Consequently, screening units are now reviewing some cases that are not necessarily error prone. Screening units, like prehearing conferencing, are not achieving STDP’s allowance goals. Before STDP, existing screening units were expected to allow about 20,000 cases per year. With the introduction of OHA senior attorneys, SSA expected to allow 38,000 cases annually, or about 3,167 cases per month. However, screening units had allowed a total of only 28,376 cases through February 1996. Only two of SSA’s screening units—Boston and New York—are allowing cases at a level that may facilitate reaching STDP’s 1996 goals. SSA officials overseeing the initiative told us that regional differences in allowances were primarily due to the reluctance of some hearing offices to provide sufficient staff and senior attorney support to the regional screening units. Despite slippage in the implementation of STDP’s major initiatives, SSA management has not revised its original backlog reduction goals or the timeframes for accomplishing them. As a result, a number of SSA and OHA personnel involved in the design and implementation of STDP are concerned that the plan may have unintended negative impacts. When STDP was announced in November 1994, it called for reducing OHA’s backlog from 488,000 to 375,000 (113,000 cases) by December 1996. However, by the end of September 1995, OHA’s backlog had increased to 548,000 cases. To achieve the plan’s original goal of reducing pending cases to 375,000, SSA would have to increase its backlog reduction target from the original 113,000 cases to about 173,000 during the remaining timeframe. Many SSA and OHA officials have expressed concern that the growth in OHA’s pending case backlog over the last several months, combined with STDP’s aggressive goals, may create pressure to inappropriately allow cases. As a means of determining STDP’s impact on OHA decision-making, SSA management is closely monitoring and tracking OHA allowance rates. Finally, the prehearing conferencing initiative under STDP has diverted almost 600 attorneys from their regular decision-writing duties. SSA intends to offset this loss in decision-writing resources with 150 temporary detailees from various components and increased overtime for support and professional staff. However, many SSA and OHA officials are concerned that the number of detailees is insufficient to offset the loss of experienced decision-writers. Unlike STDP, the redesign plan includes initiatives that SSA believes will address some of the program’s long-standing problems: multiple levels of claims development and decision-making, fragmented program accountability, and decisional disparities between DDS and OHA adjudicators. In announcing the plan in September 1994, SSA acknowledged that a longer-term strategy was needed to address the systemic problems placing the DI and SSI programs under increasing stress. The agency also noted that, to substantially improve the level of service to claimants, incremental improvements to the process were no longer feasible. At the time of our review, SSA was in the early implementation planning and testing stages of the redesign effort, and none of the initiatives had been fully implemented. To address the problem of multiple levels of claims development and decision-making, the redesign plan includes initiatives to eliminate both DDS reconsideration and Appeals Council reviews. In place of the reconsideration review, SSA plans to establish an Adjudication Officer (AO) position as the focal point for prehearing activities. The AO’s duties will include (1) identifying the specific issues in dispute, (2) determining if additional evidence development is needed to support a claim, (3) reaching agreement with claimants or their representatives on the issues not in dispute, and (4) deciding appealed claims on the basis of the evidence developed. By focusing prehearing responsibilities on a single adjudicator, SSA expects that the time needed to ensure the completeness of the record will be substantially reduced and that more appealed cases will be resolved without ALJ involvement. The redesign plan also includes initiatives that SSA believes will address the problem of fragmented program accountability. To improve overall accountability for claims processing, SSA plans to revise its management information processes to better assess the agency’s service to claimants. Information regarding staff actions at each step of the process is to be made available to all components, and a single measure of time from the claimant’s first point of contact with SSA until final notification of a decision will be developed. SSA has proposed developing or revisiting other measures related to cost, productivity, pending workload, and accuracy to better assess the performance of each participant, and the agency as a whole. The plan also calls for installing a common database for claims control and management purposes, rather than relying on the currently fragmented automated systems. To address organizational fragmentation issues, SSA plans to emphasize accountability and teamwork throughout the disability claim process. At the initial DDS level, a Disability Claims Manager position will be established as the focal point for moving the claim through the earliest stages. For OHA’s prehearing activities, the AO position will be the responsible agent. At the hearing level, the ALJ will be the responsible official. SSA plans to hold these individuals accountable for their part of the disability determination and appeals process and require them to work with other components to ensure timely case processing. The disability redesign plan also includes several initiatives to reduce decisional disparities between DDS and OHA decisionmakers by (1) providing an opportunity for the initial decisionmaker to meet claimants face-to-face, (2) improving SSA’s quality assurance processes, and (3) unifying policy guidance at both the DDS and ALJ levels. Under the redesigned process, claimants will be provided the opportunity to meet with a DDS decisionmaker before the claim is initially decided. This meeting is intended to ensure that all available evidence has been presented and that claimants understand what evidence will be considered in reaching the decision. SSA also plans to improve its quality assurance processes by extending such reviews to all levels of the adjudicatory process and using the results to identify areas for improving agency policies and training. To further ensure consistent standards for decision-making, the redesign plan includes an initiative to develop a single presentation of all substantive policies used in the determination of disability. Both DDS and ALJ adjudicators will be required to follow these same policies. SSA plans to provide policy clarifications and nationwide training to both DDS and ALJ decisionmakers to facilitate the use of the new policies. However, SSA has not proposed any changes to the de novo hearings process and the ability of claimants to submit new medical evidence upon appeal. According to SSA, revising these processes would require a legislative change, which was not within the scope of the plan at its initial stage. SSA’s disability redesign plan includes initiatives that SSA believes will address several of the long-standing problems affecting program performance, but the plan does not specifically address how SSA will consistently define and communicate its management authority over the ALJs. Although APA is an important safeguard of due process, SSA has not consistently defined and communicated to its field staff the actions that can be legally employed by managers to increase program efficiency without hindering judicial independence. For years, SSA has acknowledged the management difficulties associated with the APA issue, and the need to develop specific guidelines of allowed and prohibited practices that are fully understood by everyone involved. More recently, the Director of SSA’s redesign effort again acknowledged that APA procedures and mandates should be better clarified and refined to fit SSA’s mass adjudication approach to its disability programs. SSA’s disability programs have been the subject of numerous internal and external studies over the last 2 decades. Despite these studies and continuing agency efforts to improve the disability determination and appeals process, OHA’s case backlog has reached crisis levels. In an environment of unprecedented disability program growth, SSA has both a short- and a long-term approach to better service its DI and SSI workloads. In the near term, STDP is designed to expedite the disability appeals process and reduce OHA’s pending case backlog to a manageable level. In developing its long-term Plan for a New Disability Claim Process, SSA has also acknowledged the need for the agency to move ahead with more dramatic program changes. Considering the current backlog crisis at OHA, STDP’s approach for temporarily reducing OHA backlogs is reasonable in that it establishes specific goals and timeframes for reducing OHA backlogs. It also represents an SSA-wide commitment involving the reallocation of resources from both within and outside OHA, and coordination and cooperation among all organizational components involved in the adjudication process. Disposing of cases earlier in the decisional process may also be less costly and time consuming than allowing them to reach the ALJ hearing stage. Although backlog reduction efforts are receiving greater agencywide emphasis under STDP, implementation delays associated with prehearing conferencing and the limited impact of regional screening have adversely affected SSA’s ability to achieve the plan’s backlog reduction goals. Many OHA and SSA staff are also concerned that the continued growth in OHA’s pending case backlog and SSA’s reluctance to adjust the plan’s goals may affect the quality of decisions and lead to increased pressure to inappropriately award cases. To ensure decisional accuracy, SSA intends to monitor the quality of STDP decisions and the overall allowance rate for its disability programs. The agency’s reliance on computer-generated profiles to select certain error-prone cases for review under STDP is also intended to reduce the risk of inappropriate decisions. However, the screening unit case selection criteria have been expanded to include some nonprofiled cases, and prehearing conferencing regulations do not preclude OHA senior attorneys from reviewing nonprofiled cases in the future. Although the redesign plan includes initiatives that SSA believes will address several long-standing program problems, it does not specifically address the need to consistently define and communicate the types of management actions SSA can legally employ to better manage ALJ activities. For years, SSA has recognized that ALJ management issues underlie many of the problems affecting its disability programs, and that it should better define and thoroughly communicate a consistent APA message to field staff. We believe that addressing the APA issue will be a challenge for SSA. However, it is a challenge that must be overcome if SSA is to resolve the current disability backlog crisis and achieve its long-term service delivery goals. In providing comments on this report, SSA identified a number of actions that it has taken since 1992 to streamline and expedite the processing of hearing workloads. These actions include developing a plan to standardize disability claim file preparation, creating a Practices and Procedures Exchange Workgroup within OHA, suspending the preparation of medical summaries, standardizing decision-writing instructions, and encouraging ALJs to write some of their own decisions. However, the agency did not provide data regarding the impact of these initiatives on reducing OHA’s backlog of pending cases. Our data show that, despite SSA’s efforts, OHA’s backlog has continued to grow since 1992. In regard to STDP, SSA acknowledged that, because of increases in hearing receipt projections and the pace of STDP implementation, the plan’s backlog reduction goals would not be met by December 1996. However, SSA officials stated that a shortfall in screening unit allowances would have only a limited impact on meeting STDP’s overall goals. We disagree with SSA’s assessment, since SSA originally intended that the screening units would be second only to prehearing conferencing in terms of impact and would result in 38,000 additional allowances through December 1996. Not meeting screening unit allowance targets will, in our opinion, hinder OHA’s backlog reduction efforts. SSA did not provide us with revised backlog reduction goals for STDP or any documentation indicating that they would be changed in the near future. Regarding our concerns that pressure to meet STDP’s goals may have unintended effects, SSA has advised its adjudicators that STDP should not be interpreted to inappropriately allow cases. SSA also noted that through the deployment of resources not previously devoted to hearing office workloads, the decision-writing pending workload has been reduced from over 43,000 to about 28,000 cases. Finally, SSA agreed that clarifying the scope of its authority over ALJs under APA would be appropriate and stated it is developing such a document. However, the agency questioned the statement in our report that many ALJs believe they are exempt from nearly all management control. This was not our conclusion, but one that was reported by SSA’s Office of Workforce Analysis following its 1992 review of OHA operations. SSA also disagreed with our statement that ALJs have successfully opposed agency productivity initiatives. However, ALJ opposition to agency initiatives to improve productivity has been documented in prior SSA and GAO reviews and through field work conducted during this assignment. The full text of SSA’s comments and our response are included in appendix III. | Pursuant to a congressional request, GAO examined the growth in the backlog of pending cases at the Social Security Administration's (SSA) Office of Hearings and Appeals (OHA), focusing on SSA initiatives to: (1) reduce backlogged cases; and (2) make the disability appeals process more timely and efficient. GAO found that: (1) the growth in OHA backlogs is a direct result of increased applications and appeals to OHA, as well as SSA inattention to long-standing problems; (2) these problems include multiple levels of claims development and decisionmaking, fragmented program accountability, decisional disparities between disability determination services and OHA adjudicators, and SSA failure to communicate its management authority over administrative law judges (ALJ); (3) SSA initiated short-and long-term efforts to manage its disability determination and appeals process in 1994; (4) the SSA Short-Term Disability Plan (STDP) should reduce OHA backlogs to a manageable level by December 1996; (5) STDP relies on the temporary reallocation of SSA resources and process changes to stem the flow of cases requiring ALJ hearings; (6) start-up delays and limited timeframes have affected SSA ability to reduce the number of backlogged cases; (7) SSA tracks and monitors STDP allowances to ensure decisional accuracy; (8) the SSA redesign plan is aimed at addressing systemic problems within the SSA disability program and reducing claims processing; (9) the redesign plan is still in its early stages, and does not address the types of management actions that are legally permissible for ALJ hearings; and (10) many ALJ believe that they are legally exempt from management control, and SSA is frustrated in its efforts to manage the appeals process and reduce the number of pending cases. |
In response to the Government Performance and Results Act of 1993 and the Vice-President’s National Performance Review (NPR), the Secretary of Agriculture initiated a departmental reorganization to refocus and simplify the Department’s headquarters structure, improve accountability and service to customers, reform the Department’s field structure, and reduce costs. Several components of the Secretary’s reorganization required enabling legislation, which the Congress provided in the Reorganization Act of 1994. In addition to granting USDA broad authority for streamlining and reorganization, the Reorganization Act of 1994 directed USDA to (1) reduce the number of full-time-equivalent staff by at least 7,500 by the end of fiscal year 1999, (2) reduce the number of staff so that the percentage of the reduction in headquarters is at least twice that in the field offices, (3) consolidate headquarters offices, and (4) combine field offices and have them share resources. By the end of fiscal year 1997, USDA had achieved most of the act’s goals. It had reduced its overall staff-years by nearly 20,000, from about 129,500 in 1993 to about 110,000 by the end of 1997; 22 percent of the reductions occurred in headquarters, and about 13 percent occurred in field offices. In addition, the number of USDA agencies fell from 43 to 29, most of which are under seven mission areas. (App. I shows USDA’s staff by mission area and agencies and headquarters staff offices.) Of the seven mission areas, five include more than one agency. In four of these five mission areas,USDA has designated one agency as the lead administrative agency for the mission area. (USDA’s current administrative structure is shown in app. II.) Finally, USDA reduced the number of its county office locations by about 30 percent, from about 3,760 in 1994 to about 2,700 in 1997. The Farm Service Agency (FSA), Natural Resources Conservation Service (NRCS), and Rural Development (RD)—through the Rural Housing Service—operate three separate administrative structures to provide administrative support for seven field-based agencies in 50 states, two territories, and several Foreign Agricultural Service (FAS) overseas offices. These seven agencies employed about 37,900 staff, or about 35 percent of USDA’s total staff, in 1997 and are located in headquarters, about 150 state offices, 5,800 county-based service centers, over 500 other support offices, and several consolidated operations centers, such as FSA’s Management Office in Kansas City, Missouri; RD’s Centralized Servicing Center in St. Louis, Missouri; and NRCS’ National Science and Technology Consortium in Fort Worth, Texas. From fiscal year 1993 through fiscal year 1998, USDA reduced its departmentwide administrative staff by 15 percent, from about 10,300 to an estimated 8,800, in four areas identified by the NPR—human resources, budgeting, accounting and auditing, and acquisition. Administrative staff provide internal services for USDA’s program delivery staff, such as payroll processing, financial management and reporting, and the purchasing of supplies and equipment. USDA plans to have about 8,550 administrative staff supporting a departmentwide program staff of approximately 98,500 by the end of fiscal year 1999. Figure 1 shows the changes in the number of administrative staff for each of the four administrative functions for fiscal years 1993 and 1998. (Administrative staffing is shown in app. III.) As of November 1998, USDA had not consolidated administrative functions for its field-based agencies at the state office level. However, in October 1998, a USDA team submitted a plan (known as the Administrative Convergence Plan) to the Secretary of Agriculture that will, upon approval, implement this consolidation by 2002. USDA officials explained that the plan, when fully implemented, is expected to reduce costs and improve customer service and operating efficiencies. In addition, they said the plan will require up to 4 years to implement because the Department will need to complete a number of time-consuming and complex actions—relocating offices, developing common policies and procedures, and instituting common computing systems. Even though these actions are expected to provide savings and efficiencies in the long term, the Department has not identified the costs it will incur in the short term to achieve these savings. Furthermore, USDA officials commented that these tasks are not likely to be accomplished in a timely and effective manner unless a strong leader is appointed to oversee them. USDA expects to begin consolidating administrative functions at the state level for its field-based agencies approximately 6 to 9 months following the Secretary’s approval of the proposed October 1998 convergence plan. Under the plan, a new office headquartered in Washington, D.C.—the Support Services Bureau—will provide the administrative support now provided separately by FSA, NRCS, and RD for seven field-based agencies. (See fig. 2.) (as of Nov. 1998) In addition to its office in Washington, D.C., the bureau will have a single administrative support unit in each state and in each of its four consolidated operations centers to carry out combined administrative functions. The new state offices will receive policy guidance from the headquarters Support Services Bureau and will report to a board of directors composed of the state leaders of FSA, NRCS, and RD. While the NPR specifies only four administrative functions (personnel, budgeting, accountants and auditors, and acquisition), USDA’s Administrative Convergence Plan includes additional functions and categorizes them differently. The plan’s functions include financial management (excluding budgeting), human resources, civil rights, information technology, and management services (such as procurement and printing). By consolidating these functions into a single administrative support unit in each state or consolidated operations center, USDA expects to reduce the administrative staff for the seven field-based agencies by 45 percent from fiscal year 1993 through fiscal year 2002. However, by 1997, two-thirds of these reductions had already occurred. (See table 1.) (30.9%) (377) (33.3%) (38.6%) (380) (44.6%) (38.8%) (614) (60.3%) (22.7%) (796) (40.7%) (35.4%) (474) (80.3%) (30.6%) (2,551) (45.4%) According to USDA officials, they did not implement streamlining at the state office level earlier for two reasons. First, they were focused on implementing the Secretary’s initiative to create consolidated county-based service centers. And second, they were unable to reach agreement among the affected agencies on how to achieve consolidation. USDA officials stated they must deal with several challenges to fully achieve the cost savings, benefits, and efficiencies expected to be realized as a result of implementing the administrative consolidation plan. These challenges include relocating offices, developing common policies and procedures, and adopting a common computing environment. In addition, USDA officials said that strong leadership will be needed to implement the plan and additional investments for collocating offices and modernizing business processes and information technology will be required. Currently, in 28 states, the state offices for each of the different field-based agencies are not located in the same facility (collocated), and in 19 of these states, the offices are not even located in the same city. USDA is planning to begin consolidating administrative functions before many of these state offices have collocated. In those instances, the agencies will continue to maintain staff in up to three separate offices. Consequently, in these states, the benefits of sharing resources—reducing staff and equipment and expanding staff expertise—will not be fully realized until the agencies’ state offices are collocated. For example, in Kansas, the FSA, NRCS, and RD state offices are located from 50 to 100 miles apart in three separate cities. As a result, even though these agencies’ administrative staff will be one organization on paper, they will continue to function in up to three separate locations until the offices are collocated, requiring USDA to retain more administrative staff and continue to pay for separate equipment and facilities. In addition, at least some of the 24 collocated state offices will need to be reorganized before they can operate efficiently under the Administrative Convergence Plan. For example, several collocated state offices have separate office suites for each agency’s staff. Agency officials acknowledged that to combine administrative staff into functional work units under administrative convergence, it will be necessary to move staff within existing office space, reconfigure existing office space, or move agency operations to new facilities. In other cases, collocated offices are already designed to operate effectively under the planned administrative convergence. For example, the new state office for FSA, NRCS, and RD in Boise, Idaho—opened in February 1998—is expected to facilitate administrative convergence once the plan is implemented. When the three agencies planned the new office, they required that all employees in a functional area—such as human resources or information technology—share a common work space. In addition, the agencies share common mail rooms, printing equipment, and other office facilities. According to state officials, their location in a shared facility has already increased the efficiency of their operations by allowing them to have fewer staff, less space, and less equipment. USDA estimates that it will cost as much as $29 million to collocate offices in 24 of the 28 states where they are not currently collocated, including moving personnel and acquiring new space, and an undetermined amount to reconfigure existing space for collocated offices. Figure 3 shows the states with collocated offices, and those with noncollocated offices. (App. IV provides more detailed information on the noncollocated locations). While FSA, NRCS, and RD are subject to the same administrative regulations, each has developed a different approach to implementing them. As a result, there are slight to significant differences in the policies, procedures, and business processes that each agency follows. For example, NRCS and RD state offices have authority over personnel actions for employees up to the level of General Schedule-13 and are delegated authority to obligate funds for most categories of procurement. In contrast, FSA state offices have far less authority over personnel actions and procurement. For budgeting, NRCS provides each state with a single budget allocation for its program and administrative expenses. However, RD allocates specific budget line items to its state offices for their individual programs, salaries, and administrative expenses. FSA headquarters allocates the total number of staff that each state may have each fiscal year and retains control over certain state-level administrative expenses, such as office leasing and information technology. State office officials note that their agencies also need to develop common business processes to standardize their personnel and recordkeeping systems. Currently, the National Finance Center provides payroll processing for USDA employees. However, NRCS uses a different process than FSA and RD for entering personnel and payroll transactions transmitted to the center. To modernize and integrate the separate information systems currently used by the agencies undergoing administrative convergence, USDA plans to acquire a single, integrated information system—referred to as the common computing environment. The common computing environment, as part of USDA’s effort to modernize its business processes and information technology, will consist of new computer hardware and software applications. This new integrated system may require as many as 38,000 new personal computers and 24,000 printers, which will be expected to operate in more than 3,000 locations nationwide. As we reported in August 1998, USDA estimates that the costs of implementing a common computing environment may exceed $2.6 billion over its expected 15-year life cycle. The effort to acquire and install this system will be significant, complex, time-consuming, and costly. Achieving a common computing environment requires these agencies to accomplish many activities, such as reengineering and creating a common set of business processes, designing common software, and determining the requirements for hardware. In addition, FSA, NRCS, and RD have 150 existing software applications, many of which must be modified. It is not clear when USDA will complete these tasks. Some planning documents show that the tasks may be completed by fiscal year 2002, while others show a completion date as late as fiscal year 2008. Until existing business applications are modified, USDA plans to maintain and operate both the old and new information systems. In our August 1998 report, we found several fundamental planning and management weaknesses in the Department’s effort to modernize business processes and technology for the agencies undergoing administrative convergence. In light of these weaknesses, we suggested that the Congress consider limiting funding for information technology for these agencies’ field offices to no more than the level needed to meet Year 2000 compliance requirements until appropriate action was taken to resolve these weaknesses. USDA started acquiring new hardware and software for its common computing environment at the end of fiscal year 1998, when it purchased over 16,000 personal computers. While this purchase was principally made to replace computers that are not Year 2000 compliant, USDA also expects this procurement to enable its field-based agencies to use common software applications that will support administrative convergence in such areas as human resources, procurement, and travel. USDA officials emphasized the need for the Secretary to move quickly to fill key leadership positions for the Support Services Bureau and charge the appointed officials with the responsibility to implement the Administrative Convergence Plan once it has been approved. According to the leader of the implementation planning team, assigning leadership responsibilities and providing the appropriate authority to carry out those responsibilities are critical to the plan’s success, given the host of decisions to be made and actions to be taken in implementing the convergence plan. These decisions include determining how the new organization will be funded in the long term, how authority will be delegated within the organization, and how staff will be classified. Currently, three separate administrative structures provide support to seven agencies in 50 states, two territories, and several FAS overseas offices. As mentioned earlier, these agencies have developed different approaches to delivering administrative services to their customers. The administrators for these three structures are focused on the delivery of several programs in addition to administrative support. USDA officials said, and we agree, that unless the Secretary moves quickly to appoint the leaders to translate the plan into a workable operation, it is unlikely that substantial progress will be made. While USDA has estimated the savings it will achieve through staff reductions resulting from the administrative convergence, it has not estimated the costs associated with the convergence. USDA officials believe that administrative convergence will allow the Department to reduce the number of administrative staff by 45 percent from 1993 through 2002. However, they acknowledge that budgetary savings from staff reductions will be decreased in the next several years by the costs of collocating state offices, modernizing business processes, and acquiring and implementing a common computing environment. If the administrative convergence is fully implemented in 2002, the savings in administrative staff is projected to total about $144 million annually. However, these savings will be reduced by the approximately $29 million associated with merging offices in 24 of the 28 states that do not yet have collocated offices and by several million dollars annually for modernizing business processes and implementing a common computing environment. The Administrative Convergence Plan does not provide an estimate of these costs. USDA has not instituted, and has made no plans to develop, performance measures to determine the economies and efficiencies realized as a result of its departmentwide administrative streamlining. According to USDA officials, staff reductions should serve as a sufficient indicator of the Department’s savings and efficiencies because employees’ salary and benefit costs typically represent a majority—about 85 percent—of salary and administrative expenses. However, although it has developed savings estimates associated with staff-year reductions, these estimates do not include any offsetting expenses as a result of employee buyouts and reductions in force. While staff-year reductions are certainly one indicator of savings, absent other measures, USDA does not know the extent to which it has improved service delivery, efficiency, and quality—key objectives of the 1994 act and desired outcomes of the agencies’ ongoing restructuring efforts. Additional outcome-oriented performance measures could help USDA determine when it is achieving the overall objectives of the Reorganization Act of 1994. For example, using the ratio of the number of employees served per personnel specialist as a broad measure of efficiency, we found that although USDA had reduced its personnel staff departmentwide by 17 percent from September 1993 to September 1997, the ratio decreased from 55 to 54 employees served by one personnel specialist, indicating that the personnel reductions had not increased efficiency. Other measures of effectiveness could include (1) financial measures, such as cost per employee hired; (2) customer satisfaction measures, such as those associated with responsiveness and quality; and (3) process effectiveness measures, such as the time it takes to complete specific administrative functions. USDA has made a number of organizational changes since 1994 to reduce its staff and streamline its operations. However, USDA does not plan to determine the extent to which its streamlining efforts have achieved the objectives of the Reorganization Act of 1994, other than determining the savings associated with staff reductions. The 1994 act also had as its objectives more efficient operations to better carry out the Department’s missions. Without an assessment of the overall effects of its departmentwide streamlining efforts, USDA cannot know the extent to which its efforts have been successful in achieving all of the objectives mandated by the 1994 act. USDA’s current reorganization task—the convergence of administrative functions at the state level for the field-based agencies—is complex and, even under the best of circumstances, will be difficult to implement effectively and efficiently. However, we believe that there are weaknesses in USDA’s current plans for administrative convergence that could hinder its successful implementation. First, while the convergence is likely to save money in the long run, USDA has not calculated the costs associated with implementing the plan. As a result, USDA managers lack key cost information that could be used to evaluate the effectiveness of various actions that the Department has taken or will take in connection with administrative convergence. Second, USDA has not yet assigned leadership responsibilities for implementing the convergence plan. In our view, this is critical to establishing the accountability needed to help ensure the plan’s successful implementation. To measure the economies and efficiencies gained by the departmentwide administrative streamlining, we recommend that the Secretary of Agriculture require the leaders for the seven mission areas, in consultation with the Assistant Secretary for Administration, the Chief Information Officer, and the Chief Financial Officer, to develop and implement performance measures for the Department’s administrative operations that assess service delivery, efficiency, and quality. We further recommend that the Secretary direct the Undersecretaries for the Farm and Foreign Agricultural Services, Natural Resources and Environment, and Rural Development to develop cost estimates for the complete implementation of administrative convergence. Finally, to facilitate the effective implementation of the Administrative Convergence Plan, we recommend that the Secretary, after approving the implementation plan, move quickly to fill key leadership positions for the Support Services Bureau and charge the appointed officials with the responsibilities to carry out the plan. We provided USDA with a draft of this report for its review and comment. We met with the Deputy Assistant Secretary for Administration; Acting Director for Human Resources Management; and officials from the Office of Departmental Administration, the Office of Budget and Program Analysis, the Office of the Chief Financial Officer, the Office of Inspector General, the National Food and Agriculture Council, the Farm Service Agency, Rural Development, and the Natural Resources Conservation Service. USDA generally agreed with the report and our recommendations and noted that USDA’s field-based agencies have made progress in developing certain common policies and administrative systems for areas such as employee recognition, evaluation of human resources management, merit promotion, telecommuting, and work scheduling. In addition, USDA noted that most of the savings associated with administrative consolidation will be achieved by merging the three agencies’—FSA’s, NRCS’, and RD’s—administrative functions, not from collocating offices. Finally, USDA agreed with our recommendation to develop and implement performance measures to evaluate the efficiency and effectiveness of the Department’s administrative operations. However, USDA noted that it would be difficult to develop historical baseline data for fiscal year 1993—the baseline date established by the National Performance Review and the Federal Workforce Restructuring Act of 1994—and therefore suggested that more recent baseline data be used to measure changes in administrative operations. While we recognize it would be difficult to develop baseline data for certain indicators that date back to fiscal year 1993, we continue to believe that USDA, to the extent practicable, should develop measures using baseline data for this time period to demonstrate the progress it has made in streamlining the Department since the passage of the Reorganization Act. USDA provided a number of technical changes and clarifications to the report, which we have incorporated as appropriate. To obtain information on USDA’s progress in reducing administrative staff departmentwide, we interviewed administrative officials in Departmental Administration, the Office of Budget and Program Analysis, and each mission area and reviewed relevant documents. To understand USDA’s plans for consolidating administrative functions, we interviewed the implementation team leader and reviewed relevant documents. To determine USDA’s progress in consolidating state office administrative functions for FSA, NRCS, and RD, we interviewed headquarters officials in each agency and state office officials in five states where these agency offices are collocated and five states where the agency offices are not collocated. We also obtained relevant data and documentation. We also met with the appropriate officials in USDA agencies in Kansas City and St Louis to obtain data on the status of (1) FSA’s, NRCS’, and RD’s efforts to collocate their state offices into single facilities; (2) the reduction of administrative staff that has occurred since 1993; (3) USDA’s plans to implement administrative convergence, including the benefits the Department hopes to achieve and the problems associated with this action; and (4) USDA’s attempts to quantify the savings associated with streamlining efforts, including administrative convergence. To determine USDA’s progress in measuring the savings and efficiencies realized as a result of its departmentwide reorganization and streamlining, we interviewed Department and agency officials involved in reorganization and streamlining and reviewed documents pertaining to their performance measures. We conducted our review from May through November 1998 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to appropriate congressional committees, Members of Congress, the Secretary of Agriculture, and other interested parties. We will also make copies available to others on request. If you have any questions, please call me at (202) 512-5138. Major contributors to this report are listed in appendix V. Farm Service Agency (FSA) (federal) Farm Service Agency (nonfederal) Alternative Agricultural Research and Commercialization Corporation Natural Resources and Environment Natural Resources Conservation Service (NRCS) Cooperative State Research, Education and Extension Service Office of Chief Financial Officer Office of Chief Information Officer (continued) Office of Budget and Program Analysis Office of the Chief Economist Office of the General Counsel 129,495 124,241 117,388 113,539 109,886 109,850 107,031 Offices included under the Assistant Secretary for Administration are the Office of Administrative Support, Board of Contract Appeals, Office of the Judicial Officer, Office of Administrative Law Judges, Office of Civil Rights, Office of Procurement and Property Management, Office of Operations, Office of Human Resources Management, Office of Small and Disadvantaged Business Utilization, and Office of Outreach. Agricultural Research Service Cooperative State Research, Education, and Extension Service Economics Research Service National Agricultural Statistics Service Other staff offices and activities(Table notes on next page) State offices less than 50 miles apart 949 East 36th Avenue Anchorage 3003 North Central Avenue Phoenix 77 East Thomas Road Phoenix 16 Professional Park Road Storrs 88 Day Hill Road Windsor 1201-03 College Park Drive Dover 5201 South DuPont Highway Camden Federal Building 210 Walnut Street Des Moines 10500 Buena Vista Court Des Moines 339 Busch’s Frontage Road Annapolis 1045 South Harrison Road East Lansing 3001 Coolidge Road East Lansing Federal Building 100 West Capitol Street Jackson Federal Building 10 East Babcock Bozeman (continued) Federal Building 100 Centennial Mall Lincoln 1755 East Plumb Lane Reno 1390 South Curry Street Carson City Federal Building 2 Madbury Street Durham Mastoris Professional Plaza Route 130 Bordentown Tarnsfield Plaza 790 Woodlane Road Mt. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Department of Agriculture's (USDA) progress in streamlining its administrative operations, focusing on USDA's efforts to: (1) reduce the number of administrative staff departmentwide; (2) consolidate and streamline administrative support structures for seven field-based agencies, particularly at the state office level; and (3) measure the savings and efficiencies realized as a result of its departmentwide reorganization and streamlining efforts. GAO noted that: (1) from fiscal year (FY) 1993 through FY 1998, USDA reduced its departmentwide administrative staff for four administrative functions--human resources, budgeting, accounting and auditing, and acquisition--from about 10,300 to an estimated 8,800, or by 15 percent; (2) USDA estimates that the number of administrative staff will decrease by an additional 250 by the end of FY 1999; (3) at that time, about 8,550 administrative staff will support approximately 98,500 program staff; (4) USDA has no estimates for further departmentwide reductions in administrative staffing beyond 1999; (5) as of November 1998, USDA had not begun to implement its plan to consolidate and streamline administrative functions at the state office level; (6) these new state offices will receive policy guidance from a newly created headquarters Support Service Bureau and report to a board of directors composed of the state leaders of the Farm Service Agency, Natural Resources Conservation Service, and Rural Development; (7) the plan, which is expected to be fully implemented by 2002, requires the completion of a number of time-consuming and potentially costly actions, including relocating offices, developing common policies and procedures, and instituting common computing systems; (8) furthermore, although it appears that administrative consolidation may provide long-term savings and efficiencies, USDA may incur additional costs to implement this consolidation in the short term; (9) USDA has no plans to develop performance measures to determine the economies and efficiencies realized as a result of its departmentwide streamlining actions; (10) USDA officials believe that a single measure--personnel reductions--serves as a sufficient indicator of the Department's overall performance; and (11) however, without additional performance measures, such as those that measure the quality of service delivery, USDA will not know the extent to which it has accomplished the 1994 act's overall objective of achieving greater efficiency, effectiveness, and economy in the organization and management of its programs and activities. |
Employers in both the public and private sectors have realized that offering work/life programs—such as alternative work schedules, child care, and health and wellness programs—have become an essential element in recruiting and retaining their workforces. The federal government, as a major employer, also recognizes that work/life policies, programs, and practices make good business sense. Congress has recognized the need to provide federal workers workplace flexibilities and has authorized numerous work/life programs for federal agencies to implement. In addition, the executive branch has recognized and supported the benefits of these programs by implementing a range of work/life programs, from flexible work arrangements to child care assistance. Table 1 lists some examples of work/life programs federal agencies provide their employees, as identified by OPM. OPM plays a key role in fostering and guiding improvements in all areas of strategic human capital management—including work/life programs—in the executive branch. As part of that role, OPM can assist in—and, as appropriate, require—building infrastructures within agencies to successfully implement and sustain human capital reforms and related initiatives. For example, OPM promotes human capital leading practices across federal agencies and conducts audits of human capital management within the federal government to ensure compliance with laws, regulations, and policies. To promote coordination among agencies outside of Washington, D.C., OPM works with Federal Executive Boards (FEB) to share guidance and leading practices and obtain feedback from federal agencies on human capital issues. OPM also coordinates its efforts through its involvement in the CHCO Council, which was established to advise and coordinate the human capital activities of its members’ agencies. The CHCO Council has expressed its support of the strategic goals articulated in OPM’s 2010-2015 strategic plan, such as governmentwide initiatives addressing veterans employment, hiring reform, labor-management relations, diversity, and other efforts to hire the best employees for federal service. Additionally, OPM advocates the use of its Human Capital Assessment and Accountability Framework (HCAAF), a set of tools and strategies available to federal agencies that assist officials in achieving results from their human capital programs. The framework guides the assessment of agency human capital efforts, while allowing enough flexibility for federal agencies to tailor their human capital efforts to their missions, plans, and budgets. We have previously recommended that OPM encourage continuous improvement and assist agencies’ efforts in acquiring, developing, and retaining workforce talent. According to OPM officials, OPM fulfills this role in part by assisting federal agencies and serving as a clearinghouse of information for agencies in developing and implementing work/life programs. Within OPM, the office responsible for this mission is the Office of Work/Life/Wellness—a component of the Office of Agency and Veterans’ Support. OPM’s Office of Work/Life/Wellness provides leadership on work/life issues to the federal government by partnering with federal agencies to help them develop and manage work/life programs that meet the human capital needs of the federal workforce, and providing the policies and guidance that form the foundation of these programs. We have also previously reported on the need for OPM to continue its leadership role in identifying and helping agencies apply human capital flexibilities and the need for agencies to develop management infrastructure to make use of available flexibilities. Recently, we reported on the need for agencies to use the flexibilities available to them, including using these flexibilities to retain older and more experienced workers. In addition, in December 2002, we reported the views of agency human capital managers and employee union officers on the effectiveness of human capital flexibilities in managing federal agency workforces. These human capital managers and union officers frequently cited work/life programs as among the effective tools for workforce management. OPM officials describe OPM’s Office of Work/Life/Wellness as a source of assistance, guidance, and information that agencies may use to develop their own work/life programs. For example, OPM provides various tools to assist agencies as they address work/life programs and issues, such as accessible points of contact, formal working groups, and training. OPM also provides guidance to agencies by promulgating regulations and providing informal guidance such as memoranda and bulletins. In addition OPM shares work/life program information through tools such as newsletters and reports—for example, reports on the status of telework and childcare. In its 2006-2010 strategic plan, OPM indicated that it would work with the federal executive boards to share guidance and leading practices across the federal government, and obtain feedback from federal agencies on human capital issues. In addition, one of OPM’s 2010-2015 strategic goals focuses on providing “the training, benefits, and work/life balance necessary for federal employees to succeed, prosper, and advance in their careers.” To meet this goal, OPM proposes to: assist agencies to evaluate and revise policies, and to address employee satisfaction with work/life programs; guide agencies in implementing these programs; and provide agencies with information and tools that promote work/life programs. Overall, our survey of CHCOs and work/life managers revealed that OPM has been helpful to agencies in implementing their work/life programs. As part of our survey, we asked agency officials to respond on behalf of their departments and/or agencies on how OPM’s involvement helped or hindered their ability to implement work/life programs. As shown in figure 1, of the 33 agency officials who responded to our survey, 24 indicated that OPM’s assistance, guidance, and information sharing greatly helped or helped somewhat in implementing work/life programs. Another six agency officials indicated that OPM’s assistance, guidance, and information sharing helped in some cases and hindered in others. Although our survey provided an opportunity for respondents to elaborate on their responses or cite examples in support of their responses, none of the agency officials responding to our survey did so. OPM officials stated that the Office of Work/Life/Wellness provides various tools to assist federal agencies implement work/life programs. For example, OPM offers training to agency officials that, among other things, helps them develop action plans to address employee satisfaction concerns related to work/life programs. Also, OPM has designated points of contact who can assist agency officials to develop and implement work/life programs. In our survey, we asked agency officials to indicate how satisfied or dissatisfied they were with OPM’s assistance in developing and implementing work/life programs (such as accessible OPM points of contact, formal working groups, informal mentoring, and OPM sponsored training). As seen in figure 2, most of the 33 agency officials responding to our survey were either very satisfied or somewhat satisfied with the timeliness (22), quality (21), accessibility (22), and sufficiency (23) of OPM’s assistance. For example, one agency official stated that OPM officials respond quickly to requests for assistance on work/life policy matters, and another agency official stated that OPM’s work/life staff is always very responsive and helpful. In addition to providing assistance to federal agencies, OPM also guides federal agencies by promulgating regulations for work/life programs and issuing programmatic guides and handbooks that explain the requirements for work/life programs such as employee assistance programs, part-time employment and job sharing, child care, and tobacco cessation. In our survey, we asked agency officials to indicate how satisfied or dissatisfied they were with this guidance. As seen in figure 3, most of the 33 agency officials responded that they were either very satisfied or somewhat satisfied with the timeliness (22), quality (24), accessibility (22), and sufficiency (22) of the guidance they received from OPM. For example, one official stated that OPM greatly assisted his/her agency as it expanded its health and wellness program by providing the agency guidance and by participating in a summit meeting with the agency. According to OPM officials, the agency also shares information with federal agencies on leading practices of work/life programs using various avenues such as posting information to its Web site and notifying federal agencies through interactive listservs. Our survey asked how satisfied or dissatisfied agency officials were with OPM’s efforts to share information on leading practices in work/life programs. As seen in figure 4, most of the 33 agency officials indicated that they were either very satisfied or somewhat satisfied with the timeliness (22), quality (23), accessibility (23), and sufficiency (22) of the information they received from OPM. According to an official who responded to our survey, OPM has communicated the importance of these work/life programs and has provided practical suggestions to support agencies in defining goals and sharing best practices. Our prior work has indicated the need for federal agencies to track and use data that will allow them to measure a program’s effectiveness including the changes in the program over time. Agencies need such measurements to help them determine if a particular human capital program—such as a work/life program—is worth the investment compared to other available human capital flexibilities targeted at employee recruitment and retention. We also have previously recommended that OPM disseminate federal agencies’ leading practices in human capital programs to help agencies recruit and retain their workforces. Additionally, OMB’s fiscal year 2012 budget guidance to federal agencies encourages agencies to: reconsider the basic design of their programs; incorporate the use of data in program design; foster innovation rooted in research; and finally, encourage the evaluation of the program. Also, as part of its 2010-2015 strategic plan, OPM proposes to help agencies collect information that would allow agencies to continually improve their efforts to provide employees with a work/life balance. OPM tracks and collects information for a few work/life programs, notably childcare, telework, and health and wellness programs. In July 2009, OPM surveyed federal agencies about their health and wellness programs and specifically requested information on the: (1) number of health and wellness programs offered by each agency; (2) number of employees with access to the programs; (3) number of employees using the programs/services; (4) cost of the programs; and (5) metrics gathered on the programs. OPM officials used this data to develop profiles of health and wellness programs across the federal government, and to help agencies formulate action plans for improving the health and wellness of federal employees. Using these program profiles, OPM developed an inventory of health and wellness programs across the federal government. In response to OPM’s 2009 survey, however, agency officials reported that they either were unable to develop cost data or that the cost data could not be broken down into meaningful components such as services, facilities, and labor. Additionally, OPM officials stated that the cost data they received provided minimal insight. As a result, when OPM requested federal agencies to report on their health and wellness programs for 2010, the request excluded asking for cost data on agencies’ programs. Instead, OPM requested agencies to report on whether they had developed metrics for measuring their health and wellness programs rather than asking for the specific metrics. OPM does not collect information on other programs such as alternative work schedules, leave programs, and employee assistance programs (e.g., stress management and smoking cessation). Agency officials responding to our survey indicated that their agencies track a variety of work/life programs beyond the programs tracked by OPM. As part of our survey, we asked these officials if their departments/agencies tracked (measured) the extent to which agency employees use these work/life programs. Of the 33 agency officials who responded to our survey, 29 indicated that they track either all or some of their work/life programs, as shown in figure 5. Our survey further asked agency officials to specify if their agencies tracked work/life programs in the following categories: (1) alternative work schedules; (2) leave programs; (3) volunteerism and community involvement; (4) care giving; (5) flexible spending; (6) employee assistance programs; and (7) health promotion. The survey results showed that agencies were tracking programs across multiple categories. Specifically, of the 29 officials who indicated that their agencies track their work/life programs, the majority (20) indicated that their agencies track programs in four or more of these seven program categories. While most of the agency officials surveyed indicated that they track their work/life programs, we asked the officials if their departments or agencies also evaluated (measured) the extent to which their work/life programs met their intended goals. These evaluations may be used to assess the programs’ impact on the recruitment and/or retention of federal employees within the departments or agencies. Of the 33 agency officials responding to our survey, 21 indicated that they evaluated either all or some of their work/life programs, as shown in figure 6. Our survey also asked agency officials to specify if their agencies evaluated work/life programs in the seven categories listed above. The survey indicated that most agencies evaluated programs in at least one work/life program category. Of the 21 respondents who indicated that their agencies evaluated work/life programs, about one-half (10) indicated that their agencies evaluate programs in four or more of the seven program categories. As a result of the agencies’ independent evaluations of their work/life programs, some agency officials are potentially in a position to determine: (1) the extent to which their programs improve their ability to recruit and retain their employees and (2) whether or not they need to implement, modify, or eliminate work/life programs. The federal government continues to recognize the need to implement and modify current work/life programs. A March 2010 report published by the President’s Council of Economic Advisors presented an economic perspective on workplace policies and practices and their effect on work/life balance. The Council’s report cited a survey of human resource managers that indicated work/life programs, such as family-supportive policies and flexible hours, were the single most important factor in private sector companies attracting and retaining employees. We also surveyed agency officials about the effects of their work/life programs on employee recruitment and retention. Agency officials responding to our survey indicated that work/life programs offered by their agencies affect their ability to recruit and retain agency employees. About half of the officials indicated that offering work/life programs had a very great or great effect on their ability to recruit and retain agency employees. About another third indicated that work/life programs have a moderate effect on their ability to recruit and retain agency employees. Agency officials may also use the evaluations of their work/life programs to modify, implement, or eliminate work/life programs. As shown in figure 7, 12 out of the 18 CHCOs responding to our survey indicated that they had modified their work/life programs based on the program data that they collected and evaluated. Ten of the 18 responding CHCOs had implemented new work/life programs based on the data they collected and evaluated. However, one of the agency officials responding to our survey indicated that current budget constraints affect an agency’s ability to implement new programs. Most of the agency officials responding to our survey indicated that they track many of their work/life programs. In addition, according to OPM officials, some federal agencies independently provide OPM with data and evaluations on various work/life programs. OPM officials stated that they do not share this information across federal agencies because they lack the time and resources to maintain an inventory of these evaluations. OPM officials said that the recent addition of staff to the Office of Work/Life/Wellness will enable them to review reports they may receive in the future. At the time of this review, there were no staff or resources to track, review, or maintain an inventory of these evaluations. Offering agencies more information about which work/life programs are in place across the federal government and their impact on meeting agency- intended goals could be helpful in a budget-constrained environment. Agency CHCOs could play a valuable and central role in the selection and collection of information in or about work/life programs. Our prior work on federal agencies’ human capital efforts demonstrated the benefits of consulting with the private sector on human capital practices. For example, federal agencies such as the Internal Revenue Service and the Veterans Health Administration have incorporated private sector practices for identifying the critical skills and training needs of their workforces. Also, in its strategic plan for 2010-2015, OPM defines as one of its goals having a suite of flexible work/life programs to promote a healthy work/life balance for federal employees. One of the strategies OPM proposed for achieving this goal is to evaluate the results of surveys from public and private sector organizations to identify leading practices across the sectors. The plan further indicates that OPM will provide federal agencies with these results to provide the agencies various options that they may use to compare their work/life programs with leading private sector practices. However, while OPM has developed a health and wellness pilot program based on discussions with private sector representatives, it has not yet shared information about private sector work/life programs with federal agencies. In May 2009, OPM participated in White House-sponsored meetings with representatives of large, privately-owned companies to discuss how health and wellness programs affect the private sector’s workforce recruitment and retention. Also discussed during these meetings was the administration’s WellCheck initiative, which is intended to improve federa health and wellness programs. These meetings prompted OPM to collect information about federal agencies’ health and wellness programs in July 2009, as mentioned previously. Subsequently, in early 2010, OPM held two roundtables and several meetings with private sector company offi cials to obtain more information about private sector health and wellness programs. These meetings, according to an OPM official, helped the government representatives obtain a better understanding of models for workplace health programs and leading practices in workplace wellness. According to OPM officials, the meetings with private sector health and wellness representatives led to the development of an OPM pilot program designed to create a healthier and more pleasant work environment for employees at the headquarters buildings of OPM, the Department of the Interior, and the General Services Administration, which are located clo to each other. The pilot, known as WellnessWorks, seeks to develop a shared “work-life” campus by improving health and wellness facilities at the headquarters locations for each of the agencies. OPM has hired a wellness coordinator and is purchasing the services of a wellness service provider for the campus. The service provider will complement the existing services of the three agencies and increase the level of services across the campus to match leading practices in the private sector. WellnessWorks will offer the employees access to health and wellness services such as: an assessment that includes productivity and scientifically defined areas of well-being, in addition to physical health, mental health, and health behaviors; biometric testing, consisting of heigh t and weight measurement and blood testing for cholesterol levels; programs to encourage healthy behaviors, such as weight management agement; classes, exercise, tobacco cessation, and chronic disease man face-to-face and Web-based health education resources; and immunizations, allergy shots, and routine injections. OPM officials will evaluate the pilot program and they plan to provide details on developing this type of collaborat to federal agencies across the government. ive “shared work/life campus” Although OPM used information from the private sector to develop the WellnessWorks program with the goal of implementing it across the federal government, OPM has not shared with federal departments and agencies information about other health and wellness programs, or other work/life programs implemented in the private sector. Currently, OPM has not placed information on its Web site about private sector practices. Additionally, our work showed that none of the agency officials responding to our survey indicated that OPM provides them with this type of information. An OPM official told us that the agency has not considered providing this information because: (1) OPM officials have been focusing on other work/life programs such as telework and child care and (2) similar information is readily available through other sources (e.g., the Society for Human Resources Management). According to this official, OPM may consider providing agencies with the information collected from the private sector if the agencies express an interest in the information and the agencies understand that OPM is not endorsing or recommending any of the private sector programs. To identify useful information available to OPM and federal agencies concerning private sector work/life programs, we selected seven private sector companies that have been recognized by human capital associations and publications as providing their employees with quality work/life programs: (1) Deloitte; (2) Ernst & Young; (3) Marriott International; (4) MetLife; (5) General Mills; (6) SC Johnson & Son; and one company that requested anonymity (see appendix I for the private sector company selection methodology). These companies, representing various industries, generally offer work/life programs in the same categories and subcategories and for similar reasons as federal agencies. Table 2 lists examples of the types of programs private sector companies offer. The work/life private sector program managers informed us that they use various sources of information to determine future program needs, such as employee feedback and demographic analysis of the workforce. For example, officials from one company said that after concluding a study of working parents and their families, they decided to expand their parental leave program well beyond the industry average to help their employees balance the demands of family and career. Managers at four of the seven private sector companies told us that they compare work/life programs offered by their companies with those of other companies in the same industry or in the same geographic area to make sure they are competitive for attracting and retaining talent. Also, managers at two of the seven companies mentioned that they belong to professional human capital management organizations, which provide opportunities to share information about work/life program offerings. The work/life managers from the participating private sector companies told us that they evaluate their programs on a regular basis to determine whether the programs are enhancing workforce recruitment and retention. According to the managers, some programs can be tracked through usage data. However, they also told us that their companies do not judge the success or failure of a program based on how frequently it is used. One manager stated that his/her company encourages participation and seeks to overcome any barriers to program use, such as lack of awareness or lack of manager support. Private sector companies also reported tracking the use of their flexible work schedule programs by the number of flexibility agreements on record and by employee time and attendance records to determine the extent to which company employees are using the available flexibilities. For programs that do not have usage data, the company may rely on employee feedback through e-mail, Web site comments, or personal contact to determine (1) how much a program is being used and (2) how satisfied users are with the programs. Managers told us that through this process of tracking and evaluating, they were able to align the work/life programs they offer with their employees’ needs and thus enhance recruitment and increase retention. For example, one manager stated the need to develop a business case for implementing his/her company’s work schedule flexibilities by surveying employees to measure the effect of these flexibilities in attracting and retaining employees. More than 75 percent of the employees indicated that the flexibilities were of significant importance in deciding to remain with the company. Another manager told us that his/her company steadily tracks the impact of the work/life programs, and that since the current set of work/life programs were introduced, employees expressed that there was more balance between their careers and personal lives. Managers at four of the seven companies we spoke to indicated that the work/life programs instituted by their companies had had a great or very great effect on recruitment, retention, and productivity. One manager said that work/life programs were a key enabler of the corporate culture of flexibility and inclusion. Another told us that work/life programs had a very great effect on achieving the company’s goals of enhancing retention and work satisfaction. Overall, agency officials indicated that they were satisfied with OPM’s assistance, guidance, and information sharing as they developed and implemented work/life programs. However, OPM is potentially missing opportunities to provide federal agencies with additional information that may be useful to agencies in their efforts to develop and implement work/life programs. While OPM has limited its collection and evaluation of federal work/life programs to only a few, some federal agencies are independently tracking and collecting work/life program usage data on a wider range of programs such as alternative work schedules and employee assistance programs. The agencies are also using these data to conduct assessments of these programs and use the results to make programmatic changes. Sharing data among agencies on the effect of work/life programs on agency-intended goals could be helpful for agency decision making in a budget-constrained environment. OPM officials said that they did not track or maintain an inventory of these evaluations nor review these evaluations. OPM officials said that the recent addition of staff to the Office of Work/Life/Wellness will enable them to review reports they may receive in the future. OPM’s Office of Work/Life/Wellness has met with private sector company representatives to examine private sector health and wellness programs and the leading practices used to implement those programs, however the office does not systematically collect information on other private sector work/life programs. A more systematic approach for examining how work/life programs have been implemented and evaluated in public and private sector organizations, as well as making this information more readily available, could benefit federal agencies’ own efforts to establish work/life programs. In keeping with its mission to help federal agencies in their human capital management efforts, OPM can play a key role in the collection and dissemination of this type of information. Additionally, by adopting this role, OPM can make progress on its strategic goal of providing the agencies with various options that could be used to ensure that their agencies’ work/life program offerings are aligned with leading practices identified in the public and private sector. We recommend that the Director of OPM, working with the CHCO Council, identify the resources, steps, and timetable necessary to complete the following three actions: (1) track on a more systematic basis information already being collected by individual federal agencies on their work/life programs, such as program usage data and evaluations; (2) evaluate the results of work/life program surveys conducted by leading private sector organizations, as stated in OPM’s 2010-2015 strategic plan, that could help federal agencies as they implement their work/life programs; and (3) provide the information from both the public and private sectors, including other comprehensive evaluations produced by academic institutions, state entities, and other organizations, to agency officials—through available avenues such as the CHCO Council and federal executive boards—that could help them address work/life program issues and determine if the work/life programs are meeting their agencies’ goals. We provided a draft of this report to the Director of OPM for review and comment. OPM provided written comments which are reproduced in appendix III. OPM generally concurred with our recommendations but requested small modifications to two recommendations that include private sector work/life programs. OPM also provided technical comments which we incorporated as appropriate. OPM concurred with our recommendation that OPM evaluate the results of work/life program surveys conducted by leading private sector organizations. However, OPM cautioned that there are enough differences between private and public sector motivations and cultures that a direct comparison of policies and practices may not provide federal agencies with a comprehensive set of “ready-to-use” solutions as they implement their work/life programs. Also, OPM does not want to appear to selectively endorse leading practices in the private sector as solutions for implementing federal work/life programs. We agree with OPM that some leading private sector practices may not be applicable to federal agencies and that OPM should not appear to selectively endorse leading private sector practices. However, we do believe that communicating these leading practices without endorsing them could provide federal agencies with additional information that federal agency officials could use in implementing their work/life programs. We revised the recommendation to reflect our agreement with OPM. OPM also concurred with our recommendation that OPM provide information from both the public and private sector to agency officials that could help the agency officials address work/life program issues and determine if these programs are meeting the agencies’ goals. However, they asked that we add other evaluations of public and private work/life programs published by academic institutions, state entities, and other organizations such as the Sloan Foundation. We agree with OPM’s assessment that other available evaluations of public and private sector work/life programs could provide information to federal agency officials as they implement work/life programs. We revised the recommendation to reflect our agreement with OPM. We are sending this report to other interested parties and to the Director of OPM. In addition, the report will be available free of charge at http://www.gao.gov. If you, or your staff, have any questions about this report, please contact me at (202) 512-6806 or jonesy@gao.gov. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix IV. This appendix details the objectives and scope of our report, and the methodology used to provide information to the requesters about the role of the Office of Personnel Management (OPM) in providing assistance, guidance, and oversight to federal agencies concerning work/life programs, and about private sector work/life programs. Our requesters asked us to determine the extent to which (1) OPM provides assistance and guidance to federal agencies for establishing and enhancing work/life programs; (2) OPM or the federal agencies track, evaluate, or refine work/life (3) OPM has identified leading practices in the private sectors for the implementation of work/life programs and shared this information with federal agencies. In order to address the first two objectives, we designed and administered a Web-based survey (see app. II for a copy of our questionnaire and survey results). The survey was conducted using a self-administered electronic questionnaire which was sent to a nonprobability sample consisting of 20 Chief Human Capital Officers (CHCO) at selected federal departments or agencies who also serve as members of the CHCO Council. The same Web-based survey was also sent to a separate nonprobability sample of 20 work/life program managers from subcomponents of these departments or agencies. The purpose of the survey was to obtain respondents’ perceptions on behalf of their departments or agencies of OPM’s assistance, guidance, and information sharing during a one-year period. Because a portion of the survey focused on agency perceptions of OPM’s assistance, we excluded OPM’s CHCO from our sample. Additionally, because we intended the survey respondents to speak on behalf of their department or agency, we excluded two CHCO Council members who serve as proxies for numerous federal agencies, specifically one member representing small federal agencies and another member representing federal national security and intelligence agencies. Also included in the survey questionnaire were questions designed to obtain information on how these agencies track, evaluate, and modify their own work/life programs. Table 3 lists the federal departments selected for our survey and the number of respondents who completed our survey. We pretested the survey instrument with representatives from two federal agencies during June and July 2010 and administered the survey to our selected respondents from July through September 2010. The practical difficulties of conducting any survey may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the survey data are analyzed can all introduce unwanted variability into survey results. To minimize such nonsampling errors, a social science survey specialist designed the questionnaire, in collaboration with GAO staff that had subject matter expertise. As indicated above, the questionnaire was pretested to ensure that the questions were relevant, clearly stated, and easy to comprehend. When data were analyzed, an independent analyst reviewed the computer program used for the analysis of the survey data. Since this was a Web- based survey, respondents entered their answers directly into the electronic questionnaire, thereby eliminating the need to have the data keyed into a database and avoiding data entry errors. The results of our survey are not generalizable to all agency officials or to all agencies because they are based on a nonprobability sample. Also, for those agency officials responding that their agencies evaluate their work/life programs, we did not independently determine whether or how well they actually evaluate their work/life programs. We reviewed past GAO human capital reports on issues dealing with work/life programs. We also interviewed OPM work/life officials to obtain OPM’s description of its role in interacting with federal agencies as they develop and implement work/life programs. This included reviewing OPM’s A New Day for Federal Service: Strategic Plan 2010-2015, its 2006-2010 strategic plan; past OPM reports on work/life programs; and available written policy, guidance, and directives. We also visited the agency’s Web site to examine the material available to federal agencies and employees on work/life assistance, guidance, and identification of leading practices. In order to address our third objective on the identification of some leading practices in the private sector, we reviewed publicly available information sources to identify private sector companies that are leaders and award winners in providing work/life programs to their workforces. The awards are based on the types of work/life programs offered and the diversity of the company’s workforce. Some of the awards include Fortune Magazine, “Best Places to Work”—includes separate awards for work/life balance, child care, telecommuting, and unusual perks (2009); AARP, “Best Employers” (2008); Working Mother’s Magazine, “100 Best Companies” (2008); Alfred Sloan Awards for Business Excellence in Workplace Flexibility (2005, 2006); Latina Style, “50 Special Report” (2008); Black Enterprise, “40 Best Companies for Diversity” (2009); and Diversity Inc., Top 50 (2009). After reviewing these information sources, we identified 17 companies that received multiple awards from the sources we reviewed, based on a process of weighting the awards received. Out of the 17 companies that we reviewed, 7 agreed to be interviewed. The companies that we interviewed represented 6 of the 7 industry categories that we identified. Table 4 lists the participating private sector companies and the industries they represent. We developed a structured interview instrument that we administered to officials from the participating private sector companies to obtain information on the development and implementation of work/life programs within their companies. We also asked the officials to describe how their companies track, evaluate, and modify their work/life programs and how this information is used to make decisions about their work/life programs. Also, for those private sector company officials responding that their companies evaluate their work/life programs, we did not independently determine whether or how well they actually evaluate their work/life programs. However, these seven companies are not representative of all private sector companies and therefore, we cannot generalize the information these private sector officials provided about their work/life programs to other private sector companies. We conducted this performance audit from August 2009 through December 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Steven Lozano, Assistant Director; Steven J. Berke; Jeffrey Dawson; Karin Fangman; Stuart M. Kaufman; Melanie Papasian; Joseph L. Santiago; Megan Taylor; and Gregory H. Wilmoth made key contributions to this report. Human Capital: Sustained Attention to Strategic Human Capital Management Needed. GAO-09-632T. Washington, D.C.: April 22, 2009. Older Workers: Enhanced Communication Among Federal Agencies Could Improve Strategies for Hiring and Retaining Experienced Workers. GAO-09-206. Washington, D.C.: February 24, 2009. Human Capital: Transforming Federal Recruiting and Hiring Efforts. GAO-08-762T. Washington, D.C.: May 8, 2008. Older Workers: Federal Agencies Have Challenges, but Have Opportunities to Hire and Retain Experienced Employees. GAO-08-630T. Washington, D.C.: April 30, 2008. An Assessment of Dependent Care Needs of Federal Workers Using the Office of Personnel Management’s Survey. GAO-07-437R. Washington, D.C.: March 30, 2007. Highlights of a GAO Forum: Engaging and Retraining Older Workers. GAO-07-438SP. Washington, D.C.: February 28, 2007. Older Workers: Some Best Practices and Strategies for Engaging and Retaining Older Workers. GAO-07-433T. Washington, D.C.: February 28, 2007. Office of Personnel Management: Key Lessons Learned to Date for Strengthening Capacity to Lead and Implement Human Capital Reforms. GAO-07-90. Washington, D.C.: January 19, 2007. Human Capital: Agencies Need Leadership and the Supporting Infrastructure to Take Advantage of New Flexibilities. GAO-05-616T. Washington, D.C.: April 21, 2005. Human Capital: OPM Can Better Assist Agencies in Using Personnel Flexibilities. GAO-03-428. Washington, D.C.: May 9, 2003. Major Management Challenges and Program Risks: Office of Personnel Management. GAO-03-115. Washington, D.C.: January 2003. Human Capital: Effective Use of Flexibilities Can Assist Agencies in Managing Their Workforces. GAO-03-2. Washington, D.C.: December 6, 2002. | To improve its ability to recruit and retain federal employees, agencies have implemented a wide range of work/life programs, such as flexible work schedules, child care, and employee assistance programs. The Office of Personnel Management (OPM) plays a key role in guiding federal human capital initiatives, including the implementation of work/life programs. As requested, GAO determined the extent to which: (1) OPM provides assistance and guidance to federal agencies for establishing and enhancing work/life programs; (2) OPM or the federal agencies track, evaluate, or modify work/life programs; and (3) OPM has identified leading practices in the private sector for the implementation of work/life programs and shared this information with federal agencies. To do this, GAO reviewed OPM policy and guidance; surveyed 40 federal officials--20 Chief Human Capital Officers (CHCO) and 20 work/life managers; and interviewed officials from seven private sector companies recognized for the quality of their work/life programs. OPM's Office of Work/Life/Wellness is available to federal agencies to provide assistance, guidance, and information as agencies develop and implement work/life programs. For example, OPM has established formal working groups, sponsored training for agency officials, promulgated regulations to implement work/life programs, and provided informal guidance to agencies that address issues related to these programs. Of the 33 agency officials who responded to GAO's survey, 24 indicated that OPM's assistance, guidance, and information sharing greatly helped or helped somewhat in implementing work/life programs. Another six agency officials indicated that OPM's assistance, guidance, and information sharing helped in some cases and hindered in others. OPM tracks and collects information on a few work/life programs across the federal government, including health and wellness programs which it recently began tracking in response to a White House initiative. Some federal agencies independently provide OPM with evaluations on other work/life programs. However, when asked, OPM officials said that they did not track or maintain an inventory of these evaluations nor review these evaluations due to the lack of time and available resources. Tracking, analyzing, and sharing information among federal agencies on the effect of work/life programs on agency-intended goals could be helpful for individual agency decision making in a budget-constrained environment. To follow up on the White House health and wellness initiative, OPM held several meetings and conferences with representatives from private sector companies to discuss their health and wellness programs and the effect of these programs on recruitment and retention. Although OPM has developed a health and wellness pilot program based on some of the information obtained from these meetings and conferences, OPM has not systematically shared with federal agencies other information about the private sector's health and wellness programs or other work/life programs. GAO also interviewed officials from seven private sector companies recognized for the quality of their work/life programs to identify leading practices in implementing private sector work/life programs. Private sector officials from four of the seven companies that GAO interviewed indicated that their programs have been effective in increasing employee job satisfaction, resulting in improved recruitment, retention, and workforce productivity. Systematically collecting and disseminating information on the implementation and evaluation of private sector work/life programs could help federal agencies compare their work/life programs with leading practices in the private sector. GAO recommends that OPM assist agencies in implementing their work/life programs by more systematically tracking and evaluating data on the implementation and evaluation of work/life programs and sharing this information with federal agencies. OPM agreed with GAO's recommendations and suggested technical changes which GAO has incorporated as appropriate. |
Foodborne illness in the United States is extensive and expensive. The incidence of foodborne illness is estimated to range from 6.5 million to 81 million cases each year and result in as few as 500 to as many as 9,100 related deaths annually. In terms of medical costs and productivity losses, foodborne illness costs the nation between $7 billion and $37 billion annually, according to USDA’s estimates. Public health officials believe that the risk of foodborne illness has been increasing over the last 20 years. Trends in the incidence of foodborne illness in the United States are linked, at least in part, to changes in Americans’ eating habits. For example, Americans today consume more raw fruits and vegetables than they did in the past and in some cases may mishandle them by not washing them. While this change in diet has many health benefits, the mishandling of these foods and other foods, such as undercooking and/or improperly refrigerating meat and poultry, may also contribute to the spread of foodborne illnesses. The scientific community has recognized that preventing contamination is the key to reducing the risk of foodborne illness. However, FSIS conducts organoleptic meat and poultry inspections of each and every meat and poultry carcass in order to fulfill current program requirements for carcass-by-carcass inspections in slaughtering plants. While these inspections fulfill the requirements, they primarily identify defects in quality but do not detect microbial contamination. However, as the threat of microbial contamination has increased, a Hazard Analysis and Critical Control Point (HACCP) system has come to be considered the best approach currently available for ensuring safe food because it focuses on preventing contamination rather than on detecting it once it has occurred. The HACCP system (1) identifies hazards and assesses the risks associated with each phase of food production, (2) determines the critical points where the identified hazards can be controlled, and (3) establishes procedures to monitor these critical control points. In January 1998, FSIS began to require meat and poultry plants to implement HACCP systems. Implementation is expected to take 3 years, starting with the nation’s 300 largest slaughtering plants, which account for 75 percent of all meat and poultry slaughter production. In 2000, this system will be fully implemented and will have reached very small plants—those with fewer than 10 employees. The HACCP system requires FSIS’ verification that a plant’s overall system—not just the individual control points—is working. This verification relies on, among other things, microbial and other types of testing of product samples taken at various times throughout production. These tests contribute to verifying whether the plants meet food safety standards and alert the plants to deficiencies in the slaughtering process. In addition to carcass-by-carcass slaughter inspections, FSIS inspects meat- and poultry-processing plants at least once per day during each operating shift. Its current inspection program practice for processing plants is labor-intensive and is not based on the health risk that a plant poses. Processing plants’ operations can include the simple cutting and packaging of meat and poultry, grinding, complex canning procedures, or the preparation of ready-to-eat products. Multiple agencies share the responsibility for ensuring the safety of the nation’s food supply. In fact, 12 different federal agencies located within six federal entities are involved: HHS’ Food and Drug Administration and Centers for Disease Control and Prevention (CDC); USDA’s FSIS, Agricultural Marketing Service (AMS), Animal and Plant Health Inspection Service (APHIS), Agricultural Research Service (ARS), and Grain Inspection, Packers, and Stockyards Administration; the Department of Commerce’s National Marine Fisheries Service (NMFS); the Department of the Treasury’s U.S. Customs Service and Bureau of Alcohol, Tobacco, and Firearms; the Environmental Protection Agency (EPA); and the Federal Trade Commission. Appendix I describes these 12 agencies’ roles and responsibilities in food safety, and table I.1 shows the food safety funding for and staffing levels of the agencies for selected years. This structure necessitates extensive coordination to minimize duplication of effort, prevent gaps in regulatory coverage, and avoid conflicting actions. Our past reviews have shown inconsistencies and differences between agencies’ approaches and enforcement authorities that undercut overall efforts to ensure a safe food supply. In the past, we have recommended a single food safety agency to correct the problems created by this fragmented system. In addition to the more than $1 billion provided for routine food safety activities, the administration’s food safety initiatives increased funding for federal food safety efforts by $43 million in fiscal year 1998 and requested $101 million for fiscal 1999. These funds went to various agencies—some of which previously did not have any food safety activities—to target efforts for collaborating on food safety priorities in six areas: (1) enhance surveillance of foodborne illnesses and build an early warning system; (2) improve the assessment of the risks associated with exposure to foodborne pathogens; (3) improve coordination among local, state, and federal health authorities; (4) improve the efficiency and effectiveness of seafood, fruits and vegetables, and other FDA inspections; (5) develop educational messages for a variety of audiences, such as consumers and schoolchildren, on the hazards associated with handling food; and (6) research methodologies for, among other things, more rapid and accurate identification and characterization of foodborne hazards. These areas represent important and specific food safety activities that, in many cases, existed prior to the initiatives but had difficulty obtaining funding through their agencies’ processes for setting budget priorities. Appendix II shows, by agency, the fiscal year 1998 funding and fiscal 1999 request for these initiatives. A significant area in which food safety funds could be spent more effectively is inspection resources. Most of the $271 million—over one-fourth of the food safety budget—spent annually on FSIS’ organoleptic, carcass-by-carcass slaughter inspections could be spent more effectively on other food safety activities that better address food safety risks. Once HACCP is fully implemented, the funds could become available through the Congress’s (1) authorizing FSIS to impose user fees on meat and poultry plants for carcass-by-carcass slaughter inspections, (2) eliminating the legislatively mandated requirement for these federal inspections and allowing slaughter plants to hire their own inspectors, or (3) combining the above options—permitting the slaughter plants to either pay the user fees for federal inspections or hire their own inspectors. In addition, if daily inspections of the processing plants—at an annual cost of about $109 million—were replaced by inspections based on health risk, an undetermined amount of funds could be made available. All or part of the funds made available through the implementation of revisions to food safety inspections could be redirected to other food safety priorities. Currently, FSIS spends about $271 million annually on inspectors who are present at each slaughter plant nationwide every day that it is in operation. These inspectors, under current FSIS rules and regulations, inspect each carcass—over 8 billion birds and livestock annually—for visible defects, such as lesions and diseases. Under the traditional organoleptic inspection system, an inspector has about 2 seconds per bird, at the fastest line speeds, to determine whether the carcass meets federal standards for wholesomeness. We previously reported that with the introduction of the HACCP system, the traditional system of organoleptic meat and poultry inspections of each meat and poultry carcass will become obsolete for improving the safety of meat and poultry because it does not prevent microbial contamination.Moreover, experts have recognized that post-mortem organoleptic inspections on every carcass must be changed because (1) they waste resources and cannot detect microbial pathogens, (2) the animal diseases for which they were originally designed have been eradicated in many countries, and (3) they result in unnecessary cross-contamination because the hands-on inspection techniques used virtually ensure that contamination spreads from one carcass to another. However, this type of inspection may be useful to slaughter plants, since it primarily provides an assurance of quality, such as ensuring that feathers are removed and that tumors and blood clots are not present. While these conditions do not generally threaten human health, they affect the quality of the product. Because the organoleptic inspections of slaughtered animals primarily help to ensure quality rather than food safety, these inspections are foremost in the slaughter plants’ interest. Therefore, as we previously reported, it may be appropriate to charge user fees to cover the cost of these activities. Historically, FSIS has sought but never received the authority to charge user fees for all of its inspection activities. FSIS is requesting user fees again in its fiscal year 1999 budget for all inspection activities. Although the Congress has decided in the past that it is not appropriate to impose user fees for all food safety inspections, the Congress, as a first option, may consider it appropriate to authorize user fees for the federal organoleptic, carcass-by-carcass inspection of slaughtered animals after FSIS has fully implemented the new science- and risk-based HACCP inspection system. If this authority were granted and used, most of the $271 million that FSIS currently spends on these inspections could be recovered. As a second option, the Congress could amend the mandated requirement for federal carcass-by-carcass inspections by stipulating that after a slaughter plant has operated under a HACCP system for a period of time, the plant could conduct its own carcass-by-carcass slaughter inspections, with appropriate FSIS oversight. Alternatively, as we previously recommended, the Congress could revise the meat and poultry acts to provide FSIS with the flexibility and discretion to target its inspection resources to meet the most serious food safety risks. Finally, the Congress could provide for a combination of the first two options. That is, a plant could (1) pay a user fee to FSIS, adjusted periodically to reflect FSIS’ increased costs, and use FSIS inspectors for carcass-by-carcass slaughter inspections or (2) hire its own employees to do these inspection activities with the appropriate FSIS oversight. In prior work, we reported on the opportunity to more effectively use federal food safety resources by adopting a risk-based approach rather than the approach currently used by FSIS, which requires daily inspections at all processing plants. This inflexible, labor-intensive approach costs an estimated $109 million annually. Under FSIS’ current approach, an inspector must visit each meat and poultry processing plant every 8-hour operating shift to perform a number of tasks, such as monitoring the cleanliness of the workers’ bathrooms and ensuring that the canning process operates under the right temperatures and pressures. An undetermined amount of funds could be made available by adopting a risk-based approach to determine the appropriate frequency for these inspections and to allow for more substantial inspections, if needed, when they do occur. Funds made available from this new approach could then be redirected to other food safety priorities. Developing a risk-based system to determine the frequency of daily inspections would result in fewer inspections but also in inspections that are more closely tied to risk. Our past work pointed out the inefficiencies of FSIS’ daily inspection of all 5,900 meat- and poultry-processing plants (or once per shift if a plant operates more than one 8-hour shift) with the same frequency and intensity of inspection regardless of the processing plant’s public health risk and compliance history. In fiscal year 1997, the annual cost associated with inspectors traveling between processing plants on daily “patrol assignments,” which averaged three to six plants per day, was $6 million. Under a risk-based approach, some of these inspections would occur less frequently because they would be based on the risk that specific food products pose to public health and the plants’ past inspection histories. If FSIS changes its current approach to carcass-by-carcass slaughter inspections, all or part of the $271 million annually spent on these inspections could be redirected to other federal food safety activities that better reduce the threat of foodborne illness. In prior work, we identified a number of food safety concerns that could be addressed, such as the following: FSIS could help to install HACCP inspection systems at the smallest meat and poultry slaughter and processing plants. Since industry will bear most of the installation cost for these new systems and the smallest plants have a smaller volume over which to spread this cost, these plants will be disproportionately affected by the cost of the new inspection systems. FDA could increase the frequency of its inspections of other U.S. food-processing plants, such as nonmeat soup plants, cereal manufacturers, and canned fruit and vegetable processors. Currently, FDA inspects such plants under its jurisdiction only once in 10 years, on average. These inspections are not based on the health risks that these plants pose, but rather on available resources. FDA officials informed us that if they had increased resources, FDA could increase the frequency of inspections of high-, moderate-, and low-risk firms, in that order. In general, the inspections of lower-risk firms would be based on the availability of resources. FDA could improve its oversight of imported foods by assisting foreign countries in developing equivalent food safety systems or it could use the funds to improve its oversight of imported foods at ports of entry. In addition to these actions, the food safety agencies may have other priorities for the use of the funds that are made available from organoleptic slaughter inspections of meat and poultry plants or by basing the frequency of meat- and poultry-processing plant inspections on risk. For example, an ARS official stated that FDA could use additional funding to support an ongoing surveillance system of food animals. This system samples tissue from food animals that have been treated with antibiotics. The system monitors (1) the buildup of antibiotic tolerances in animals and (2) the mutation of pathogens due to antibiotic treatment. The health concern is antibiotic resistance to pathogens in humans as a result of consuming these food animals. The national food safety initiatives were announced by the President for fiscal years 1998-99 and provided additional funds for identified weaknesses. These initiatives have improved some food safety activities. However, the initiatives do not address the fundamental problem of the system—its fragmented structure. In fact, for certain food safety activities, the initiatives intensified the need for coordination among the loosely networked group of federal food safety agencies. For fiscal year 1998, the administration’s initiative received $43 million for specific food safety activities to improve the nation’s food safety system. Prior to the initiative, these activities had competed with other agency priorities for funding. The $43 million in funding was aimed at, among other things, (1) improving a nationwide early-warning system for foodborne illnesses, (2) increasing seafood safety inspections, and (3) expanding research, training, and education in food safety. Under the initiative for fiscal year 1999, the administration has requested $101 million to build upon the food safety efforts in the 1998 initiative and to enhance the safety of imported and domestic fruits and vegetables, among other things. CDC used initiatives funding to improve its monitoring of foodborne illnesses and will expand its surveillance locations throughout the country to eight. This program, now known as FoodNet, provides national data to better identify illnesses associated with foods; these data allow for more informed decisions about dealing with microbial contamination. Prior to FoodNet, CDC had very limited information on the extent of foodborne illnesses. Since this surveillance effort was undertaken, for example, CDC has learned that the incidence of one pathogen, Campylobacter, is far more frequent than previously known. Policymakers can now use this information to direct research and other activities to reduce illnesses from this pathogen. While these food safety initiatives have addressed, and intend to address, some targeted problems, they do not effectively deal with the underlying fragmentation in the federal food safety system. As we have reported, past efforts to correct deficiencies in the federal inspection system for food safety have fallen short, in part because they did not address the fundamental problems in the system. Agencies operate under different regulatory approaches, have widely disparate budgets and staffs, and lack the flexibility needed to respond to changing consumption patterns and emerging food safety issues. These agencies’ efforts are hampered by laws that were designed to address safety concerns in specific foods in a piecemeal fashion, typically in response to particular health threats or economic crises. In addition, this fragmentation may have impeded the effective implementation of some of the activities funded through the food safety initiatives. For example, the initiatives for fiscal years 1998-99 included about $15.7 million to FSIS, FDA, and the Cooperative State Research, Education, and Extension Service, among other agencies, to jointly develop a national campaign to educate the public about the safe handling of fruits and vegetables. However, this effort excluded EPA, which is spending about $230,000 in fiscal year 1998 and about $400,000 in fiscal 1999 to develop and distribute its own brochure to educate the public about pesticides and foods. While EPA attempted to coordinate its educational brochure with the other agencies, significant differences over the message still occurred. According to USDA and FDA officials and consumer groups, EPA’s message implied that there are risks associated with eating fruits and vegetables treated with pesticides. These groups said that EPA’s message contradicted USDA’s advice to eat more fruits and vegetables. At the same time, the other agencies’ effort developed a message that discussed the safe handling of fruits and vegetables and encouraged their consumption. In March 1998, after receiving comments from other agencies and the public on its draft brochure as published in the Federal Register, EPA began revising its brochure to reflect the concerns of the other agencies and advised us that it is still in that process. Even when an activity under the initiatives has been designed to address a fragmentation problem, there is no assurance that it will be successful. For example, in January 1997, the President’s Food Safety Initiative (Food Safety From Farm to Table: A National Food Safety Initiative) proposed improving seafood inspection activities by consolidating seafood inspections under one agency by October 1998. Under the proposal, NMFS’ voluntary fee-for-service seafood inspection program would be moved to FDA. Progress on this consolidation has been slow because some of the necessary legislative changes are still being drafted. As of May 1998, NMFS officials told us that they have drafted legislation, in conjunction with FDA, to transfer the program to FDA but budget issues have delayed the legislation from being sent to the Office of Management and Budget for its review and approval. Consequently, the Congress has not had the opportunity to decide on the proposed legislation. Commerce’s fiscal year 1999 budget request does not show NMFS’ program as part of Commerce’s fiscal 1999 budget, because Commerce assumed that legislation to transfer the program would be enacted during fiscal 1998. In addition, neither FDA’s fiscal year 1999 budget nor its initiative funds provide for transferring NMFS’ program to FDA, which has primary responsibility for seafood inspections. FDA officials told us that they did not include the transfer in their fiscal year 1999 budget request because they had not received the legislative authority to charge the user fees that are associated with NMFS’ inspection program. We provided the Department of Commerce, the CDC, EPA, FDA, and USDA with a draft of this report for their review and comment. The following summarizes their comments, which are shown in their entirety with our point-by-point responses, in appendixes III through VII. USDA disagreed with the draft report and had concerns with (1) the draft’s description of the Department’s food safety inspection operations as well as the laws supporting these operations and (2) any implication that food safety resources should be transferred out of the Department. Concerning the former, USDA stated that we mischaracterized the statutory authorities for FSIS’ programs that ensure the safety of the meat and poultry supply and inaccurately described FSIS’ current inspection practices. For example, USDA noted that, in contrast to statements in the draft report, the statutes do not mandate how carcass-by-carcass inspections are to be carried out nor do they state the frequency of processing inspections. We used the Department’s comments, where appropriate, to clarify certain aspects of the report. These clarifications are described in more detail in appendix VII. However, none of these revisions changed the fundamental description of the Department’s inspection operations. Furthermore, they do not change our principal observation that USDA’s current carcass-by-carcass inspection process as well as its daily processing plant inspection process are not risk-based and, therefore, in our view, may not be an efficient use of federal food safety resources. USDA’s second concern stemmed from a misinterpretation of the draft. USDA officials incorrectly inferred that the report implied that any resources made available by revising the Department’s current carcass-by-carcass inspection and daily plant inspection processes should be redirected outside FSIS. The report does not say this; rather, it presents several food safety activities that these resources could be redirected toward, both within and outside of FSIS. EPA and FDA each had one primary concern about the draft report. This concern related to one of several examples used to illustrate our observation that the food safety initiatives did not address the underlying problems of fragmentation in food safety regulation. More specifically, the draft report noted that under the food safety initiative for fiscal year 1999, USDA and FDA had planned to consolidate efforts for monitoring microbial contamination in fruits and vegetables but had missed an opportunity to take a similar approach to monitor for pesticide residues in these foods. In commenting on the draft, both FDA and EPA stated that the objectives of USDA’s and FDA’s pesticide-monitoring efforts differed significantly enough that it would be difficult to develop a single monitoring program that would satisfy both agencies’ monitoring objectives. On the basis of their concerns, we eliminated this particular example. However, our overall observation concerning fragmentation and the problems it creates for ensuring food safety remains unchanged. The Department of Commerce and CDC generally agreed with our report and provided several technical corrections, which we incorporated as appropriate. You asked us to (1) analyze the federal food safety agencies’ budgets for fiscal year 1999 to determine whether the appropriated funds of more than $1 billion can be spent more effectively and (2) provide our views on whether the food safety initiatives for fiscal years 1998-99 will address underlying problems in the federal food safety system. To address the first question, we reviewed the two food safety agencies with the largest budgets and another seven agencies with budgetary increases in their fiscal year 1999 budget requests for selected food safety programs and projects. In total, we examined 10 agencies’ budgets: FDA and CDC, within HHS; FSIS, AMS, APHIS, ARS, the Grain Inspection, Packers, and Stockyards Administration, and the Cooperative State Research, Education, and Extension Service, within USDA; NMFS, within the Department of Commerce; and EPA. In addition, we asked the agencies’ program and budget officials to explain budget justifications in more detail for selected programs and projects to ascertain if these various agencies’ budgets represented the best way to spend $1 billion on federal food safety activities through appropriations and user fees. In order to provide our views on whether the food safety initiatives for fiscal years 1998-99 will address the underlying problems in the federal food safety system, we reviewed the administration’s initiatives on food safety, examined four of the six priority areas identified within the initiatives because these areas had the largest budgets, and interviewed knowledgeable food safety agencies’ program and budget officials on selected projects within those four areas. In addition, to address both issues, we used information from our prior reports and reports from the Congressional Research Service. We conducted our review from February through May 1998 in accordance with generally accepted government auditing standards. We are sending this report to various congressional committees because of their role in overseeing the activities and funding of the issues discussed. We are also sending copies of this report to the Secretaries of Agriculture, Commerce, and HHS; Administrator, EPA; and Director, Office of Management and Budget. In addition, we will make copies available to others on request. See appendix VIII for major contributors to this report. Please contact me at (202) 512-5138 if you or your staff have any questions. Food and Drug Administration (FDA), within the Department of Health and Human Services (HHS), is responsible for ensuring that domestic and imported food products (except meat, poultry, and processed egg products) are safe, wholesome, and properly labeled. The Federal Food, Drug, and Cosmetic Act, as amended, is the major law governing FDA’s activities to ensure food safety and quality. The act also authorizes FDA to maintain a surveillance of all animal drugs, feeds, and veterinary devices to ensure that drugs and feeds used in animals are safe and properly labeled, and produce no human health hazards when used in food-producing animals. Centers for Disease Control and Prevention (CDC), within HHS, is charged with protecting the nation’s public health by providing leadership and direction in preventing and controlling diseases and responding to public health emergencies. CDC conducts surveillance for foodborne diseases; develops new epidemiologic and laboratory tools to enhance the surveillance and detection of outbreaks; and performs other activities to strengthen local, state, and national capacity to identify, characterize, and control foodborne hazards. CDC engages in public health activities related to food safety under the general authority of the Public Health Service Act, as amended. Food Safety and Inspection Service (FSIS), within the U.S. Department of Agriculture (USDA), is responsible for ensuring that meat, poultry, and processed egg products moving in interstate and foreign commerce are safe, wholesome, and correctly marked, labeled, and packaged. FSIS carries out its meat and poultry inspection responsibilities under the Federal Meat Inspection Act, as amended, and the Poultry Products Inspection Act, as amended. Amendments to these acts require that meat inspected by state inspection programs as well as imported meat are to meet inspection standards “at least equal to” those of the federal program. Furthermore, the Department of Agriculture Reorganization Act of 1994 transferred to FSIS some food safety inspections previously performed by other organizations within USDA. Animal and Plant Health Inspection Service (APHIS), within USDA, is responsible for ensuring the health and care of animals and plants. APHIS has no statutory authority for public health issues unless the concern to public health is also a concern to the health of animals or plants. APHIS identifies research and data needs and coordinates research programs designed to protect the animal industry against pathogens or diseases that are a risk to humans to improve food safety. Grain Inspection, Packers and Stockyards Administration (GIPSA), within USDA, is responsible for establishing quality standards and providing for a national inspection system to facilitate the marketing of grain and other related products. Certain inspection services, such as testing corn for the presence of aflatoxin, enable the market to assess the value of a product on the basis of its compliance with contractual specifications and FDA requirements. Those requesting inspection services, typically the owner of the grain, are responsible for complying with FDA regulations. GIPSA has no regulatory responsibility regarding food safety. Under a memorandum of understanding with FDA, GIPSA reports to FDA certain lots of grain, rice, pulses, or food products (which were officially inspected as part of GIPSA’s service functions) that are considered objectionable under the Federal Food, Drug, and Cosmetic Act. GIPSA carries out its responsibilities under the U.S. Grain Standards Act, as amended, and the Agricultural Marketing Act of 1946, as amended. Agricultural Marketing Service (AMS), within USDA, is primarily responsible for establishing the standards of quality and condition and for grading the quality of dairy, egg, fruit, meat, poultry, seafood, and vegetable products. As part of this grading process, AMS considers safety factors, such as the cleanliness of the product. AMS carries out its wide array of programs to facilitate marketing under more than 30 statutes—for example, the Agricultural Marketing Agreement Act of 1937, as amended; the Agricultural Marketing Act of 1946, as amended; the Egg Products Inspection Act, as amended; the Export Apple and Pear Act, as amended; and the Export Grape and Plum Act, as amended. AMS is largely funded with user fees. Agricultural Research Service (ARS), within USDA, is responsible for conducting a wide range of research relating to the Department’s mission, including food safety research. ARS carries out its programs under the Department of Agriculture Organic Act of 1862; the Research and Marketing Act of 1946, as amended; and the National Agricultural Research, Extension, and Teaching Policy Act of 1977, as amended. National Marine Fisheries Service (NMFS), within the Department of Commerce, conducts its voluntary seafood safety and quality inspection programs under the Agricultural Marketing Act of 1946, as amended, and the Fish and Wildlife Act of 1956, as amended. In addition to the inspection and certification services provided for fishery products for human consumption, NMFS provides inspection and certification services for animal feeds and pet foods containing a fish base. Environmental Protection Agency (EPA) is responsible for regulating all pesticide products sold or distributed in the United States and setting maximum allowed residue levels—tolerances—for pesticides on food commodities and animal feed. EPA’s activities are conducted under the Federal Insecticide, Fungicide, and Rodenticide Act, as amended, and the Federal Food, Drug, and Cosmetic Act, as amended. Federal Trade Commission (FTC) enforces the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. FTC’s food safety objective is to prevent consumer deception through the misrepresentation of food. U.S. Customs Service, within the Department of the Treasury, is responsible for collecting revenues and enforcing various customs and related laws. Customs assists FDA and FSIS in carrying out their regulatory roles in food safety. Bureau of Alcohol, Tobacco, and Firearms (ATF), within the Department of the Treasury, is responsible for administering and enforcing laws covering the production (including safety), use, and distribution of alcoholic beverages under the Federal Alcohol Administration Act and the Internal Revenue Code. FDA’s data include funding and staffing for various programs across FDA that are involved with food safety activities, including the Center for Food Safety and Applied Nutrition, the Center for Veterinary Medicine, the field components for these centers, and overall agencywide support. The agency did not specify its food safety resources. Agencies’ funding and staffing levels are for both safety and quality inspection activities. AMS’ funding and staffing totals for fiscal year 1989 reflect egg inspection activities, which were transferred to FSIS in 1994. Totals for fiscal years 1994 and 1998 include data for the Pesticide Data Program, which began in 1991. Numbers for EPA are from the following sources: Fiscal Year 1991 President’s Budget, 1989 Actuals; Fiscal Year 1996 President’s Budget, 1994 Actuals; and Fiscal Year 1999 President’s Budget, 1998 Enacted, and includes the total Office of Pesticides Programs. We did not review these agencies’ food safety budgets because of the small amount of funds for these activities in previous years. (continued) FY = fiscal year. The following are GAO’s comments on the Department of Commerce’s letter dated June 24, 1998. 1. We revised the report to reflect the Department of Commerce’s language changes. However, we did not delete the “January 1997” date because we wanted to clearly demonstrate the time frame involved with the activity. 2. We revised the report to reflect the language requested by the Department. The following are GAO’s comments on CDC’s letter dated June 25, 1998. 1. We revised the report to reflect the language requested by CDC. The following are GAO’s comments on EPA’s letter dated July 6, 1998. 1. The report now reflects the $230,000 that EPA expects to spend on the effort for fiscal year 1998. In addition, the $1 million estimate for fiscal year 1999, which EPA’s budget officials had previously provided us with, has been revised to reflect EPA’s current estimate of $400,000. 2. This section of the report was deleted. Originally, this section discussed a specific example of how the food safety initiative did not address underlying problems associated with the fragmentation of food safety responsibilities. In particular, the example noted efficiencies that could be gained by combining FDA’s and USDA’s pesticide-residue-monitoring programs for fruits and vegetables. This action would have been consistent with FDA’s and USDA’s plans under the 1999 food safety initiative to combine their systems for monitoring the microbial contamination of fruits and vegetables. However, FDA’s letter expressed concerns about whether the proposed combined microbial-contamination-monitoring program would satisfy its monitoring needs and has similar concerns about combined pesticide residue monitoring. (See app. VI.) In view of these concerns, as well as similar concerns expressed in EPA’s letter, we eliminated the discussion of this particular example. However, we did not change the report’s overall observation concerning the food safety initiative’s failure to address fundamental fragmentation problems. 3. We revised the draft report to reflect EPA’s most recent funding and staffing estimates. The following are GAO’s comments on FDA’s letter dated July 7, 1998. 1. This section of the report was deleted. Originally, this section discussed a specific example of how the food safety initiative did not address underlying problems associated with the fragmentation of food safety responsibilities. In particular, the example noted efficiencies that could be gained by combining FDA’s and USDA’s pesticide-residue-monitoring programs for fruits and vegetables. This action would have been consistent with FDA’s and USDA’s plans under the 1999 food safety initiative to combine their systems for monitoring the microbial contamination of fruits and vegetables. However, FDA’s letter expressed concerns about whether the proposed combined microbial contamination monitoring program would satisfy its monitoring needs and has similar concerns about combined pesticide residue monitoring. In view of these concerns, as well as similar concerns expressed in EPA’s letter (see app. V), we eliminated the discussion of this particular example. However, we did not change the report’s overall observation concerning the food safety initiative’s failure to address fundamental fragmentation problems. The following are GAO’s comments on USDA’s letter dated July 7, 1998. 1. We do not believe that we have seriously mischaracterized descriptions of the Food Safety and Inspection Service’s programs and activities. USDA’s specific comments in this regard and our responses are addressed below. (See comments 2, 3, 4, and 5.) 2. We revised the language to more clearly explain that the law requires carcass-by-carcass inspections but does not specify who should conduct the inspections nor how the inspection should be performed. However, USDA has historically fulfilled this mandate through organoleptic inspections, which are accurately described in this report. Our point remains that the inspections are not risk based and, therefore, resources used for them could be used more effectively in other areas of the federal food safety system. 3. We agree that organoleptic inspections do not solely ensure product quality. In fact, in the draft report, we noted that these inspections provide some measure of safety. However, we continue to believe that they primarily are meant to ensure product quality rather than detect the most serious food safety risk—microbial contamination. Furthermore, experts have increasingly questioned the public health benefits of these inspections. For example, an October 1993 conference of the World Congress on Meat and Poultry Inspection, an international association of government regulators from meat-trading countries, concluded that post-mortem carcass-by-carcass organoleptic inspection must be changed because (1) it wastes resources and cannot detect microbial pathogens, (2) the animal diseases for which it was originally designed have been eradicated in many countries, and (3) it results in unnecessary cross-contamination because the hands-on inspection techniques used virtually ensure that contamination spreads from one carcass to another. 4. We recognize that a statute mandating the frequency of processing plant inspections does not exist and have clarified the report language accordingly. However, the fact remains that FSIS continues to conduct these inspections on a daily basis. The frequency of these inspections is not risk based and therefore, in our view, may not be an efficient use of federal food safety resources. 5. Our use of the word simple was to illustrate the range of processing operations from simple cutting and packing operations through grinding to more complex operations, such as canning and the preparation of ready-to-eat products. We were not describing risks associated with any particular aspect of meat-processing operations. We revised the language of the report to avoid any misinterpretation. 6. The report does not assert that resources should be transferred from FSIS. Instead, the report identifies examples of food safety resources that could be used more effectively if they were redirected to other food safety activities. As we point out in the report, these activities may be within or outside of FSIS’ area of responsibility. Furthermore, as USDA correctly points out, we did not conduct comparative risk assessments for prioritizing which other food safety activities could be carried out if the resources were redirected. Instead, we present a list of possible activities where food safety resources could be more effectively used, recognizing that food safety officials may have other priorities. 7. The report does not claim that funds appropriated to FSIS could be more effectively used if redirected from the agency. (See comment 6.) 8. While APHIS, AMS, and GIPSA have no regulatory responsibilities for food safety, they do perform food safety activities and provide the food safety regulatory agencies with information. For example, AMS conducts sanitation inspections when doing grading activities. When AMS identifies problems, it notifies the appropriate food safety regulatory agencies. 9. We included this more detailed description of GIPSA’s food safety activities in appendix I. Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are Inconsistent and Unreliable (GAO/RCED-98-103, Apr. 30, 1998). Food Safety: Fundamental Changes Needed to Improve Food Safety (GAO/RCED-97-249R, Sept. 9, 1997). Food-Related Services: Opportunities Exist to Recover Costs by Charging Beneficiaries (GAO/RCED-97-57, Mar. 20, 1997). Food Safety: Information on Foodborne Illnesses (GAO/RCED-96-96, May 8, 1996). Food Safety: New Initiatives Would Fundamentally Alter the Existing System (GAO/RCED-96-81, Mar. 27, 1996). Meat and Poultry Inspection: Impact of USDA’s Food Safety Proposal on State Agencies and Small Plants (GAO/RCED-95-228, June 30, 1995). Food Safety: Risk-Based Inspections and Microbial Monitoring Needed for Meat and Poultry (GAO/RCED-94-110, May 19, 1994). Food Safety and Quality: Uniform, Risk-Based Inspection System Needed to Ensure Safe Food Supply (GAO/RCED-92-152, June 26, 1992). Food Safety and Quality: Who Does What in the Federal Government (GAO/RCED-91-19B, Dec. 21, 1990). Food Safety and Quality: Who Does What in the Federal Government (GAO/RCED-91-19A, Dec. 21, 1990). Food Safety: Reducing the Threat of Foodborne Illnesses (GAO/T-RCED-96-185, May 23, 1996). Food Safety: A Unified, Risk-Based Food Safety System Needed (GAO/T-RCED-94-223, May 25, 1994). Food Safety: A Unified, Risk-Based System Needed to Enhance Food Safety (GAO/T-RCED-94-71, Nov. 4, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO: (1) analyzed the federal food safety agencies' budgets for fiscal year 1999 to determine whether the appropriated funds of more than $1 billion can be spent more effectively; and (2) provided its views on whether the food safety initiatives for fiscal years 1998-1999 will address underlying problems in the federal food safety system. GAO noted that: (1) more than one-fourth of the over $1-billion federal budget for food safety--about $271 million--could be used more effectively if most of these funds were congressionally redirected from the Food Safety and Inspection Service's organoleptic carcass-by-carcass slaughter inspections to a number of the other food safety activities that need attention; (2) funds currently used for organoleptic, carcass-by-carcass slaughter inspections do not optimize federal resources because these inspections do not detect the most serious public health threat associated with meat and poultry--microbial contamination; (3) instead, these inspections mostly assure the quality of food and therefore benefit the industry more than they ensure food safety for consumers; (4) the $271 million could be used, for example, by the Food Safety and Inspection Service to help the smallest slaughter and processing plants with the cost of installing new science- and risk-based inspection systems; (5) since industry will bear most of the installation cost and the smallest plants operate at a smaller volume over which to spread this cost, these plants will be disproportionately affected by the cost of the new inspection systems; (6) in addition to the funds that could be made available from the revisions to the carcass-by-carcass slaughter inspections, some funds used for daily inspections of meat- and poultry-processing plants could be congressionally redirected to other needs; (7) for example, inspections could be based on the risks at other food plants, such as cereal manufacturers; (8) if the frequency of these inspections were based on the health risk posed rather than on the Food Safety and Inspection Service's practice of conducting processing plant inspections on a daily basis, these inspections would be more effective; (9) the food safety initiatives have made some improvements to the federal food safety system, but they have not comprehensively addressed the underlying problem of the fragmented nature of this system; (10) in fact, while the initiatives provided funding for specific food safety efforts, the initiatives' effective implementation may be impeded by the system's fragmentation; and (11) for example, progress in carrying out the initiative's objective of consolidating seafood inspection activities under one agency has been impeded by the slow progress of the Food and Drug Administration and the Department of Commerce in developing legislation for congressional consideration. |
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